UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


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


For the quarterly period ended March 31,September 30, 2021


OR


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


For the transition period from _______ to _______


Commission file number: 000-25927


MACATAWA BANK CORPORATION
(Exact name of registrant as specified in its charter)


Michigan



38-3391345

(State or other jurisdiction of  incorporation or organization)

(I.R.S. Employer Identification No.)


10753 Macatawa Drive, Holland, Michigan 49424
(Address of principal executive offices) (Zip Code)


Registrant'sRegistrant’s telephone number, including area code: (616) 820-1444


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




Title of each class


Trading Symbol


Name of each exchange on which registered


Common stock


MCBC


NASDAQ


Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No


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


Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth Company


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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No


The number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date: 34,193,13234,189,799 shares of the Company'sCompany’s Common Stock (no par value) were outstanding as of April 22, 2021.October 28, 2021.




Forward-Looking Statements


This report contains forward-looking statements that are based on management'smanagement’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, future composition of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, 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 interest rate levels, future net interest margin levels, the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, loan demand and loan growth and the future level of other revenue sources. Management'sManagement’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. 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“Item 1A - Risk Factors"Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020. 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.



Part IFinancial Information
Item 1.
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31,September 30, 2021 (unaudited) and December 31, 2020
(Dollars in thousands, except per share data)




March 31,
2021


December 31,
2020
  
September 30,
2021
  
December 31,
2020
 
ASSETS
 
        
Cash and due from banks
$26,900
$31,480  $30,413  $31,480 
Federal funds sold and other short-term investments
 884,985

752,256   1,239,525   752,256 
Cash and cash equivalents
 911,885
783,736   1,269,938   783,736 
Debt securities available for sale, at fair value
 233,672
236,832   241,475   236,832 
Debt securities held to maturity (fair value 2021 - $92,139 and 2020 - $83,246)
 89,170
79,468 
Debt securities held to maturity (fair value 2021 - $140,412 and 2020 - $83,246)
  137,569   79,468 
Federal Home Loan Bank (FHLB) stock
 11,558
11,558   11,558   11,558 
Loans held for sale, at fair value
 9,315
5,422   2,635   5,422 
Total loans
 1,382,951
1,429,331   1,136,613   1,429,331 
Allowance for loan losses
 (17,452) 
(17,408)  (16,532)  (17,408)
Net loans
 1,365,499 
1,411,923   1,120,081   1,411,923 
Premises and equipment – net
 43,113 
43,254   42,343   43,254 
Accrued interest receivable
 5,994 
5,625   4,005   5,625 
Bank-owned life insurance
 42,244 
42,516   52,781   42,516 
Other real estate owned - net
 2,371 
2,537   2,343   2,537 
Net deferred tax asset
 3,298 
2,059   2,126   2,059 
Other assets
 16,222 
17,096   14,646   17,096 
Total assets
$2,734,341 $2,642,026  $2,901,500  $2,642,026 
LIABILITIES AND SHAREHOLDERS' EQUITY
  
  
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Deposits
  
          
Noninterest-bearing
$848,798
$809,437  $934,477  $809,437 
Interest-bearing
 1,539,147

1,489,150   1,618,698   1,489,150 
Total deposits
 2,387,945
2,298,587   2,553,175   2,298,587 
Other borrowed funds
 70,000
70,000   85,000   70,000 
Long-term debt
 20,619
20,619   0   20,619 
Accrued expenses and other liabilities
 13,398

12,977   11,112   12,977 
Total liabilities
 2,491,962
2,402,183   2,649,287   2,402,183 
Commitments and contingent liabilities
 
   0   0 
Shareholders' equity
  
  
Common stock, no par value, 200,000,000 shares authorized; 34,193,132 and 34,197,519 shares issued and outstanding at March 31, 2021 and December 31, 2020
 218,687
218,528 
Shareholders’ equity        
Common stock, 0 par value, 200,000,000 shares authorized; 34,189,799 and 34,197,519 shares issued and outstanding at September 30, 2021 and December 31, 2020
  218,991   218,528 
Retained earnings
 22,156
17,101   31,728   17,101 
Accumulated other comprehensive income
 1,536

4,214   1,494   4,214 
Total shareholders' equity
 242,379

239,843 
Total liabilities and shareholders' equity
$2,734,341
$2,642,026 
Total shareholders’ equity  252,213   239,843 
Total liabilities and shareholders’ equity $2,901,500  $2,642,026 


See accompanying notes to consolidated financial statements.


MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three and nine month periods ended March 31,September 30, 2021 and 2020
(unaudited)
(Dollars in thousands, except per share data)



 
Three Months
Ended
March 31,
2021
  
Three Months
Ended
March 31,
2020
  
Three Months
Ended
September 30,
2021
  
Three Months
Ended
September 30,
2020
  
Nine Months
Ended
September 30,
2021
  
Nine Months
Ended
September 30,
2020
 
Interest income                 
Loans, including fees $13,467 $14,851  $12,761  $13,854  $39,530  $43,194 
Securities                     
Taxable 787 1,061   786   867   2,365   2,881 
Tax-exempt 758 882   777   861   2,295   2,607 
FHLB Stock 61 124   44   100   162   339 
Federal funds sold and other short-term investments  201  576   474   140   948   802 
Total interest income 15,274 17,494   14,842   15,822   45,300   49,823 
Interest expense                     
Deposits 279 1,603   209   621   732   3,118 
Other borrowings 352 349   325   364   1,006   1,069 
Long-term debt  153  239   12   163   319   612 
Total interest expense  784  2,191   546   1,148   2,057   4,799 
Net interest income 14,490 15,303   14,296   14,674   43,243   45,024 
Provision for loan losses    700   (550)  500   (1,300)  2,200 
Net interest income after provision for loan losses 14,490 14,603   14,846   14,174   44,543   42,824 
Noninterest income                     
Service charges and fees 992 1,110   1,183   987   3,240   2,957 
Net gains on mortgage loans 2,015 650   851   1,546   4,177   4,045 
Trust fees 1,005 935   1,079   921   3,217   2,801 
ATM and debit card fees 1,485 1,337   1,676   1,542   4,844   4,199 
Gain on sales of securities   
Bank owned life insurance ("BOLI") income 276 242 
Bank owned life insurance (“BOLI”) income  260   215   787   688 
Other  766  685   593   881   2,084   2,214 
Total noninterest income 6,539 4,959   5,642   6,092   18,349   16,904 
Noninterest expense                     
Salaries and benefits 6,412 6,691   6,278   6,480   19,192   18,937 
Occupancy of premises 1,037 1,009   992   1,026   3,023   2,984 
Furniture and equipment 937 855   1,014   967   2,929   2,704 
Legal and professional 222 291   272   260   768   798 
Marketing and promotion 175 238   175   239   525   716 
Data processing 908 760   839   761   2,602   2,309 
FDIC assessment 170    204   131   532   207 
Interchange and other card expense 358 347   391   367   1,137   1,041 
Bond and D&O insurance 111 105 
Net (gains) losses on repossessed and foreclosed properties 18 31 
Administration and disposition of problem assets 14 30 
Bond and D&O Insurance  112   104   334   313 
Other  1,123  1,365   1,273   1,198   3,711   3,750 
Total noninterest expenses  11,485  11,722   11,550   11,533   34,753   33,759 
Income before income tax 9,544 7,840   8,938   8,733   28,139   25,969 
Income tax expense  1,766  1,429   1,736   1,613   5,341   4,800 
Net income $7,778 $6,411  $7,202  $7,120  $22,798  $21,169 
Basic earnings per common share $0.23 $0.19  $0.21  $0.21  $0.67  $0.62 
Diluted earnings per common share $0.23 $0.19  $0.21  $0.21  $0.67  $0.62 
Cash dividends per common share $0.08 $0.08  $0.08  $0.08  $0.24  $0.24 


See accompanying notes to consolidated financial statements.



MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and nine month periods ended March 31,September 30, 2021 and 2020
(unaudited)
(Dollars in thousands)



 
Three Months
Ended
March 31,
2021
  
Three Months
Ended
March 31,
2020
  
Three Months
Ended
September 30,
2021
  
Three Months
Ended
September 30,
2020
  
Nine Months
Ended
September 30,
2021
  
Nine Months
Ended
September 30,
2020
 
Net income $7,778 $6,411  $7,202  $7,120  $22,798  $21,169 
Other comprehensive income:                     
Unrealized gains (losses):                     
Net change in unrealized gains (losses) on debt securities available for sale (3,390) 2,939   (792)  39   (3,443)  3,865 
Tax effect  712  (617)  166   (8)  723   (814)
Net change in unrealized gains (losses) on debt securities available for sale, net of tax  (2,678)  2,322   (626)  31   (2,720)  3,051 
Less: reclassification adjustments:                     
Reclassification for gains included in net income     0   0   0   0 
Tax effect       0   0   0   0 
Reclassification for gains included in net income, net of tax       0   0   0   0 
Other comprehensive income (loss), net of tax  (2,678)  2,322   (626)  31   (2,720)  3,051 
Comprehensive income $5,100 $8,733  $6,576  $7,151  $20,078  $24,220 


See accompanying notes to consolidated financial statements.


MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITY
Three and nine month periods ended March 31,September 30, 2021 and 2020
(unaudited)
(Dollars in thousands, except per share data)



  
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 gain 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 
  
Common
Stock
  Retained Earnings  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
Shareholders’
Equity
 
Balance, July 1, 2020 $218,349  $6,425  $4,564  $229,338 
Net income for the three months ended September 30, 2020  0   7,120   0   7,120 
Cash dividends at $0.08 per share  0   (2,720)  0   (2,720)
Repurchase of 1,696 shares for taxes withheld on vested restricted stock
  (13)  0   0   (13)
Net change in unrealized gain on debt securities available for sale, net of tax  0   0   31   31 
Stock compensation expense  109   0   0   109 
Balance, September 30, 2020 $218,445  $10,825  $4,595  $233,865 
                 
                 
Balance, July 1, 2021 $218,846  $27,251  $2,120  $248,217 
Net income for the three months ended September 30, 2021  0   7,202   0   7,202 
Cash dividends at $0.08 per share  0   (2,725)  0   (2,725)
Repurchase of 2,518 shares for taxes withheld on vested restricted stock  (21)  0   0   (21)
Net change in unrealized gain on debt securities available for sale, net of tax  0   0   (626)  (626)
Stock compensation expense  166   0   0   166 
Balance, September 30, 2021 $218,991  $31,728  $1,494  $252,213 


  
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
Shareholders'
Equity
 
Balance, January 1, 2021 $218,528  $17,101  $4,214  $239,843 
Net income for the three months ended March 31, 2021     7,778      7,778 
Cash dividends at $.08 per share     (2,723)     (2,723)
Repurchase of 526 shares for taxes withheld on vested restricted stock  (5)        (5)
Net change in unrealized gain on debt securities available for sale, net of tax        (2,678)  (2,678)
Stock compensation expense  164         164 
Balance, March 31, 2021��$218,687  $22,156  $1,536  $242,379 
 
Common
Stock
 Retained Earnings 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Balance, January 1, 2020 $218,109  $(2,184) $1,544  $217,469 
Net income for the nine months ended September 30, 2020  0   21,169   0   21,169 
Cash dividends at $0.24 per share  0   (8,160)  0   (8,160)
Repurchase of 3,304 shares for taxes withheld on vested restricted stock  (24)  0   0   (24)
Net change in unrealized gain on debt securities available for sale, net of tax  0   0   3,051   3,051 
Stock compensation expense  360   0   0   360 
Balance, September 30, 2020 $218,445  $10,825  $4,595  $233,865 
                 
                 
Balance, January 1, 2021 $218,528  $17,101  $4,214  $239,843 
Net income for the nine months ended September 30, 2021  0   22,798   0   22,798 
Cash dividends at $0.24 per share  0   (8,171)  0   (8,171)
Repurchase of 3,859 shares for taxes withheld on vested restricted stock  (34)  0   0   (34)
Net change in unrealized gain on debt securities available for sale, net of tax  0   0   (2,720)  (2,720)
Stock compensation expense  497   0   0   497 
Balance, September 30, 2021 $218,991  $31,728  $1,494  $252,213 


See accompanying notes to consolidated financial statements.


MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
ThreeNine month periods ended March 31,September 30, 2021 and 2020
(unaudited)
(Dollars in thousands)



 
Three Months
Ended
March 31,
2021
  
Three Months
Ended
March 31,
2020
  
Nine Months
Ended
September 30,
2021
  
Nine Months
Ended
September 30,
2020
 
Cash flows from operating activities           
Net income $7,778 $6,411  $22,798  $21,169 
Adjustments to reconcile net income to net cash from operating activities:             
Depreciation and amortization 498 721   1,863   2,105 
Stock compensation expense 164 109   497   360 
Provision for loan losses  700   (1,300)  2,200 
Origination of loans for sale (47,296) (29,356)  (107,845)  (120,171)
Proceeds from sales of loans originated for sale 45,418 31,334   114,809   124,002 
Net gains on mortgage loans (2,015) (650)  (4,177)  (4,045)
Write-down of other real estate 4 31   4   32 
Net loss on sales of other real estate 14    20   0 
Deferred income tax expense (528) (271)
Deferred income tax expense (benefit)
  656  (1,174)
Change in accrued interest receivable and other assets 505 (3,138)  4,071   (7,450)
Earnings in bank-owned life insurance (276) (242)  (787)  (688)
Change in accrued expenses and other liabilities  421  4,276   (1,865)  4,483 
Net cash from operating activities 4,687 9,925   28,744   20,823 
Cash flows from investing activities             
Loan originations and payments, net 46,424 (8,725)  293,142   (159,550)
Purchases of securities available for sale (23,106) (49,894)  (71,864)  (102,158)
Purchases of securities held to maturity (10,172) (5,876)  (72,916)  (29,745)
Purchase of bank-owned life insurance  (10,000)  0 
Proceeds from:             
Maturities and calls of securities 14,239 26,544   47,220   86,667 
Principal paydowns on securities 9,197 3,949   31,317   27,423 
Sales of other real estate 148 91   170   92 
Proceeds from payout of bank-owned insurance claim 560    560   0 
Additions to premises and equipment  (458)  (624)  (935)  (2,103)
Net cash from investing activities 36,832 (34,535)  216,694   (179,374)
Cash flows from financing activities             
Change in deposits 89,358 (47,914)  254,588   417,285 
Repayments and maturities of other borrowed funds  (30,619)  0 
Proceeds from other borrowed funds  10,000   25,000   10,000 
Repurchase of shares for taxes withheld on vested restricted stock (5) (11)  (34)  (24)
Cash dividends paid  (2,723)  (2,720)  (8,171)  (8,160)
Net cash from financing activities  86,630  (40,645)  240,764   419,101 
Net change in cash and cash equivalents 128,149 (65,255)  486,202   260,550 
Cash and cash equivalents at beginning of period  783,736  272,450   783,736   272,450 
Cash and cash equivalents at end of period $911,885 $207,195  $1,269,938  $533,000 


See accompanying notes to consolidated financial statements.


MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
ThreeNine month periods ended March 31,September 30, 2021 and 2020
(unaudited)
(Dollars in thousands)



 
Three Months
Ended
March 31,
2021
  
Three Months
Ended
March 31,
2020
  
Nine Months
Ended
September 30,
2021
  
Nine Months
Ended
September 30,
2020
 
Supplemental cash flow information           
Interest paid $786 $2,234  $2,227  $5,043 
Income taxes paid     4,750   5,315 
Supplemental noncash disclosures:             
Security settlement  (10,153)  0   1,937 


See accompanying notes to consolidated financial statements.



-9-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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"Company”, "our"“our”, "we"“we”) and its wholly-owned subsidiary, Macatawa Bank ("(“the Bank"Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation.


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


The Company ownspreviously owned all of the common stock of Macatawa Statutory Trust II. This iswas a grantor trust that issued trust preferred securities Underand was not consolidated with the Company under accounting principles generally accepted accounting principles, this trust is not consolidated intoin the financial statementsUnited States of America.  On July 7, 2021, the Company redeemed all of the Company.$20.0 million of outstanding trust preferred securities and $619,000 of common securities associated with this trust.


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

The Company quickly responded to the changing environment by successfully executing its business continuity plan, including implementing work from home arrangements and limiting branch activities.  As of March 31, 2021, branches were fully open with additional health and safety requirements to comply with U.S. federal and state of Michigan health mandates, including, among other things, daily deep cleaning, nonsurgical face mask requirements and strict social distancing measures.

Events: On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”  This guidance encourages financial institutions to work prudently with borrowers that are or that may be unable to meet their contractual obligations because of the effects of COVID-19.  The guidance goes on to explainexplained that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”).  The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs.  On December 27, 2020, President Trump signed another COVID-19 relief bill was signed that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated.  Through March 31,September 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  The majorityAs of these modifications involved three-month extensions.  By March 31,September 30, 2021, mostall of these modifications had expired other than those receiving a third short-term modification as allowed underand the guidance.  At March 31, 2021, there were 5 such loans under COVID-19 modification, totaling $21.9 million.  This is down from a quarter end peak of $297.3 million at June 30, 2020.returned to their contractual payment terms.


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


On December 27, 2020, President Trump signed another COVID-19 relief bill was signed that extended and modified several provisions of the PPP.  This included an additional allocation of $284 billion.  The SBA reactivated the PPP on January 11, 2021.  The Bank is originatingoriginated additional PPP loans through the PPP, which will currently extend throughexpired on May 31, 2021.  In the threenine months ended March 31,September 30, 2021, the Bank had generated and received SBA approval on 7471,000 PPP loans totaling $96.9$128.1 million and received $4.4generated $5.6 million in related deferred PPP fees under the 2021 PPP authorization.fees.  In the threenine months ended March 31,September 30, 2021, 5231,742 PPP loans totaling $71.7$279.9 million had been forgiven by the SBA and a total of $2.0$7.1 million in PPP fees had been recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP originations.

-10-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

While the Company continues to evaluate the disruption caused by the pandemic and impact of the CARES Act, these events may have a material adverse impact on the Company’s results of future operations, financial position, capital, and liquidity in fiscal year 2021 and beyond.


-10-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of 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 periodperiods ended March 31,September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, refer to the consolidated financial statements and related notes included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2020.


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.


Bank-Owned Life Insurance (BOLI):The Bank has purchased life insurance policies on certain officers.  BOLI is recorded at its currently realizable cash surrender value.  Changes in cash surrender value are recorded in other income.  In early April 2021, the Bank purchased an additional $10.0 million in BOLI policies.


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 March 31,September 30, 2021, 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.  At September 30, 2021, the qualitative factor allocations for economic trends related to the COVID-19 that had been increased significantly during 2020 were maintained reflecting continued uncertainty of economic conditions with the reopening of the economy and surges in COVID-19 cases associated with the Delta variant of the virus. PPP loans receive $0 allocation as they are fully guaranteed by the SBA and are subject to be forgiven under the SBA forgiveness criteria.


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.


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.


-11-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Foreclosed Assets: Assets acquired through or instead of loan foreclosure, primarily other real estate owned, are initially recorded at estimated 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: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.


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


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 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 two2 freestanding interest rate swaps, each of which areis carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At March 31,September 30, 2021 and December 31, 2020, the total notional amount of such agreements was $147.5$143.2 million and $156.4 million, respectively, and resulted in a derivative asset with a fair value of $3.8$3.4 million and $4.2 million, respectively, which were included in other assets and a derivative liability of $3.8$3.4 million and $4.2 million, respectively, which were included in other liabilities.


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

Changes in the fair values of these interest rate lock and mortgage backed security and forward commitment derivatives are included in net gains on mortgage loans.  The netfair value of interest rate lock commitments was $(28,000) at September 30, 2021 and $103,000 at December 31, 2020.  The fair value of mortgage bankingbacked security derivatives was approximately $285,000 and $(130,000)$43,000 at March 31,September 30, 2021 and $(233,000) at December 31, 2020, respectively.2020.


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

-12-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Newly Issued Not Yet Effective StandardsFASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down.


ASU No. 2019-10 Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) – Effective Datesupdated the effective date of this ASU for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022.  The Company selected a software vendor for applying this new ASU for Current Expected Credit Losses (“CECL”), began implementation of the software in the second quarter of 2018, completed integration during the third quarter of 2018 and ran parallel computations with both systems using the current GAAP incurred loss model in the fourth quarter of 2018.  The Company went live with this software beginning in January 2019 for its monthly incurred loss computations and began modeling the new current expected credit loss model assumptions to the allowance for loan losses computation.  During 2019, 2020 and 2020,the first nine months of 2021, the Company modeled the various methods prescribed in the ASU against the Company’s identified loan segments.  The Company anticipates continuing to run parallel computations and fine tune assumptions as it continues to evaluate the impact of adoption of the new standard.  The COVID-19 pandemic that broke out in the United States in the first quarter of 2020 and continued into 2021 may have a significant impact on allowance computations under the incurred loss model which could be amplified under the new standard.


-13-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SECURITIES


The amortized cost and estimated 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
 
March 31, 2021
         
September 30, 2021
            
Available for Sale
                     
U.S. Treasury and federal agency securities $62,993 $196 $(1,337) $61,852  $69,488  $85  $(701) $68,872 
U.S. Agency MBS and CMOs 63,386 977 (600) 63,763   64,353   691   (535)  64,509 
Tax-exempt state and municipal bonds 41,915 1,581 (1) 43,495   38,624   1,384   0   40,008 
Taxable state and municipal bonds 59,108 1,357 (385) 60,080   63,723   1,170   (300)  64,593 
Corporate bonds and other debt securities  4,326  156    4,482   3,396   97   0   3,493 
 $231,728 $4,267 $(2,323) $233,672  $239,584  $3,427  $(1,536) $241,475 
Held to Maturity
                         
Tax-exempt state and municipal bonds $89,170 $3,089 $(120) $92,139  $137,569  $2,890  $(47) $140,412 


 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
December 31, 2020
                     
Available for Sale
                     
U.S. Treasury and federal agency securities $63,993 $287 $(170) $64,110  $63,993  $287  $(170) $64,110 
U.S. Agency MBS and CMOs 63,652 1,376 (45) 64,983   63,652   1,376   (45)  64,983 
Tax-exempt state and municipal bonds 43,739 1,903  45,642   43,739   1,903   0   45,642 
Taxable state and municipal bonds 55,383 1,801 (7) 57,177   55,383   1,801   (7)  57,177 
Corporate bonds and other debt securities  4,731  189    4,920   4,731   189   0   4,920 
 $231,498 $5,556 $(222) $236,832  $231,498  $5,556  $(222) $236,832 
Held to Maturity
                         
Tax-exempt state and municipal bonds $79,468 $3,778 $ $83,246  $79,468  $3,778  $0  $83,246 

-13-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SECURITIES (Continued)


There were no0 sales of securities in the three and nine month periods ended March 31,September 30, 2021 and 2020.


Contractual maturities of debt securities at March 31,September 30, 2021 were as follows (dollars in thousands):


 Held–to-Maturity Securities  Available-for-Sale Securities  Held–to-Maturity Securities  Available-for-Sale Securities 
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Due in one year or less $24,515 $24,632 $25,807 $25,992  $31,503  $31,569  $22,681  $22,881 
Due from one to five years 31,050 32,008 60,710 62,555   69,127   70,077   66,771   68,448 
Due from five to ten years 16,025 17,155 84,052 83,682   19,359   20,425   87,960   87,899 
Due after ten years  17,580  18,344  61,159  61,443   17,580   18,341   62,172   62,247 
 $89,170 $92,139 $231,728 $233,672  $137,569  $140,412  $239,584  $241,475 


-14-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SECURITIES (Continued)

Securities with unrealized losses at March 31,September 30, 2021 and December 31, 2020, 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 
March 31, 2021
 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
September 30, 2021
 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
Available for Sale
                               
U.S. Treasury and federal agency securities $41,062 $(1,337) $ $ $41,062 $(1,337) $53,249  $(655) $4,953  $(46) $58,202  $(701)
U.S. Agency MBS and CMOs 29,553 (600)   29,553 (600)  34,332   (510)  1,563   (25)  35,895   (535)
Tax-exempt state and municipal bonds 450 (1)   450 (1)  250   0   0   0   250   0 
Taxable state and municipal bonds 16,583 (385)   16,583 (385)  21,919   (285)  490   (15)  22,409   (300)
Corporate bonds and other debt securities               0   0   0   0   0   0 
Total $87,648 $(2,323) $ $ $87,648 $(2,323) $109,750  $(1,450) $7,006  $(86) $116,756  $(1,536)
                                     
Held to Maturity
                                           
Tax-exempt state and municipal bonds $15,588 $(120) $ $ $15,588 $(120) $20,390  $(47) $0  $0  $20,390  $(47)


 Less than 12 Months  12 Months or More  Total  Less than 12 Months  12 Months or More  Total 
December 31, 2020
 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
Available for Sale
                               
U.S. Treasury and federal agency securities $22,830 $(170) $ $ $22,830 $(170) $22,830  $(170) $0  $0  $22,830  $(170)
U.S. Agency MBS and CMOs 9,299 (45)   9,299 (45)  9,299   (45)  0   0   9,299   (45)
Tax-exempt state and municipal bonds         0   0   0   0   0   0 
Taxable state and municipal bonds 2,336 (7)   2,336 (7)  2,336   (7)  0   0   2,336   (7)
Corporate bonds and other debt securities               0   0   0   0   0   0 
Total $34,465 $(222) $ $ $34,465 $(222) $34,465  $(222) $0  $0  $34,465  $(222)
                                     
Held to Maturity
                                           
Tax-exempt state and municipal bonds $ $ $ $ $ $  $0  $0  $0  $0  $0  $0 


Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment ("OTTI"(“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. At March 31,September 30, 2021, 7088 securities available for sale with fair values totaling $87.7$116.8 million had unrealized losses totaling approximately $2.3$1.5 million.  At March 31,September 30, 2021, seven7 securities held to maturity with fair valuevalues totaling $15.6$20.4 million had unrealized losses totaling approximately $120,000.$47,000.  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 of its investment securities before a recovery of cost.  Management determined that the unrealized losses for the three and nine month periods ended March 31,September 30, 2021 and 2020 were attributable to changes in interest rates and not due to credit quality.  As such, no0 OTTI charges were necessary during each period.


Securities with a carrying value of approximately $5.1$5.0 million and $6.1 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at March 31,September 30, 2021 and December 31, 2020, respectively.


-14-

-15-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3 – LOANS




Portfolio loans were as follows (dollars in thousands):

  
March 31,
2021
  
December 31,
2020
 
Commercial and industrial      
Commercial and industrial, excluding PPP $392,208  $436,331 
PPP  253,811   229,079 
Total commercial and industrial  646,019   665,410 
         
Commercial real estate:        
Residential developed  8,651   8,549 
Vacant and unimproved  41,375   47,122 
Commercial development  841   857 
Residential improved  112,618   114,392 
Commercial improved  264,122   266,006 
Manufacturing and industrial  112,995   115,247 
Total commercial real estate  540,602   552,173 
Consumer        
Residential mortgage  139,727   149,556 
Unsecured  134   161 
Home equity  52,709   57,975 
Other secured  3,760   4,056 
Total consumer  196,330   211,748 
Total loans  1,382,951   1,429,331 
Allowance for loan losses  (17,452)  (17,408)
  $1,365,499  $1,411,923 



  
September 30,
2021
  
December 31,
2020
 
Commercial and industrial:      
Commercial and industrial, excluding PPP $356,812  $436,331 
PPP  77,571   229,079 
Total commercial and industrial  434,383   665,410 
Commercial real estate:        
Residential developed  6,184   8,549 
Unsecured to residential developers  19   0 
Vacant and unimproved  36,616   47,122 
Commercial development  403   857 
Residential improved  100,608   114,392 
Commercial improved  267,910   266,006 
Manufacturing and industrial  115,470   115,247 
Total commercial real estate  527,210   552,173 
Consumer:        
Residential mortgage  119,106   149,556 
Unsecured  103   161 
Home equity  52,127   57,975 
Other secured  3,684   4,056 
Total consumer  175,020   211,748 
Total loans  1,136,613   1,429,331 
Allowance for loan losses  (16,532
)
  (17,408
)
  $1,120,081  $1,411,923 


-15--16-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)


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


Three months ended March 31, 2021
 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $6,632  $7,999  $2,758  $19  $17,408 
Charge-offs        (50)     (50)
Recoveries  20   39   35      94 
Provision for loan losses  (851)  860   (25)  16    
Ending Balance $5,801  $8,898  $2,718  $35  $17,452 


Three months ended March 31, 2020
 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Three months ended September 30, 2021 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $7,658 $6,521 $3,009 $12 $17,200  $5,206  $8,740  $2,856  $4  $16,806 
Charge-offs   (39)  (39)  0   0   (22)  0   (22)
Recoveries 19 974 35  1,028   265   11   22   0   298 
Provision for loan losses  1,130  (582)  125  27  700   (259)  (250)  (68)  27   (550)
Ending Balance $8,807 $6,913 $3,130 $39 $18,889  $5,212  $8,501  $2,788  $31  $16,532 


Three months ended September 30, 2020 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $5,431  $7,262  $3,138  $24  $15,855 
Charge-offs  0  0  (24)  0   (24)
Recoveries  22   168   37   0   227 
Provision for loan losses  513  237   (242)  (8)  500 
Ending Balance $5,966  $7,667  $2,909  $16  $16,558 


Nine months ended September 30, 2021 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $6,632  $7,999  $2,758  $19  $17,408 
Charge-offs  0   0   (102)  0   (102)
Recoveries  320   122   84   0   526 
Provision for loan losses  (1,740)  380   48   12  (1,300)
Ending Balance $5,212  $8,501  $2,788  $31  $16,532 


Nine months ended September 30, 2020 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $7,658  $6,521  $3,009  $12  $17,200 
Charge-offs  (1,192)  (2,957)  (97)  0   (4,246)
Recoveries  124   1,159   121   0   1,404 
Provision for loan losses  (624)  2,944   (124)  4   2,200 
Ending Balance $5,966  $7,667  $2,909  $16  $16,558 




-17-

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):


March 31, 2021
 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Allowance for loan losses:               
Ending allowance attributable to loans:               
Individually reviewed for impairment $511  $181  $295  $  $987 
Collectively evaluated for impairment  5,290   8,717   2,423   35   16,465 
Total ending allowance balance $5,801  $8,898  $2,718  $35  $17,452 
Loans:                    
Individually reviewed for impairment $4,987  $2,481  $3,817  $  $11,285 
Collectively evaluated for impairment  641,032   538,121   192,513      1,371,666 
Total ending loans balance $646,019  $540,602  $196,330  $  $1,382,951 


December 31, 2020
 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
September 30, 2021 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Allowance for loan losses:                          
Ending allowance attributable to loans:                          
Individually reviewed for impairment $587 $313 $310 $ $1,210  $303  $10  $261  $0  $574 
Collectively evaluated for impairment  6,045  7,686  2,448  19  16,198   4,909   8,491   2,527   31   15,958 
Total ending allowance balance $6,632 $7,999 $2,758 $19 $17,408  $5,212  $8,501  $2,788  $31  $16,532 
Loans:                               
Individually reviewed for impairment $3,957 $2,613 $4,049 $ $10,619  $969  $1,165  $3,296  $0  $5,430 
Collectively evaluated for impairment  661,453  549,560  207,699    1,418,712   433,414   526,045   171,724   0   1,131,183 
Total ending loans balance $665,410 $552,173 $211,748 $ $1,429,331  $434,383  $527,210  $175,020  $0  $1,136,613 


December 31, 2020 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Allowance for loan losses:               
Ending allowance attributable to loans:               
Individually reviewed for impairment $587  $313  $310  $0  $1,210 
Collectively evaluated for impairment  6,045   7,686   2,448   19   16,198 
Total ending allowance balance $6,632  $7,999  $2,758  $19  $17,408 
Loans:                    
Individually reviewed for impairment $3,957  $2,613  $4,049  $0  $10,619 
Collectively evaluated for impairment  661,453   549,560   207,699   0   1,418,712 
Total ending loans balance $665,410  $552,173  $211,748  $0  $1,429,331 


-16--18-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)


The following table presents loans individually evaluated for impairment by class of loans as of March 31,September 30, 2021 (dollars in thousands):


March 31, 2021 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance
Allocated
 
With no related allowance recorded:         
Commercial and industrial $143  $143  $ 
Commercial real estate:            
Residential improved  87   87    
Commercial improved  1,035   1,035    
   1,122   1,122    
Consumer         
Total with no related allowance recorded $1,265  $1,265  $ 
             
With an allowance recorded:            
Commercial and industrial $4,844  $4,844  $511 
Commercial real estate:            
Commercial improved  1,161   1,161   173 
Manufacturing and industrial  198   198   8 
   1,359   1,359   181 
Consumer:            
Residential mortgage  3,292   3,292   254 
Unsecured  104   104   8 
Home equity  400   400   31 
Other secured  21   21   2 
   3,817   3,817   295 
Total with an allowance recorded $10,020  $10,020  $987 
Total $11,285  $11,285  $987 


September 30, 2021 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance
Allocated
 
With no related allowance recorded:         
Commercial and industrial $72  $72  $ 
Commercial real estate:            
Residential improved  42   42    
Commercial improved  929   929    
   971   971    
Consumer  0   0    
Total with no related allowance recorded $1,043  $1,043  $ 
             
With an allowance recorded:            
Commercial and industrial $897  $897  $303 
Commercial real estate:            
Commercial improved  0   0   0 
Manufacturing and industrial  194   194   10 
   194   194   10 
Consumer:            
Residential mortgage  2,944   2,944   233 
Unsecured  84   84   7 
Home equity  267   267   21 
Other secured  1   1   0 
   3,296   3,296   261 
Total with an allowance recorded $4,387  $4,387  $574 
Total $5,430  $5,430  $574 


-17--19-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)



The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2020 (dollars in thousands):

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



December 31, 2020 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance
Allocated
 
With no related allowance recorded:         
Commercial and industrial $156  $156  $ 
Commercial real estate:            
Residential improved  107   107    
Commercial improved  714   714    
   821   821    
Consumer  0   0    
Total with no related allowance recorded $977  $977  $ 
             
With an allowance recorded:            
Commercial and industrial $3,801  $3,801  $587 
Commercial real estate:            
Residential developed  67   67   3 
Commercial improved  1,524   1,524   301 
Manufacturing and industrial  201   201   9 
   1,792   1,792   313 
Consumer:            
Residential mortgage  3,484   3,484   266 
Unsecured  123   123   10 
Home equity  419   419   32 
Other secured  23   23   2 
   4,049   4,049   310 
Total with an allowance recorded $9,642  $9,642  $1,210 
Total $10,619  $10,619  $1,210 




-18--20-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)


The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three and nine month periods ended March 31,September 30, 2021 and 2020 (dollars in thousands):

  
Three
Months
Ended
March 31,
2021
  
Three
Months
Ended
March 31,
2020
 
Average of impaired loans during the period:      
Commercial and industrial $4,586  $6,615 
Commercial real estate:        
Residential developed  45   74 
Residential improved  87   267 
Commercial improved  2,208   5,822 
Manufacturing and industrial  199   356 
Consumer  3,941   4,914 
Interest income recognized during impairment:        
Commercial and industrial  134   273 
Commercial real estate  31   99 
Consumer  38   57 
Cash-basis interest income recognized        
Commercial and industrial  125   275 
Commercial real estate  31   128 
Consumer  36   60 



  
Three
Months
Ended
September 30,
2021
  
Three
Months
Ended
September 30,
2020
  
Nine
Months
Ended
September 30,
2021
  
Nine
Months
Ended
September 30,
2020
 
Average of impaired loans during the period:            
Commercial and industrial $749  $2,208  $2,417  $4,362 
Commercial real estate:                
Residential developed  0   71   15   72 
Residential improved  18   168   46   211 
Commercial improved  1,349   1,650   1,909   4,652 
Manufacturing and industrial  195   347   197   352 
Consumer  3,362   4,441   3,641   4,687 
Interest income recognized during impairment:                
Commercial and industrial  40   23   336   303 
Commercial real estate  22   33   88   193 
Consumer  28   41   97   153 
Cash-basis interest income recognized                
Commercial and industrial  37   13   356   298 
Commercial real estate  22   33   88   218 
Consumer  30   43   98   148 


-21-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31,September 30, 2021 and December 31, 2020:



September 30, 2021 Nonaccrual  
Over 90
days
Accruing
 
Commercial and industrial $0  $0 
Commercial real estate:        
Residential improved  5   0 
Commercial improved  327   0 
   332   0 
Consumer:        
Residential mortgage  88   0 
   88   0 
Total $420  $0 


December 31, 2020 Nonaccrual  
Over 90 days
Accruing
 
Commercial and industrial $0  $0 
Commercial real estate:        
Residential improved  87   0 
Commercial improved  351   0 
   438   0 
Consumer:        
Residential mortgage  95   0 
   95   0 
Total $533  $0 


-19--22-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)

March 31, 2021
 Nonaccrual  
Over 90
days
Accruing
 
Commercial and industrial $  $ 
Commercial real estate:        
Residential improved  87    
Commercial improved  345    
   432    
Consumer:        
Residential mortgage  93    
   93    
Total $525  $ 

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


The following table presents the aging of the recorded investment in past due loans as of March 31,September 30, 2021 and December 31, 2020 by class of loans (dollars in thousands):


March 31, 2021
 
30-90
Days
  
Greater Than
90 Days
  
Total
Past Due
  
Loans Not
Past Due
  Total 
Commercial and industrial $39     $39  $645,980  $646,019 
Commercial real estate:                    
Residential developed           8,651   8,651 
Vacant and unimproved           41,375   41,375 
Commercial development           841   841 
Residential improved     87   87   112,531   112,618 
Commercial improved           264,122   264,122 
Manufacturing and industrial           112,995   112,995 
      87   87   540,515   540,602 
Consumer:                    
Residential mortgage     91   91   139,636   139,727 
Unsecured           134   134 
Home equity           52,709   52,709 
Other secured           3,760   3,760 
      91   91   196,239   196,330 
Total $39  $178  $217  $1,382,734  $1,382,951 


September 30, 2021 
30-90
Days
  
Greater Than
90 Days
  
Total
Past Due
  
Loans Not
Past Due
  Total 
Commercial and industrial $0  $0  $0  $434,383  $434,383 
Commercial real estate:                    
Residential developed  0   0   0   6,184   6,184 
Unsecured to residential developers  0   0   0   19   19 
Vacant and unimproved  0   0   0   36,616   36,616 
Commercial development  0   0   0   403   403 
Residential improved  0   5   5   100,603   100,608 
Commercial improved  344   0   344   267,566   267,910 
Manufacturing and industrial  0   0   0   115,470   115,470 
   344   5   349   526,861   527,210 
Consumer:                    
Residential mortgage  0   87   87   119,019   119,106 
Unsecured  0   0   0   103   103 
Home equity  0   0   0   52,127   52,127 
Other secured  1   0   1   3,683   3,684 
   1   87   88   174,932   175,020 
Total $345  $92  $437  $1,136,176  $1,136,613 


December 31, 2020 
30-90
Days
  
Greater Than
90 Days
  
Total
Past Due
  
Loans Not
Past Due
  Total 
Commercial and industrial $45  $0  $45  $665,365  $665,410 
Commercial real estate:                    
Residential developed  0   0   0   8,549   8,549 
Unsecured to residential developers  0   0   0   0   0 
Vacant and unimproved  0   0   0   47,122   47,122 
Commercial development  0   0   0   857   857 
Residential improved  0   87   87   114,305   114,392 
Commercial improved  353   0   353   265,653   266,006 
Manufacturing and industrial  0   0   0   115,247   115,247 
   353   87   440   551,733   552,173 
Consumer:                    
Residential mortgage  0   94   94   149,462   149,556 
Unsecured  0   0   0   161   161 
Home equity  0   0   0   57,975   57,975 
Other secured  2   0   2   4,054   4,056 
   2   94   96   211,652   211,748 
Total $400  $181  $581  $1,428,750  $1,429,331 


-20--23-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)


December 31, 2020
 
30-90
Days
  
Greater Than
90 Days
  
Total
Past Due
  
Loans Not
Past Due
  Total 
Commercial and industrial $45  $  $45  $665,365  $665,410 
Commercial real estate:                    
Residential developed           8,549   8,549 
Vacant and unimproved           47,122   47,122 
Commercial development           857   857 
Residential improved     87   87   114,305   114,392 
Commercial improved  353      353   265,653   266,006 
Manufacturing and industrial           115,247   115,247 
   353   87   440   551,733   552,173 
Consumer:                    
Residential mortgage     94   94   149,462   149,556 
Unsecured           161   161 
Home equity           57,975   57,975 
Other secured  2      2   4,054   4,056 
   2   94   96   211,652   211,748 
Total $400  $181  $581  $1,428,750  $1,429,331 


The Company had allocated $987,000$574,000 and $1.2 million$1,210,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of March 31,September 30, 2021 and December 31, 2020, 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.  The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure.  For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan.  In some cases, the modification will include separating the note into two2 notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt.  The second note is charged off immediately and collected only after the first note is paid in full.  This modification type is commonly referred to as an A-B note structure.  For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief.  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 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 six6 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 loan designations may be removed.  In addition, the TDR designation may also be removed from loans modified under an A-B note structure.  If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms.  The market rate relative to the borrower’s credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model.  The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration differences in credit risk.  In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.




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.

-21-


Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)


The following table presents information regarding troubled debt restructurings as of March 31,September 30, 2021 and December 31, 2020 (dollars in thousands):

  March 31, 2021  December 31, 2020 
  
Number of
Loans
  
Outstanding
Recorded
Balance
  
Number of
Loans
  
Outstanding
Recorded
Balance
 
Commercial and industrial  6  $4,987   7  $3,957 
Commercial real estate  7   1,320   9   1,439 
Consumer  57   3,817   60   4,049 
   70  $10,124   76  $9,445 



  September 30, 2021  December 31, 2020 
  
Number of
Loans
  
Outstanding
Recorded
Balance
  
Number of
Loans
  
Outstanding
Recorded
Balance
 
Commercial and industrial  5  $969   7  $3,957 
Commercial real estate  6   1,165   9   1,439 
Consumer  48   3,296   60   4,049 
   59  $5,430   76  $9,445 


-24-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)


The following table presents information related to accruing troubled debt restructuringsTDRs as of March 31,September 30, 2021 and December 31, 2020.  The table presents the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of each period reported (dollars in thousands):

  
March 31,
2021
  
December 31,
2020
 
Accruing TDR - nonaccrual at restructuring $  $ 
Accruing TDR - accruing at restructuring  5,176   5,479 
Accruing TDR - upgraded to accruing after six consecutive payments  4,516   3,529 
  $9,692  $9,008 



  
September 30,
2021
  
December 31,
2020
 
Accruing TDR - nonaccrual at restructuring $0  $0 
Accruing TDR - accruing at restructuring  4,554   5,479 
Accruing TDR - upgraded to accruing after six consecutive payments  544   3,529 
  $5,098  $9,008 



There were no troubled debt restructurings0 TDRs executed during the three month and nine month periods ended September 30, 2021.  There were 0 TDRs executed during the three month period ended March 31, 2021September 30, 2020 and one2 consumer loan troubled debt restructuringTDRs totaling $3,000$30,000 executed during the threenine month period ended March 31, 2020, with no writedown taken upon restructuring.September 30, 2020.




According to the accounting standards, not all loan modifications are TDRs.  TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress.  The Company reviews all modifications and renewals for determination of TDR status.  In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession.  These modifications are not considered TDRs.  In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress.  This could be the case if the Company is matching a competitor’s interest rate.  These modifications would also not be considered TDRs.  Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.  As with other loans not considered TDR or impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.




Payment defaults on TDRs have been minimal and during the three and nine month periods ended March 31,September 30, 2021 and 2020, the balance of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.




In late March 2020, the federal banking regulators issued guidance that modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders do not need to be identified as a TDR if the loan was current at the time a modification plan was implemented.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs.  On December 27, 2020, President Trump signed another COVID-19 relief bill that extends this guidance until the earlier of January 1, 2022 or 60 days after the national emergency termination date.  Through March 31,September 30, 2021, the Bank had applied this guidance and had made 726 such modifications with principal balances totaling $337.2 million.  The Bank continues to follow the guidance issued by the banking regulators in making any TDR determinations.  At March 31,September 30, 2021, there were 50 such loans still in their modification period, totaling $21.9 million.  Of the 5 remaining loans, 3 were modified during the three months ended March 31, 2021.period.



-22--25-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)



Credit Quality Indicators:   The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Company analyzes commercial loans individually and classifies these relationships by credit risk grading.  The Company uses an eight8 point grading system, with grades 5 through 8 being considered classified, or watch, credits.  All commercial loans are assigned a grade at origination, at each renewal or any amendment.  When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by the credit department and the loan officer.  All watch credits have an ALR completed quarterly which analyzes the collateral position and cash flow of the borrower and its guarantors.  Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled.  When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR.  Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process.  The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero balance.  The Company uses the following definitions for the risk grades:




1. Excellent - Loans supported by extremely strong financial condition or secured by the Bank’s own deposits. Minimal risk to the Bank and the probability of serious rapid financial deterioration is extremely small.




2. Above Average - Loans supported by sound financial statements that indicate the ability to repay or borrowings secured (and margined properly) with marketable securities. Nominal risk to the Bank and probability of serious financial deterioration is highly unlikely. The overall quality of these credits is very high.




3. Good Quality - Loans supported by satisfactory asset quality and liquidity, good debt capacity coverage, and good management in all critical positions. Loans are secured by acceptable collateral with adequate margins. There is a slight risk of deterioration if adverse market conditions prevail.




4. Acceptable Risk - Loans carrying an acceptable risk to the Bank, which may be slightly below average quality. The borrower has limited financial strength with considerable leverage. There is some probability of deterioration if adverse market conditions prevail. These credits should be monitored closely by the Relationship Manager.




5. Marginally Acceptable - Loans are of marginal quality with above normal risk to the Bank. The borrower shows acceptable asset quality but very little liquidity with high leverage. There is inconsistent earning performance without the ability to sustain adverse market conditions. The primary source of repayment is questionable, but the secondary source of repayment still remains an option. Very close attention by the Relationship Manager and management is needed.




6. Substandard - Loans are inadequately protected by the net worth and paying capacity of the borrower or the collateral pledged. The primary and secondary sources of repayment are questionable. Heavy debt condition may be evident and volume and earnings deterioration may be underway. It is possible that the Bank will sustain some loss if the deficiencies are not immediately addressed and corrected.




7. Doubtful - Loans supported by weak or no financial statements, as well as the ability to repay the entire loan, are questionable. Loans in this category are normally characterized less than adequate collateral, insolvent, or extremely weak financial condition. A loan classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses makes collection or liquidation in full highly questionable. The possibility of loss is extremely high, however, activity may be underway to minimize the loss or maximize the recovery.




8. Loss - Loans are considered uncollectible and of little or no value as a bank asset.


-23--26-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)


As of March 31,September 30, 2021 and December 31, 2020, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):


March 31, 2021
  1   2   3   4   5   6   7   8  Total 
Commercial and industrial $268,809  $15,062  $92,769  $261,340  $2,929  $5,110  $  $  $646,019 
                                     
Commercial real estate:                                    
Residential developed           8,651               8,651 
Vacant and unimproved     2,640   8,469   30,266               41,375 
Commercial development        296   545               841 
Residential improved        21,118   91,211   202      87      112,618 
Commercial improved     6,158   53,139   200,785   2,535   1,160   345      264,122 
Manufacturing & industrial     2,075   28,462   78,800   3,658            112,995 
  $268,809  $25,935  $204,253  $671,598  $9,324  $6,270  $432  $  $1,186,621 


December 31, 2020
  1   2   3   4   5   6   7   8  Total 
September 30, 2021
 1
  2
  3
  4
  5
  6
  7
  8
  Total 
Commercial and industrial $244,079 $14,896 $111,611 $276,728 $13,957 $4,139 $ $ $665,410  $92,615  $13,376  $94,433  $230,163  $2,862  $934  $0  $0  $434,383 
                                                       
Commercial real estate:                                                       
Residential developed    8,549     8,549   0   0   0   6,184   0   0   0   0   6,184 
Unsecured to residential developers  0   0   19   0   0   0   0   0   19 
Vacant and unimproved  3,473 9,427 32,751 1,471    47,122   0   1,791   9,028   25,797   0   0   0   0   36,616 
Commercial development   302 555     857   0   0   220   183   0   0   0   0   403 
Residential improved   23,706 90,372 227  87  114,392   0      22,774   77,705   124   0   5   0   100,608 
Commercial improved  6,328 58,483 192,030 7,641 1,174 350  266,006   0   13,713   64,208   182,085   7,577   0   327   0   267,910 
Manufacturing & industrial      31,451  80,075  3,721        115,247   0   3,563   42,672   66,440   2,795   0   0   0   115,470 
 $244,079 $24,697 $234,980 $681,060 $27,017 $5,313 $437 $ $1,217,583  $92,615  $32,443  $233,354  $588,557  $13,358  $934  $332  $0  $961,593 


December 31, 2020
 1
  2
  3  4
  5
  6
  7
  8
  Total 
Commercial and industrial $244,079  $14,896  $111,611  $276,728  $13,957  $4,139  $0  $0  $665,410 
                                     
Commercial real estate:                                    
Residential developed  0   0   0   8,549   0   0   0   0   8,549 
Vacant and unimproved  0   3,473   9,427   32,751   1,471   0   0   0   47,122 
Commercial development  0   0   302   555   0   0   0   0   857 
Residential improved  0   0   23,706   90,372   227   0   87   0   114,392 
Commercial improved  0   6,328   58,483   192,030   7,641   1,174   350   0   266,006 
Manufacturing & industrial  0   0   31,451   80,075   3,721   0   0   0   115,247 
  $244,079  $24,697  $234,980  $681,060  $27,017  $5,313  $437  $0  $1,217,583 



Commercial loans rated a 6 or worse per the Company’s internal risk rating system are considered substandard, doubtful or loss. Commercial loans classified as substandard or worse were as follows at period-end (dollars in thousands):

  
March 31,
2021
  
December 31,
2020
 
Not classified as impaired $591  $591 
Classified as impaired  6,111   5,159 
Total commercial loans classified substandard or worse $6,702  $5,750 



  
September 30,
2021
  
December 31,
2020
 
Not classified as impaired $263  $591 
Classified as impaired  1,003   5,159 
Total commercial loans classified substandard or worse $1,266  $5,750 



The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in consumer loans based on payment activity (dollars in thousands):

March 31, 2021
 
Residential
Mortgage
  
Consumer
Unsecured
  
Home
Equity
  
Consumer
Other
 
Performing $139,636  $134  $52,709  $3,760 
Nonperforming  91          
Total $139,727  $134  $52,709  $3,760 


December 31, 2020
 
Residential
Mortgage
  
Consumer
Unsecured
  
Home
Equity
  
Consumer
Other
 
Performing $149,462  $161  $57,975  $4,056 
Nonperforming  94          
Total $149,556  $161  $57,975  $4,056 


September 30, 2021 
Residential
Mortgage
  
Consumer
Unsecured
  
Home
Equity
  
Consumer
Other
 
Performing $119,018  $103  $52,127  $3,684 
Nonperforming  88   0   0   0 
Total $119,106  $103  $52,127  $3,684 


December 31, 2020 
Residential
Mortgage
  
Consumer
Unsecured
  
Home
Equity
  
Consumer
Other
 
Performing $149,461  $161  $57,975  $4,056 
Nonperforming  95   0   0   0 
Total $149,556  $161  $57,975  $4,056 

-24--27-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – OTHER REAL ESTATE OWNED

Other real estate owned was as follows (dollars in thousands):

  
Three
Months Ended
March 31,
2021
  
Year
Ended
December 31,
2020
  
Three
Months Ended
March 31,
2020
 
Beginning balance $2,731  $3,112  $3,112 
Additions, transfers from loans         
Proceeds from sales of other real estate owned  (148)  (192)  (91)
Valuation allowance reversal upon sale  (94)  (202)   
Gain / (loss) on sales of other real estate owned  (14)  13    
   2,475   2,731   3,021 
Less: valuation allowance  (104)  (194)  (395)
Ending balance $2,371  $2,537  $2,626 

Activity in the valuation allowance was as follows (dollars in thousands):

  
Three
Months Ended
March 31,
2021
  
Three
Months Ended
March 31,
2020
 
Beginning balance $194  $364 
Additions charged to expense  4   31 
Reversals upon sale  (94)   
Ending balance $104  $395 

NOTE 5 – FAIR VALUE


ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value include:




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'sentity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.


Investment 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'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
: 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 chargeoffcharge-off 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: 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.


-28-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – FAIR VALUE (Continued)

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


  
Fair
Value
    
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
    
Significant Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
   
Fair
Value
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
March 31, 2021
         
Available for sale securities         
September 30, 2021
            
U.S. Treasury and federal agency securities $61,852 $ $61,852 $  $68,872  $0  $68,872  $0 
U.S. Agency MBS and CMOs 63,763  63,763    64,509   0   64,509   0 
Tax-exempt state and municipal bonds 43,495  43,495    40,008   0   40,008   0 
Taxable state and municipal bonds 60,080  60,080    64,593   0   64,593   0 
Corporate bonds and other debt securities 4,482  4,482    3,493   0   3,493   0 
Other equity securities 1,487  1,487    1,484   0   1,484   0 
Loans held for sale 9,315  9,315    2,635   0   2,635   0 
Interest rate swaps 3,801   3,801   3,446   0   0   3,446 
Interest rate swaps (3,801)   (3,801)  (3,446)  0   0   (3,446)
      ��                   
December 31, 2020
                         
Available for sale securities                         
U.S. Treasury and federal agency securities $64,110 $ $64,110 $  $64,110  $0  $64,110  $0 
U.S. Agency MBS and CMOs 64,983  64,983    64,983   0   64,983   0 
Tax-exempt state and municipal bonds 45,642  45,642    45,642   0   45,642   0 
Taxable state and municipal bonds 57,177  57,177    57,177   0   57,177   0 
Corporate bonds and other debt securities 4,920  4,920    4,920   0   4,920   0 
Other equity securities 1,513  1,513    1,513   0   1,513   0 
Loans held for sale 5,422  5,422    5,422   0   5,422   0 
Interest rate swaps 4,217   4,217   4,217   0   0   4,217 
Interest rate swaps (4,217)   (4,217)  (4,217)  0   0   (4,217)


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


    
Fair
Value
    
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
    
Significant Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
March 31, 2021
            
Impaired loans $5,800  $  $  $5,800 
Other real estate owned  28         28 
                 
December 31, 2020
                
Impaired loans $4,686  $  $  $4,686 
Other real estate owned  194         194 
 
 
Fair
Value
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
September 30, 2021
            
Impaired loans $794  $0  $0  $794 
                 
December 31, 2020
                
Impaired loans $4,686  $0  $0  $4,686 
Other real estate owned  194   0   0   194 


-26--29-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 54 – 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, 2021
            
Impaired Loans $5,800 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  28 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 (%)
September 30, 2021               
Impaired Loans $794 Sales comparison approach Adjustment for differences between comparable sales 1.0 to 7.0


 
Asset Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range (%) 
Asset Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range (%)
December 31, 2020
                           
Impaired Loans $4,686 Sales comparison approach 
Adjustment for differences
between comparable sales
 1.5 to 20.0 $4,686 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 194 Sales comparison approach 
Adjustment for differences
between comparable sales
 3.0 to 20.0  194 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


-27--30-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 54 – FAIR VALUE (Continued)


The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at March 31,September 30, 2021 and December 31, 2020 (dollars in thousands):



Level in
 March 31, 2021  December 31, 2020 Level in September 30, 2021  December 31, 2020 

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 banksLevel 1 $26,900 $26,900 $31,480 $31,480 Level 1 $30,413  $30,413  $31,480  $31,480 
Cash equivalentsLevel 2 884,985 884,985 752,256 752,256 Level 2  1,239,525   1,239,525   752,256   752,256 
Securities held to maturityLevel 3 89,170 92,139 79,468 83,246 Level 3  137,569   140,412   79,468   83,246 
FHLB stock  11,558  NA 11,558  NA    11,558  NA   11,558  NA 
Loans, netLevel 2 1,377,151 1,402,744 1,407,236 1,448,874 Level 2  1,119,287   1,140,169   1,407,236   1,448,874 
Bank owned life insuranceLevel 3 42,244 42,244 42,516 42,516 Level 3  52,781   52,781   42,516   42,516 
Accrued interest receivableLevel 2 5,994 5,994 5,625 5,625 Level 2  4,005   4,005   5,625   5,625 
Financial liabilities                           
DepositsLevel 2 (2,387,945) (2,388,095) (2,298,587) (2,298,867)Level 2  (2,553,175)  (2,553,148)  (2,298,587)  (2,298,867)
Other borrowed fundsLevel 2 (70,000) (72,438) (70,000) (73,010)Level 2  (85,000)  (86,973)  (70,000)  (73,010)
Long-term debtLevel 2 (20,619) (18,073) (20,619) (18,011)Level 2  0  0  (20,619)  (18,011)
Accrued interest payableLevel 2 (240) (240) (242) (242)Level 2  (72)  (72)  (242)  (242)
Off-balance sheet credit-related items                           
Loan commitments         0   0   0   0 


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.


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 65 – DEPOSITS

Deposits are summarized as follows (dollars in thousands):


 
March 31,
2021
  
December 31,
2020
  
September 30,
2021
  
December 31,
2020
 
Noninterest-bearing demand $848,798 $809,437  $934,477  $809,437 
Interest bearing demand 614,316 642,918   706,247   642,918 
Savings and money market accounts 822,493 742,685   818,525   742,685 
Certificates of deposit  102,338  103,547   93,926   103,547 
 $2,387,945 $2,298,587  $2,553,175  $2,298,587 


Time deposits that exceed the FDIC insurance limit of $250,000 were approximately $29.9$29.7 million at March 31,September 30, 2021 and $28.8 million at December 31, 2020.


-28--31-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 76 - 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
 
March 31, 2021
       
September 30, 2021       
Single maturity fixed rate advances $40,000 April 2021 to July 2024  2.50% $30,000 
May 2023 to July 2024
  2.87%
Putable advances  30,000 November 2024 to February 2030  1.36%  55,000 
November 2024 to July 2031
  0.74%
 $70,000       $85,000      


Principal Terms 
Advance
Amount
 Range of Maturities 
Weighted
Average
Interest Rate
 
December 31, 2020       
Single maturity fixed rate advances $40,000 
April 2021 to July 2024
  2.50%
Putable advances  30,000 
November 2024 to February 2030
  1.36%
  $70,000      


-29-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $402.7$389.8 million and $427.9 million under a blanket lien arrangement at March 31,September 30, 2021 and December 31, 2020, respectively.


Scheduled repayments of FHLB advances as of March 31,September 30, 2021 were as follows (in thousands):


2021 $10,000  $0 
2022    0 
2023 10,000   10,000 
2024 40,000   40,000 
2025    0 
Thereafter  10,000   35,000 
 $70,000  $85,000 


Federal Reserve Bank borrowings


The Company has a financing arrangement with the Federal Reserve Bank.  There were no0 borrowings outstanding at March 31,September 30, 2021 and December 31, 2020, and the Company had approximately $2.6$4.8 million and $12.9 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $2.9$5.2 million and $13.8 million at March 31,September 30, 2021 and December 31, 2020, respectively.


-32-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 87 - 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 March 31,September 30, 2021 and 2020 are as follows (dollars in thousands, except per share data):


  
Three Months
Ended
March 31, 2021
  
Three Months
Ended
March 31, 2020
 
Net income available to common shares $7,778  $6,411 
Weighted average shares outstanding, including participating stock awards - Basic  34,195,526   34,106,719 
Dilutive potential common shares:        
Stock options      
Weighted average shares outstanding - Diluted  34,195,526   34,106,719 
Basic earnings per common share $0.23  $0.19 
Diluted earnings per common share $0.23  $0.19 


  
Three Months
Ended
September 30, 2021
  
Three Months
Ended
September 30, 2020
  
Nine Months
Ended
September 30, 2021
  
Nine Months
Ended
September 30, 2020
 
Net income available to common shares $7,202  $7,120  $22,798  $21,169 
Weighted average shares outstanding, including participating stock awards - Basic  34,190,264   34,109,901   34,192,916   34,108,676 
Dilutive potential common shares:                
Stock options  0   0   0   0 
Weighted average shares outstanding - Diluted  34,190,264   34,109,901   34,192,916   34,108,676 
Basic earnings per common share $0.21  $0.21  $0.67  $0.62 
Diluted earnings per common share $0.21  $0.21  $0.67  $0.62 



There were no0 antidilutive shares of common stock in the three and nine month periods ended March 31,September 30, 2021 and 2020.


-30--33-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 98 - FEDERAL INCOME TAXES




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


  
Three Months
Ended
March 31, 2021
  
Three Months
Ended
March 31, 2020
 
Current $2,294  $1,700 
Deferred  (528)  (271)
  $1,766  $1,429 


  
Three Months
Ended
September 30, 2021
  
Three Months
Ended
September 30, 2020
  
Nine Months
Ended
September 30, 2021
  
Nine Months
Ended
September 30, 2020
 
Current $936  $1,304  $4,685  $5,974 
Deferred  800   309  656  (1,174)
  $1,736  $1,613  $5,341  $4,800 



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
March 31, 2021
  
Three Months
Ended
March 31, 2020
 
Statutory rate  21%  21%
Statutory rate applied to income before taxes $2,004  $1,646 
Deduct        
Tax-exempt interest income  (159)  (178)
Bank-owned life insurance  (58)  (51)
Other, net  (21)  12 
  $1,766  $1,429 


  
Three Months
Ended
September 30, 2021
  
Three Months
Ended
September 30, 2020
  
Nine Months
Ended
September 30, 2021
  
Nine Months
Ended
September 30, 2020
 
Statutory rate  21%  21%  21%  21%
Statutory rate applied to income before taxes $1,877  $1,834  $5,909  $5,454 
Deduct                
Tax-exempt interest income  (162)  (178)  (477)  (533)
Bank-owned life insurance  (54)  (45)  (165)  (144)
Other, net  75   2   74  23 
  $1,736  $1,613  $5,341  $4,800 



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, the Company considerswe 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.  Management believes it is more likely than not that all of the deferred tax assets at March 31, 2021 and December 31, 2020 will be realized against deferred tax liabilities and projected future taxable income.




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


  
March 31,
2021
  
December 31,
2020
 
Deferred tax assets      
Allowance for loan losses $3,665  $3,656 
Net deferred loan fees  1,309  $822 
Nonaccrual loan interest  96   120 
Valuation allowance on other real estate owned  22   41 
Unrealized loss on securities available for sale      
Other  525   499 
Gross deferred tax assets  5,617   5,138 
Valuation allowance      
Total net deferred tax assets  5,617   5,138 
Deferred tax liabilities        
Depreciation  (1,238)  (1,285)
Prepaid expenses  (170)  (170)
Unrealized gain on securities available for sale  (409)  (1,120)
Other  (502)  (504)
Gross deferred tax liabilities  (2,319)  (3,079)
Net deferred tax asset $3,298  $2,059 


  
September 30,
2021
  
December 31,
2020
 
Deferred tax assets      
Allowance for loan losses $3,472  $3,656 
Net deferred loan fees  519  
822 
Nonaccrual loan interest  69   120 
Valuation allowance on other real estate owned  5   41 
Other  389   499 
Gross deferred tax assets  4,454   5,138 
Valuation allowance  0   0 
Total net deferred tax assets  4,454   5,138 
Deferred tax liabilities        
Depreciation  (1,260)  (1,285)
Prepaid expenses  (262)  (170)
Unrealized gain on securities available for sale  (397)  (1,120)
Other  (409)  (504)
Gross deferred tax liabilities  (2,328)  (3,079)
Net deferred tax asset $2,126  $2,059 



There were no0 unrecognized tax benefits at March 31,September 30, 2021 or December 31, 2020 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 2016.2018.


-31--34-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 109 – 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):


 
March 31,
2021
  
December 31,
2020
  
September 30,
2021
  
December 31,
2020
 
Commitments to make loans $77,460 $88,022  $103,595  $88,022 
Letters of credit 12,374 11,751   11,784   11,751 
Unused lines of credit 644,440 596,298   691,928   596,298 


The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $6.3$3.7 million and $0 at March 31,September 30, 2021 and December 31, 2020, respectively.


The Bank enters into commitments to sell mortgage backed securities, which it later buys back in order to hedge its exposure to interest rate risk in its mortgage pipeline.  These commitments were approximately $33.8$8.5 million and $21.0 million at March 31,September 30, 2021 and December 31, 2020, respectively.


At March 31,September 30, 2021, approximately 53.3%40.3% 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 1110 – CONTINGENCIES


The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. As of March 31,September 30, 2021, 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 1211SHAREHOLDERS'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 five5 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 rules implementing the Basel Committee on Banking Supervision'sSupervision’s capital guidelines for U.S. banks (commonly known as Basel III). The rules include a 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 effectively results in a minimum CET1 ratio of 7.0%. The minimum ratio of Tier 1 capital to risk-weighted assets is 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5%), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer), and requires a minimum leverage ratio of 4.0%.


-32--35-

Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1211 – SHAREHOLDERS' EQUITY (Continued)


At March 31,September 30, 2021 and December 31, 2020, actual capital levels and minimum required levels were (dollars in thousands):


      
Minimum
Capital
  
Minimum Capital
Adequacy With
  
To Be Well
Capitalized Under
Prompt Corrective
        
Minimum
Capital
  
Minimum Capital
Adequacy With
  
To Be Well
Capitalized Under
Prompt Corrective
 
 Actual  Adequacy  Capital Buffer  Action Regulations  Actual  Adequacy  Capital Buffer  Action Regulations 
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
March 31, 2021
                 
September 30, 2021
                        
CET1 capital (to risk weighted assets)                                         
Consolidated $240,843 16.7% $64,791 4.5% $100,786 7.0% N/A  N/A  $250,719   17.4% $64,714   4.5% $100,666   7.0%  N/A   N/A 
Bank 253,330 17.6 64,785 4.5 100,776 7.0 $93,578 6.5%  242,635
   16.9   64,703   4.5   100,648   7.0  $93,459   6.5%
Tier 1 capital (to risk weighted assets)                                                 
Consolidated 260,843 18.1 86,388 6.0 122,383 8.5  N/A  N/A   250,719
   17.4   86,285   6.0   122,237   8.5   N/A   N/A 
Bank 253,330 17.6 86,380 6.0 122,371 8.5 115,173 8.0   242,635
   16.9   86,270   6.0   122,216   8.5   115,027   8.0 
Total capital (to risk weighted assets)                                                 
Consolidated 278,295 19.3 115,184 8.0 151,180 10.5  N/A  N/A   267,251   18.6   115,046   8.0   150,998   10.5   N/A   N/A 
Bank 270,782 18.8 115,173 8.0 151,165 10.5 143,966 10.0   259,167   18.0   115,027   8.0   150,973   10.5   143,783   10.0 
Tier 1 capital (to average assets)                                                 
Consolidated 260,843 9.8 106,493 4.0  N/A  N/A  N/A  N/A   250,719   8.5   117,813   4.0   N/A   N/A   N/A   N/A 
Bank 253,330 9.5 106,459 4.0  N/A  N/A 133,073 5.0   242,635   8.2   117,801   4.0   N/A   N/A   147,251   5.0 
                                                 
December 31, 2020
                 
December 31, 2020
                                
CET1 capital (to risk weighted assets)                                                 
Consolidated $235,629 15.8% $67,170 4.5% $104,487 7.0% N/A  N/A  $235,629   15.8% $67,170   4.5% $104,487   7.0%  N/A   N/A 
Bank 248,829 16.7 67,161 4.5 104,473 7.0 $97,010 6.5%  248,829   16.7   67,161   4.5   104,473   7.0  $97,010   6.5%
Tier 1 capital (to risk weighted assets)                                                 
Consolidated 255,629 17.1 89,561 6.0 126,877 8.5  N/A  N/A   255,629   17.1   89,561   6.0   126,877   8.5   N/A   N/A 
Bank 248,829 16.7 89,548 6.0 126,860 8.5 119,397 8.0   248,829   16.7   89,548   6.0   126,860   8.5   119,397   8.0 
Total capital (to risk weighted assets)                                                 
Consolidated 273,037 18.3 119,414 8.0 156,731 10.5  N/A  N/A   273,037   18.3   119,414   8.0   156,731   10.5   N/A   N/A 
Bank 266,237 17.8 119,397 8.0 156,709 10.5 149,247 10.0   266,237   17.8   119,397   8.0   156,709   10.5   149,247   10.0 
Tier 1 capital (to average assets)                                                 
Consolidated 255,629 9.9 103,420 4.0  N/A  N/A  N/A  N/A   255,629   9.9   103,420   4.0   N/A   N/A   N/A   N/A 
Bank 248,829 9.6 103,391 4.0  N/A  N/A 129,238 5.0   248,829   9.6   103,391   4.0   N/A   N/A   129,238
   5.0 


All $20.0 million of trust preferred securities outstanding at  March 31, 2021 and December 31, 2020 respectively, qualified as Tier 1 capital. On July 7, 2021, the Company redeemed all of the outstanding trust preferred securities.  Refer to our 2020 Form 10-K for more information on the trust preferred securities.


The Bank was categorized as "well capitalized"“well capitalized” at March 31,September 30, 2021 and December 31, 2020.


-33-
-36-

Item2.
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 and Macatawa Statutory Trust II.Bank.  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. The Company previously owned all of the common stock of Macatawa Statutory Trust II, is a grantor trust that issued trust preferred securities and issuedwas not consolidated with the Company under accounting principles generally accepted in the United States of America.  On July 7, 2021, the Company redeemed all of the $20.0 million of pooledoutstanding trust preferred securities. This trust is not consolidated in our Consolidated Financial Statements.securities and $619,000 of common securities associated with this trust.  For further information regarding consolidation, see the Notes to Consolidated Financial Statements.

At March 31,September 30, 2021, we had total assets of $2.73$2.90 billion, total loans of $1.38$1.14 billion, total deposits of $2.39$2.55 billion and shareholders' equity of $242.4$252.2 million.  For the three months ended March 31,September 30, 2021, we recognized net income of $7.8$7.2 million compared to $6.4$7.1 million for the same period in 2020.  For the nine months ended September 30, 2021, we recognized net income of $22.8 million compared to $21.2 million for the same period in 2020.  The Bank was categorized as “well capitalized” under regulatory capital standards at March 31,September 30, 2021.

We paid a dividend of $0.08 per share in each quarter ofin 2020 and in the first quarterthree quarters of 2021.

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

The Company quickly responded to the changing environment by successfully executing its business continuity plan, including implementing work from home arrangements and limiting branch activities.  As of March 31, 2021, branches were fully open with additional health and safety requirements to comply with U.S. federal and state of Michigan health mandates, including, among other things, daily deep cleaning, nonsurgical face mask requirements and strict social distancing measures.


On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”  This guidance encourages financial institutions to work prudently with borrowers that are or that may be unable to meet their contractual obligations because of the effects of COVID-19.  The guidance goes on to explainexplained that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”).  The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs.  On December 27, 2020, President Trump signed another COVID-19 relief bill was signed that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated.  Through March 31,September 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  The majorityAs of these modifications involved three-month extensions.  By March 31,September 30, 2021, mostall of these modifications had expired other than those receiving a third short-term modification as allowed underand the guidance.  At March 31, 2021, there were 5 such loans under COVID-19 modification, totaling $21.9 million.  This is down from a quarter end peak of $297.3 million at June 30, 2020.returned to their contractual payment terms.


The CARES Act, as amended, included an allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”).  PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP.  These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part.  Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through December 31, 2020, the Bank had originated 1,738 PPP loans totaling $346.7 million in principal, with an average loan size of $200,000.  Fees totaling $10.0 million were generated from the SBA for these loans in the year ended December 31, 2020.  These fees are deferred and amortized into interest income over the contractual period of 24 months or 60 months, as applicable.  Upon SBA forgiveness, unamortized fees are then recognized into interest income.  Participation in the PPP had a significant impact on the Bank’s asset mix and net interest income in 2020 and will continue to impact both asset mix and net interest income until these loans are forgiven or paid off.  The initial PPP expired on August 8, 2020.  Through December 31, 2020, 747765 PPP loans totaling $96.9$113.5 million had been forgiven by the SBA and a total of $4.4$5.4 million in PPP fees had been recognized by the Bank.  Of the 5 remaining loans, 3 were modified during the three months ended March 31, 2021.


On December 27, 2020, President Trump signed another COVID-19 relief bill was signed that extended and modified several provisions of the PPP.  This included an additional allocation of $284 billion.  The SBA reactivated the PPP on January 11, 2021.  The Bank is originatingoriginated additional loans through the PPP, loans, which will currently extend throughexpired on May 31, 2021.  In the threenine months ended March 31,September 30, 2021, the Bank had generated and received SBA approval on 8981,000 PPP loans totaling $112.7$128.1 million with $5.1and generated $5.6 million in related deferred fees under the 2021 PPP authorization.fees.  In the threenine months ended March 31,September 30, 2021, 5231,742 PPP loans totaling $71.7$279.9 million had been forgiven by the SBA and a total of $2.0$7.1 million in PPP fees had been recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP originations.


-34--37-

RESULTS OF OPERATIONS

Summary: Net income for the three months ended March 31,September 30, 2021 was $7.8$7.2 million, compared to $6.4$7.1 million for the same period in 2020.  Net income per share on a diluted basis for the three months ended March 31,September 30, 2021 was $0.23$0.21 compared to $0.19$0.21 for the same period in 2020.  Net income for the nine months ended September 30, 2021 was $22.8 million, compared to $21.2 million for the same period in 2020.  Net income per share on a diluted basis for the nine months ended September 30, 2021 was $0.67 compared to $0.62 for the same period in 2020.

The increase in earnings in both the three and nine months ended March 31,September 30, 2021 compared to the same periodperiods in 2020 was due primarily to a higher levellower provision for loan losses more than offsetting the impact of lower levels of net gains on mortgage loansinterest income.  Net interest income decreased to $14.3 million in the three months ended September 30, 2021 compared to $14.7 million in the same period in 2020.  Net interest income decreased to $43.2 million in the nine months ended September 30, 2021 compared to $45.0 million in the nine months ended September 30, 2020.  These decreases in net interest income were primarily attributable to the decreases in volumes of interest-earning assets and, to a lesser extent, a lower provision for loan losses.  decreases in short-term interest rates instituted by the Federal Reserve in March 2020.
The provision for loan losses was $0a benefit of $550,000 for the three months ended March 31,September 30, 2021, compared to $700,000an expense of $500,000 for the same period in 2020.  The provision for loan losses inwas a benefit of $1.3 million for the threenine months ended March 31, 2020 was impacted bySeptember 30, 2021 compared to an expense of $2.2 million for the establishment of a specific reserve on a large commercial loan relationship.  Provisionssame period in both periods were impacted by qualitative factors applied to address the increased risk of loss from the negative effects of the COVID-19 pandemic.2020.  We were in a net loan recovery position for the three months ended March 31,September 30, 2021, with $44,000$276,000 in net loan recoveries, compared to $989,000$203,000 in net loan recoveries in the same period in 2020.  Partially offsettingWe were also in a net loan recovery position for the favorable impact on earnings of higher mortgage gains and a lower provision fornine months ended September 30, 2021, with $424,000 in net loan losses, net interest income decreasedrecoveries compared to $14.5$2.8 million in the three months ended March 31, 2021 compared to $15.3 millionnet loan charge-offs in the same period in 2020.  The nine month period ended September 30, 2020 was impacted by a $4.1 million charge-off taken in June 2020 related to a single loan relationship with a movie theater business where the underlying assets were sold through bankruptcy proceedings.  The provision for loan losses in the 2020 periods was also impacted by increases to qualitative environmental factors to address increased risk of loss attributable to the COVID-19 pandemic.

Net Interest Income: Net interest income totaled $14.5$14.3 million for the three months ended March 31,September 30, 2021 compared to $15.3$14.7 million for the same period in 2020.

Net interest income was positively impacteddecreased to $43.2 million in the threenine months ended March 31,September 30, 2021 by an increase in average earning assets of $640.0 million compared to $45.0 million in the same period in 2020.  However, our average yield on earning assets for the threenine months ended March 31, 2021 decreased 126 basis points compared to the same period in 2020 from 3.71% to 2.45%, offsetting the effect of the growth in earning assets.September 30, 2020.


Net interest income for the firstthird quarter of 2021 decreased $813,000$378,000 compared to the same period in 2020.  Of this decrease, $3.0$2.5 million was due to decreases in rates earned or paid, partially offset by $2.1 million from increaseschanges in the volume of average interest earning assets and interest bearing liabilities.liabilities, partially offset by a $2.1 million increase from changes in rates earned or paid.  The largest changes came in commercial loan interest income which decreased by $489,000 in the first quarter of 2021.  Of the $489,000 decreaseoccurred in interest income on commercial loans $1.5 million was due to decreases(excluding PPP loans) and in rates earned, partially offset by the increase of $1.0 million in average balances between periods.  Net interest incomePPP loans which fluctuated significantly in the firstthird quarter of 2021 benefitted from $2.0 million in fee amortization related to PPP loans.  Net interest income in the first quarter of 2020 benefitted from prepayment fees and interest recovery of $65,000 collected on two commercial loans.

Average interest earning assets totaled $2.54 billion for three months ended March 31, 2021 compared to $1.90 billion for the same period in 2020.  An increaseThe net change in interest income for commercial loans (excluding PPP loans) was $1.4 million with a decrease of $624.0$639,000 due to rate and a decrease of $786,000 due to portfolio contraction.  PPP loans contributed an additional $1.0 million in average federal funds sold and other short-term investments were the primary components of the increase.  The net interest margin was 2.33% forincome in the three months ended March 31,third quarter of 2021 primarily due to higher PPP fee recognition tied to loan principal forgiveness.  Additionally, residential mortgage loan interest income decreased by $565,000 in the third quarter of 2021 compared to 3.25% for the same period in 2020.  YieldOf the $565,000 decrease in interest income on residential mortgage loans, $448,000 was due to a decrease in average balances resulting from a high volume of originations of refinanced loans which are sold versus retained in portfolio. Rate reductions in the deposit portfolio served to partially offset the net negative effects of the changes noted above in interest income.

Net interest income for the nine months ended September 30, 2021 decreased $1.8 million compared to the same period in 2020.  Of this decrease, $4.0 million was from changes in the volume of average interest earning assets and interest bearing liabilities, partially offset by a $2.2 million increase due to changes in rates earned or paid.  The largest changes occurred in interest income on commercial loans (excluding PPP loans) decreased from 4.32% for threeand in PPP loans which fluctuated significantly in the first nine months ended March 31, 2020of 2021 compared to 3.76%, for the same period in 2021.2020.  The yield onnet change for commercial loans (excluding PPP loans) was a $6.3 million decrease with a decrease in interest income of $2.5 million due to rate and a decrease in interest income of $3.8 million due to portfolio contraction.  PPP loans was 4.24% forcontributed an additional $5.0 million in net interest income in the threefirst nine months ended March 31, 2021. The rate on these loans is 1.0%, but the yield is also impacted by amortizationof 2021 due to slightly higher average balances and significantly higher levels of PPP fees.  The yieldfee recognition upon forgiveness.  Of the $1.7 million decrease in interest income on residential mortgage loans, decreased$1.4 million was due to a decrease in average balances resulting from 3.71% fora high volume of originations of refinanced loans which are sold versus retained in portfolio and $326,000 was due to lower loan rates. Rate reductions in the three months ended March 31, 2020deposit portfolio served to 3.51% forpartially offset the same period in 2021, while yields on consumer loans decreased from 4.79% for the first quarter of 2020 to 4.09% for the first quarter of 2021.  The decreases in yields on commercial loans and consumer loans were the resultnet negative effects of the predominance of loanschanges noted above in these categories with variable rates of interest tied to prime and LIBOR, each of which decreased significantly in 2020 and remained low in the first quarter of 2021.income.

In response to the news and government action related to COVID-19, the Federal Reserve Board decreased the target federal funds rate by 150 basis points in March 2020.  As the Company iswe are in an asset-sensitive position, reductions in market interest rates have a negative impact on margin as the Company’sour interest earning assets reprice faster than its interest-bearing liabilities. Much of our asset-sensitivity is due to 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 net interest income when short-term interest rates decline.


The cost of funds decreased to 0.19%0.13% in the firstthird quarter of 2021 compared to 0.66%0.29% in the firstthird quarter of 2020. For the first nine months of 2021, the cost of funds decreased to 0.16% compared to 0.44% for the same period in 2020.  Decreases in the rates paid on our interest-bearing checking, savings and money market accounts in response to the federal funds rate decreases over the past year caused the decrease in our cost of funds.


-35--38-

The following table shows an analysis of net interest margin for the three month periods ended March 31,September 30, 2021 and 2020 (dollars in thousands):


 For the three months ended March 31,  For the three months ended September 30, 
 2021  2020  2021  2020 
 
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 $190,019 $787 1.66% $191,531 $1,061 2.22% $200,981  $786   1.56% $179,887  $867   1.92%
Tax-exempt securities (1) 124,039 758 3.15 127,972 882 3.54   172,372   777   2.32   137,351   861   3.23 
Commercial loans, excluding PPP loans (2) 956,396 8,995 3.76 1,103,320 12,036 4.32 
Commercial loans (2)  873,248   8,055   3.61   955,695   9,480   3.88 
PPP loans (3) 240,545 2,552 4.24      133,413   3,104   9.10   346,073   2,067   2.34 
Residential mortgage loans 150,701 1,323 3.51 205,782 1,908 3.71   123,574   1,039   3.36   175,978   1,604   3.64 
Consumer loans 59,129 597 4.09 76,195 907 4.79   54,591   563   4.09   67,549   703   4.14 
Federal Home Loan Bank stock 11,558 61 2.10 11,558 124 4.24   11,558   44   1.51   11,558   100   3.41 
Federal funds sold and other short-term investments  804,913  201  0.10  180,878  576  1.26   1,234,420   474   0.15   541,981   140   0.10 
Total interest earning assets (1) 2,537,300 15,274 2.45 1,897,236 17,494 3.71   2,804,157   14,842   2.12   2,416,072   15,822   2.62 
Noninterest earning assets:                                     
Cash and due from banks 31,156     29,142       39,725           35,737         
Other  98,346      91,445       104,782           102,389         
Total assets $2,666,802     $2,017,823      $2,948,664          $2,554,198         
Liabilities
                                     
Deposits:                                     
Interest bearing demand $626,664 $35 0.02% $434,910 $190 0.18% $723,516  $49   0.03% $587,356  $78   0.05%
Savings and money market accounts 797,590 60 0.03 651,035 714 0.44   817,307   60   0.03   743,612   121   0.07 
Time deposits 107,625 184 0.69 153,561 699 1.83   99,312   100   0.40   128,551   422   1.31 
Borrowings:                                     
Other borrowed funds 70,000 352 2.01 63,736 349 2.17   79,565   325   1.60   72,057   364   1.97 
Long-term debt  20,619  153  2.96  20,619  239  4.59   1,345   12   3.42   20,619   163   3.10 
Total interest bearing liabilities 1,622,498 784 0.19 1,323,861 2,191 0.66   1,721,045   546   0.13   1,552,195   1,148   0.29 
Noninterest bearing liabilities:                                     
Noninterest bearing demand accounts 789,133     462,489       964,908           755,990         
Other noninterest bearing liabilities 14,148     10,935       12,717           14,311         
Shareholders' equity  241,023      220,538       249,994           231,702         
Total liabilities and shareholders' equity $2,666,802      $2,017,823       $2,948,664          $2,554,198         
Net interest income   $14,490     $15,303        $14,296          $14,674     
Net interest spread (1)     2.26%     3.05%          1.99%          2.33%
Net interest margin (1)     2.33%     3.25%          2.04%          2.43%
Ratio of average interest earning assets to average interest bearing liabilities 156.38%     143.31%       162.93%          155.66%        


(1)
Yields are presented on a tax equivalent basis using a 21%an assumed tax rate of 21% at March 31,September 30, 2021 and 2020.
(2)
Includes loan fees of $169,000$103,000 and $178,000$152,000 for the three months ended March 31,September 30, 2021 and 2020, respectively.  Includes average nonaccrual loans of approximately $528,000$426,000 and $2,546,000$196,000 for the three months ended March 31,September 30, 2021 and 2020, respectively.
  Excludes PPP loans.
(3)
Includes loan fees of $2.0$2.8 million and $1.2 million for the three months ended March 31, 2021.
September 30, 2021 and 2020, respectively.


-36--39-

The following table shows an analysis of net interest margin for the nine month periods ended September 30, 2021 and 2020 (dollars in thousands):
  For the nine months ended September 30, 
  2021  2020 
  
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
  
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
 
Assets                  
Taxable securities $195,867  $2,365   1.61% $184,809  $2,882   2.08%
Tax-exempt securities (1)  145,571   2,295   2.71   132,471   2,607   3.38 
Commercial loans (2)  906,493   25,590   3.72   1,035,247   31,882   4.06 
PPP loans (3)  206,941   8,690   5.54   203,875   3,682   2.38 
Residential mortgage loans  136,435   3,526   3.44   190,782   5,275   3.69 
Consumer loans  56,373   1,724   4.09   71,732   2,354   4.38 
Federal Home Loan Bank stock  11,558   162   1.84   11,558   339   3.86 
Federal funds sold and other short-term investments  1,012,179   948   0.12   346,900   802   0.30 
Total interest earning assets (1)  2,671,417   45,300   2.28   2,177,374   49,823   3.07 
Noninterest earning assets:                        
Cash and due from banks  35,084           30,572         
Other  102,849           96,605         
Total assets $2,809,350          $2,304,551         
Liabilities                        
Deposits:                        
Interest bearing demand $670,029  $122   0.02% $510,181  $356   0.09%
Savings and money market accounts  811,381   183   0.03   698,097   1,050   0.20 
Time deposits  103,271   428   0.55   141,762   1,712   1.62 
Borrowings:                        
Other borrowed funds  70,623   1,005   1.88   68,610   1,069   2.06 
Long-term debt  14,123   319   2.98   20,619   612   3.90 
Total interest bearing liabilities  1,669,427   2,057   0.16   1,439,269   4,799   0.44 
Noninterest bearing liabilities:                        
Noninterest bearing demand accounts  881,177           625,759         
Other noninterest bearing liabilities  13,535           13,327         
Shareholders' equity  245,211           226,196         
Total liabilities and shareholders' equity $2,809,350          $2,304,551         
Net interest income     $43,243          $45,024     
Net interest spread (1)          2.12%          2.63%
Net interest margin (1)          2.18%          2.77%
Ratio of average interest earning assets to average interest bearing liabilities  160.02%          151.28%        
(1)Yields are presented on a tax equivalent basis using an assumed tax rate of 21% at September 30, 2021 and 2020.
(2)Includes loan fees of $628,000 and $612,000 for the nine months ended September 30, 2021 and 2020, respectively. Includes average nonaccrual loans of approximately $472,000 and $2.8 million for the nine months ended September 30, 2021 and 2020, respectively. Excludes PPP loans.
(3)Includes loan fees of $7.1 million and $2.1 million for the nine months ended September 30, 2021 and 2020, respectively.

-40-

The following table presents the dollar amount of changes in net interest income due to changes in volume and rate:rate (dollars in thousands):


 
For the three months ended March 31,
2021 vs 2020
Increase (Decrease) Due to
  
For the three months ended September 30,
2021 vs 2020
Increase (Decrease) Due to
  
For the nine months ended September 30,
2021 vs 2020
Increase (Decrease) Due to
 
 Volume  Rate  Total  Volume  Rate  Total  Volume  Rate  Total 
(Dollars in thousands)       
                  
Interest income                         
Taxable securities $(8) $(266) $(274) $94  $(175) $(81) $164  $(681) $(517)
Tax-exempt securities (26) (98) (124) 255  (339) (84) 338  (650) (312)
Commercial loans, excluding PPP loans (1,494) (1,547) (3,041) (786) (639) (1,425) (3,767) (2,525) (6,292)
PPP loans 2,552  2,552  (1,868) 2,905  1,037  56  4,952  5,008 
Residential mortgage loans (488) (97) (585) (448) (117) (565) (1,423) (326) (1,749)
Consumer loans (185) (125) (310) (134) (6) (140) (484) (146) (630)
Federal Home Loan Bank stock  (63) (63)   (56) (56)   (177) (177)
Federal funds sold and other short-term investments  3,055  (3,430)  (375)  240   94   334   828   (682)  146 
Total interest income 3,406 (5,626) (2,220) (2,647) 1,667  (980) (4,288) (235) (4,523)
Interest expense                         
Interest bearing demand $393 $(548) $(155) $15  $(44) $(29) $87  $(321) (234)
Savings and money market accounts 908 (1,562) (654) 11  (72) (61) 147  (1,014) (867)
Time deposits (167) (348) (515) (80) (242) (322) (376) (908) (1,284)
Other borrowed funds 126 (123) 3  34  (73) (39) 30  (94) (64)
Long-term debt    (86)  (86)  (166)  15   (151)  (167)  (126)  (293)
Total interest expense  1,260  (2,667)  (1,407)  (186)  (416)  (602)  (279)  (2,463)  (2,742)
Net interest income $2,146 $(2,959) $(813) $(2,461) $2,083  $(378) $(4,009) $2,228  $(1,781)


Provision for Loan Losses: The provision for loan losses for the three months ended March 31,September 30, 2021 was $0a benefit of $550,000 compared to $700,000an expense of $500,000 for the same period in 2020.  Positively impacting the provision for loan losses for each period were the continued stabilization of asset quality metrics and net loan recoveries of $44,000 in the three months ended March 31, 2021 and $989,000 in the same period in 2020.   Positively impacting the provision for loan losses for the three months ended March 31, 2021 was the reduction in loan portfolio balances, excluding PPP loans.  Negatively impacting theThe provision for loan losses for the first quarternine months of 20202021 was a benefit of $1.3 million compared to an expense of $2.2 million for the establishment of a specific reserve on a large commercial loan.  Provisionssame period in both2020.  The provisions for loan losses for the 2020 periods were impacted by additional qualitative adjustments made to provide for estimated losses associated with the estimated impactCOVID-19 pandemic as well as a $4.1 million charge-off taken in June 2020 related to a single loan relationship with a movie theater business for which the underlying assets were sold through bankruptcy proceedings, some of COVID-19.which was specifically reserved for previously.  No other loans of this industry type remain in our portfolio.  This was partially offset by continued strong asset quality metrics and loan portfolio contraction.  When excluding PPP loans, which are 100% guaranteed by the SBA, total loans decreased by $9.6 million in the three months ended September 30, 2021.  This was a partial factor in determining the provision for loan losses in the third quarter of 2021.  Net loan recoveries were $276,000 in the three months ended September 30, 2021 compared to net loan recoveries of $203,000 in the same period in 2020.

Gross loan recoveries were $94,000$298,000 for the three months ended March 31,September 30, 2021 and $1.0 million$227,000 for the same period in 2020.  In the three months ended March 31,September 30, 2021, we had $50,000$22,000 in gross loan charge-offs, compared to $39,000$24,000 in the same period in 2020.  We continueFor the nine months ended September 30, 2021, we experienced gross loan recoveries of $526,000 compared 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$1.4 million for the same level we have experiencedperiod in 2020.  Gross charge-offs for the past several quarters.nine months ended September 30, 2021 were $102,000 compared to $4.2 million for the same period in 2020.

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.  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.

-41-

Noninterest Income: Noninterest income for the three and nine month periodperiods ended March 31,September 30, 2021 was $6.5$5.6 million and $18.3 million compared to $5.0$6.1 million and $16.9 million for the same periodperiods in 2020.2020, respectively.   The components of noninterest income are shown in the table below (in thousands):


 
Three Months
Ended
March 31,
2021
  
Three Months
Ended
March 31,
2020
  
Three Months
Ended
September 30,
2021
  
Three Months
Ended
September 30,
2020
  
Nine Months
Ended
September 30,
2021
  
Nine Months
Ended
September 30,
2020
 
Service charges and fees on deposit accounts $992 $1,110  $1,183  $987  $3,240  $2,957 
Net gains on mortgage loans 2,015 650  851  1,546  4,177  4,045 
Trust fees 1,005 935  1,079  921  3,217  2,801 
ATM and debit card fees 1,485 1,337  1,676  1,542  4,844  4,199 
Bank owned life insurance (“BOLI”) income 276 242  260  215  787  688 
Investment services fees 477 424  330  328  1,146  980 
Other income  289  261   263   553   938   1,234 
Total noninterest income $6,539 $4,959  $5,642  $6,092  $18,349  $16,904 

-37-


Net gains on mortgage loans were up $1.4 milliondown $695,000 in the three months ended March 31,September 30, 2021 and were up $132,000 in the nine months ended September 30, 2021 compared to the same periodperiods in 2020 as a result of an increasechanges in the volume of loans originated for sale andsale.  In the past two years volumes have been high due to a continued periodlower interest rate environment, spurring more refinancing of historically low market interest rates.fixed rate loans which we sell into the secondary market.  Mortgage loans originated for sale in the three months ended March 31,September 30, 2021 were $47.3$21.3 million, compared to $29.4$40.8 million in the same period in 2020.  Mortgage loansFor the first nine months of 2021, mortgages originated for portfoliosale were $107.8 million, compared to $120.2 million for the same period in 2020.
Trust fees were up $158,000 in the three months ended March 31,September 30, 2021 and were $9.8 million,up $416,000 in the nine months ended September 30, 2021 compared to $4.6 million in the same period in 2020.  Investment services fees were up inthree and nine months ended September 30, 2020, respectively. The increase for the first three and nine months ofended September 30, 2021 was largely due to success in growing the number2020 periods reflecting lower market valuations of investment services customer relationships we have and favorable investment market value changes.trust assets resulting from the COVID-19 shutdown of the economy.  ATM and debit card fees were also up in the three and nine months ended March 31,September 30, 2021 as compared to the three and nine months ended September 30, 2020, respectively, due to higherreduced volume of usage by our customers.customers during the COVID-19 shutdown of the economy in the 2020 periods.  These volumes and resulting income have returned to more normal levels in the 2021 periods.  Service charges on deposit accounts increased in the three and nine months ended September 30, 2021 as compared to the same periods in 2020 as customers returned to more normal behaviors in 2021 after having curtailed spending in 2020 due to uncertainty related to the COVID-19 pandemic.  Additionally, customers’ account balances in 2020 were bolstered by economic impact payments, thereby resulting in fewer overdrafts.

Noninterest Expense: Noninterest expense decreasedincreased by $17,000 to $11.5$11.6 million for the three month period ended March 31,September 30, 2021 from $11.7as compared to the same period in 2020.  Noninterest expense increased by $994,000 to $34.8 million for the nine months ended September 30, 2021 compared to $33.8 million for the same period in 2020.  The components of noninterest expense are shown in the table below (in thousands):


 
Three Months
Ended
March 31,
2021
  
Three Months
Ended
March 31,
2020
  
Three Months
Ended
September 30,
2021
  
Three Months
Ended
September 30,
2020
  
Nine Months
Ended
September 30,
2021
  
Nine Months
Ended
September 30,
2020
 
Salaries and benefits $6,412 $6,691  $6,278  $6,480  $19,192  $18,937 
Occupancy of premises 1,037 1,009  992  1,026  3,023  2,984 
Furniture and equipment 937 855  1,014  967  2,929  2,704 
Legal and professional 222 291  272  260  768  798 
Marketing and promotion 175 238  175  239  525  716 
Data processing 908 760  839  761  2,602  2,309 
FDIC assessment 170   204  131  532  207 
Interchange and other card expense 358 347  391  367  1,137  1,041 
Bond and D&O insurance 111 105  112  104  334  313 
Net (gains) losses on repossessed and foreclosed properties 18 31 
Administration and disposition of problem assets 14 30 
Outside services 434 453  510  491  1,434  1,322 
Other noninterest expense  689  912   763   707   2,277   2,428 
Total noninterest expense $11,485 $11,722  $11,550  $11,533  $34,753  $33,759 


-42-

Most categories of noninterest expense were relatively unchanged compared to the three months ended March 31,September 30, 2020 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, decreased by $279,000$202,000 in the three months ended March 31,September 30, 2021 from same period in 2020. This decrease was partiallyis primarily due to higher salary cost deferrals (drivena decrease in variable-based compensation due to lower mortgage origination volume and a reduction in 401k matching contributions. Salaries and benefits increased by PPP loan originations) and lower medical insurance claims experience, offset by$255,000 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 due primarily to a higher level of variable basedstock-based compensation which was up $150,000 forand variable-based compensation tied to brokerage services. The table below identifies the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due in part to higher mortgage production.primary components of salaries and benefits (in thousands):

  
Three Months
Ended
September 30,
2021
  
Three Months
Ended
September 30,
2020
  
Nine Months
Ended
September 30,
2021
  
Nine Months
Ended
September 30,
2020
 
Salaries and other compensation $
5,708  $
5,678  $
17,174  $
16,919 
Salary deferral from commercial loan originations  (204)  (229)  (825)  (899)
Bonus accrual  289   296   688   619 
Mortgage production - variable comp  187   316   903   834 
401k matching contributions  98   194   327   464 
Medical insurance costs  200   225   925   1,000 
Total salaries and benefits $6,278  $6,480  $19,192  $18,937 
Occupancy expenses were up $28,000down $34,000 in the three months ended March 31,September 30, 2021 and were up $39,000 in the nine months ended September 30, 2021 compared to the same periods in 2020 due to fluctuations in maintenance costs incurred.  Furniture and equipment expenses were up $47,000 in the three months ended September 30, 2021 and were up $225,000 in the nine months ended September 30, 2021 compared to the same periods in 2020 due to costs associated with equipment and service contracts primarily to improve information security.
Our FDIC assessment costs increased by $73,000 in the three months ended September 30, 2021 compared to the same period in 2020 due to higher maintenance costs associated with our branch facilities. These maintenance costs were up $32,000 primarily due to higher costs incurred for snow removal.

Our FDIC assessment costs increased by $170,000the significant increase in the first quarter of 2021 compared to the same period in 2020 due primarily to no assessment being due in the first quarter of 2020.deposit balances between these periods.  In January 2019, the FDIC notified us that the Bank would receive an assessment 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$172,000 were applied in the third and fourth quarters of 2019 and the remaining $172,000 credits were applied in 2020.

Costs associated with administration and disposition of problem assets have decreased significantly over the past several years and are now at negligible levels. These expenses include legal costs and repossessed and foreclosed property administration expense. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs.  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.  The net of these two line items decreased from the first quarter ofnine months ended September 30, 2020, contributing to the first quarterincrease in FDIC assessment costs of 2021, primarily due to higher losses on sale of properties and higher related legal costs$325,000 in the first three months of 2020.

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

  
Three Months
Ended
March 31,
2021
  
Three Months
Ended
March 31,
2020
 
Legal and professional – nonperforming assets $11  $15 
Repossessed and foreclosed property administration  3   15 
Net (gains) losses on repossessed and foreclosed properties  18   31 
Total $32  $61 

-38-

As the level of problem loans and assets has declined over the past several years, the costs associated with these nonperforming assets have decreased significantly.  Other real estate owned decreased from $3.3 million at March 31, 2020 to $2.4 million at March 31, 2021.

Net (gains) losses on repossessed assets and foreclosed properties for the three month period ended March 31, 2021 decreased by $13,000 compared to the same period in 2020.  In the three month period ended March 31, 2021, valuation writedowns totaled $4,000 compared to valuation writedowns of $31,000 for the same period in 2020. In the three month period ended March 31, 2021, net realized losses totaled $14,000, compared to net realized losses of $0 for the same period in 2020.

Other noninterest expense decreased by $223,000 in the first threenine months of 2021 compared to the same period in 2020.  The first
Data processing costs were up $78,000 and $293,000 in the three and nine month periods ended September 30, 2021, respectively, compared to the same periods in 2020 due to higher usage of electronic banking services and debit cards by our customers.
Outside services were up $19,000 and $112,000 in the three and nine months ofended September 30, 2021, respectively, compared to the same periods in 2020 included an expense of $156,000 relateddue to certain increased vendor costs including a correction to oneperiodic business process review of our trust accounts.customer onboarding process.

Federal Income Tax Expense: We recorded $1.8$1.7 million and $5.3 million in federal income tax expense for the three and nine month periodperiods ended March 31,September 30, 2021 compared to $1.4$1.6 million inand $4.8 million for the same periodperiods in 2020.  Our effective tax raterates for the three periodand nine month periods ended March 31,September 30, 2021 was 18.50%were 19.42% and 18.98%, respectively, compared to 18.23%18.47% and 18.48% for the same periodperiods in 2020.

FINANCIAL CONDITION

Total assets were $2.73$2.90 billion at March 31,September 30, 2021, an increase of $92.3$259.5 million from $2.64 billion at December 31, 2020. This change reflected increases of $128.1$486.2 million in cash and cash equivalents, $3.9$4.6 million in loans helddebt securities available for sale, and $9.7$58.1 million in debt securities held to maturity, and $10.3 in bank-owned life insurance, partially offset by a decrease of $46.4$292.7 million in our loan portfolio and $3.2 million in securities available for sale.including PPP loans. Total deposits increased by $89.4$254.6 million at March 31,September 30, 2021 compared to December 31, 2020.  ThroughoutFHLB advances increased by $15 million from December 31, 2020 to September 30, 2021, while long term debt decreased by $20.6 million with the COVID-19 pandemic, our deposit customers have held significantly higher balances, which has resulted in a substantial increase in our cash and cash equivalent balances and total assets.redemption of the remaining trust preferred securities on July 7, 2021.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $911.9 million$1.27 billion at March 31,September 30, 2021 compared to $783.7 million at December 31, 2020.  The increase in these balances primarily related primarily to thean increase in our total deposits.deposits combined with a decrease in our loan portfolio.

Securities: Debt securities available for sale were $233.7$241.5 million at March 31,September 30, 2021 compared to $236.8 million at December 31, 2020. The balance at March 31,September 30, 2021 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio was $137.6 million at September 30, 2021 compared to $79.5 million at December 31, 2020 and $89.2 million at March 31, 2021.2020.  Our held to maturity portfolio is comprised of state, municipal and privately placed commercial bonds.

-43-

Portfolio Loans and Asset Quality: Total portfolio loans decreased by $46.4$292.7 million in the first threenine months of 2021 and were $1.38$1.14 billion at March 31,September 30, 2021 compared to $1.43 billion at December 31, 2020. During the first threenine months of 2020,2021, our commercial portfolio decreased by $31.0$256.0 million.  We originated a total of 1,000 PPP loans totaling $128.1 million whilein the nine months ended September 30, 2021 and received forgiveness proceeds in the amount of $279.9 million from the SBA in the same time period.  As a result, PPP loans decreased by $151.5 million during the first nine months of 2021.  Excluding the PPP loans, our commercial loans decreased by $104.5 million in the first nine months of 2021 as customers substituted PPP loans for drawing on their lines of credit.  Our consumer portfolio decreased by $5.6$6.3 million and our residential mortgage portfolio decreased by $9.8 million.$30.4 million in the first nine months of 2021.

Mortgage loans originated for portfolio are typically adjustable rate loans as well as fixed rate loans that conform to secondary market requirements and have a term of fifteen years or less.  Mortgage loans originated for portfolio in the first threenine months of 2021 increased $5.2$1.1 million compared to the same period in 2020, from $4.6$29.3 million in the first threenine months of 2020 to $9.8$30.4 million in the same period in 2021.  However, this increase in volume was not enough to offset paydowns on mortgage portfolio loans.

Due primarily to re-financings associated with a lower rate environment, theThe volume of residential mortgage loans originated for sale in the first threenine months of 2021 increased $17.9decreased $12.3 million compared to the same period in 2020. Residential mortgage loans originated for sale were $47.3$107.8 million in the first threenine months of 2021 compared to $29.4$120.2 million in the first threenine months of 2020.

-39-

The following table shows our loan origination activity for loans to be held in portfolio during the first threenine months of 2021 and 2020, broken out by loan type and also shows average originated loan size (dollars in thousands):


 Three months ended March 31, 2021  Three months ended March 31, 2020  Nine months ended September 30, 2021  Nine months ended September 30, 2020 
 
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 $5,086 2.7% $636 $126 0.0% $42  $6,369  1.4% $
490  $3,035  0.5% $
217 
Unsecured to residential developers              170    170 
Vacant and unimproved 433 0.2 217 2,978 3.0 1,489  8,345  1.9  642  23,943  3.7  2,394 
Commercial development                   
Residential improved 36,580 19.4 778 16,942 16.6 385  75,223  16.9  607  45,463  7.0  425 
Commercial improved 3,656 1.9 609 8,476 8.3 848  54,609  12.2  1,187  45,493  7.0  1,379 
Manufacturing and industrial  8,553  4.5 1,222  4,544  4.5 303   24,962   5.6  960   12,098   1.9  432 
Total commercial real estate 54,308 28.7 776 33,066 32.4 517  169,508  38.0  764  130,202  20.1  675 
Commercial and industrial, excluding PPP 15,652 8.3 423 54,144 53.1 918  77,019  17.3  770  112,312  17.3  913 
PPP loans  96,958  51.2 129        128,052   28.7  127   346,276   53.4  199 
Total commercial and commercial real estate 166,918 88.2 1,560 87,210 85.5 709  374,579  84.0  282  588,790  90.9  287 
Consumer                               
Residential mortgage 9,803 5.2 338 4,577 4.5 254  30,415  6.8  295  29,327  4.5  333 
Unsecured              21    11 
Home equity 12,105 6.4 114 9,890 9.7 103  39,884  8.9  126  28,727  4.4  112 
Other secured  375  0.2 20  299  0.3 15   1,452   0.3  25   1,003   0.2  15 
Total consumer  22,283  11.8 145  14,766  14.5 110   71,751   16.0  150   59,078   9.1  142 
Total loans $189,201  100.0% 725 $101,976  100.0% 397  $446,330   100.0% $
247  $647,868   100.0% $
262 


-44-

The following table shows a breakout of our commercial loan activity during the first threenine months of 2021 and 2020 (dollars in thousands):


 
Three Months
Ended
March 31,
2021
  
Three Months
Ended
March 31,
2020
  
Nine Months
Ended
September 30,
2021
  
Nine Months
Ended
September 30,
2020
 
Commercial loans originated $166,918 $87,210  $374,579  $588,790 
Repayments of commercial loans (154,807) (74,069) (543,287) (288,049)
Change in undistributed - available credit  (43,073)  9,070   (87,282)  (86,930)
Net decrease in total commercial loans $(30,962) $22,211 
Net increase (decrease) in total commercial loans $(255,990) $213,811 


Overall, the commercial loan portfolio decreased $46.4$256.0 million in the first threenine months of 2021 compared to the same period in 2020.2021.  Our commercial and industrial portfolio decreased by $19.4$231.0 million while our commercial real estate loans decreased by $11.6$25.0 million.  As discussed above, included in the commercial production for the first nine months of 2021 is $128.1 million in PPP loans.  Our overall production of commercial loans decreased by $214.2 million from $588.8 million in the first three months of 2021 compared to the same period in 2020.  Our production of commercial loans increased by $79.7 million from $87.2 million in the first threenine months of 2020 to $166.9$374.6 million in the same period of 2021.2021 mostly due to the significantly lower production of PPP loans (down $218.2 million).  Beyond the effect of the PPP loan production, our commercial and industrial portfolio was impacted by fluctuations in floor plan loan lines to vehicle dealers.  The decline in borrowings in this sector was primarily the result of our dealers selling through their inventory but not being able to buy new inventory due to supply shortages from the COVID-19 shutdown of the economy.

Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 85.8%84.6% and 85.2% of the total loan portfolio at March 31,September 30, 2021 and December 31, 2020, respectively. Residential mortgage and consumer loans comprised approximately 14.2%15.4% and 14.8% of total loans at March 31,September 30, 2021 and 14.8% at December 31, 2020.2020, respectively.

-40-

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


 March 31, 2021  December 31, 2020  September 30, 2021  December 31, 2020 
 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 $8,651 0.6% $8,549 0.6% $6,184  0.5% $8,549  0.6%
Unsecured to residential developers      19       
Vacant and unimproved 41,375 3.0 47,122 3.3  36,616  3.2  47,122  3.3 
Commercial development 841 0.1 857   403    857   
Residential improved 112,618 8.1 114,392 8.0  100,608  8.9  114,392  8.0 
Commercial improved 264,122 19.1 266,006 18.6  267,910  23.6  266,006  18.6 
Manufacturing and industrial  112,995  8.2  115,247  8.1   115,470   10.2   115,247   8.1 
Total commercial real estate 540,602 39.1 552,173 38.6  527,210  46.4  552,173  38.6 
Commercial and industrial, excluding PPP 392,208 28.4 436,331 30.6  356,812  31.4  436,331  30.6 
PPP loans  253,811  18.3  229,079  16.0   77,571   6.8   229,079   16.0 
Total commercial and commercial real estate 1,186,621 85.8 1,217,583 85.2  961,593  84.6  1,217,583  85.2 
Consumer                     
Residential mortgage 139,727 10.1 149,556 10.5  119,106  10.5  149,556  10.5 
Unsecured 134  161   103    161   
Home equity 52,709 3.8 57,975 4.0  52,127  4.6  57,975  4.0 
Other secured  3,760  0.3  4,056  0.3   3,684   0.3   4,056   0.3 
Total consumer  196,330  14.2  211,748  14.8   175,020   15.4   211,748   14.8 
Total loans $1,382,951  100.0% $1,429,331  100.0% $1,136,613   100.0% $1,429,331   100.0%


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

Commercial real estate loans accounted for 39.1%46.4% and 38.6% of the total loan portfolio at March 31,September 30, 2021 and December 31, 2020, 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.

-45-

Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised 10.1%10.5% of portfolio loans at March 31,September 30, 2021 and 10.5% at December 31, 2020.  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.

The volume of residential mortgage loans originated for sale during the first three months of 2021 increased from the first three months of 2020 as a result of interest rate conditions.  The continued historically low interest rate environment in 2020 and so far in 2021 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 were $56.6This portfolio decreased by $6.3 million to $55.9 million at March 31,September 30, 2021 andfrom $62.2 million at December 31, 2020.  Consumer2020, due primarily to a decrease in home equity loans.  These other consumer loans comprised 4.1%4.9% of our portfolio loans at March 31,September 30, 2021 and 4.3% at December 31, 2020.

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 March 31,September 30, 2021, nonperforming assets totaled $2.9$2.8 million compared to $3.1 million at December 31, 2020. There were no additions to other real estate owned in the first threenine months of 2021 or in the first threenine months of 2020.  At March 31,September 30, 2021, there were no loans in redemption following foreclosure, so we expect there to be few, if any, additions to other real estate owned in the remainder of 2021.  Proceeds from sales of foreclosed properties were $148,000$170,000 in the first threenine months of 2021, resulting in net realized loss on sales of $14,000.$20,000.  Proceeds from sales of foreclosed properties were $91,000$92,000 in the first threenine months of 2020 resulting in netwith no realized loss on sales of $0.gains or losses.

-41-

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing.  Nonperforming loans at September 30, 2021 consisted of $332,000 of commercial real estate loans and $88,000 of consumer and residential mortgage loans.  As of March 31,September 30, 2021, nonperforming loans totaled $525,000,$420,000, or 0.04% of total portfolio loans, compared to $533,000, or 0.04% of total portfolio loans, at December 31, 2020.

Nonperforming loans at March 31, 2021 consisted of $432,000 of commercial real estate loans and $93,000 of consumer and residential mortgage loans.

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $2.4$2.3 million at March 31,September 30, 2021 and $2.5 million at December 31, 2020. The entire balance at March 31,September 30, 2021 was comprised of threeone commercial real estate properties.property. 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 March 31, 2021, our foreclosed asset portfolio had a weighted average age held in portfolio of 9.03 years. Below is a breakout of our foreclosed asset portfolio at March 31, 2021 and December 31, 2020 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):

  March 31, 2021  December 31, 2020 
Foreclosed Asset Property Type 
Carrying
Value
  
Foreclosed
Asset
Writedown
  
Combined
Writedown
(Loan and
Foreclosed
Asset)
  
Carrying
Value
  
Foreclosed
Asset
Writedown
  
Combined
Writedown
(Loan and
Foreclosed
Asset)
 
Single Family     %  %     %  %
Residential Lot                  
Multi-Family                  
Vacant Land  28   73.2   83.7   67   72.0   78.2 
Residential Development           127   15.3   49.4 
Commercial Office                  
Commercial Industrial                  
Commercial Improved  2,343         2,343       
  $2,371   4.2   10.3  $2,537   7.1   12.5 

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


 
March 31,
2021
  
December 31,
2020
  
September 30,
2021
  
December 31,
2020
 
Nonaccrual loans $525 $533  $420  $533 
Loans 90 days or more delinquent and still accruing           
Total nonperforming loans (NPLs) 525 533  420  533 
Foreclosed assets 2,371 2,537  2,343  2,537 
Repossessed assets           
Total nonperforming assets (NPAs) $2,896 $3,070  $2,763  $3,070 
NPLs to total loans 0.04% 0.04% 0.04% 0.04%
NPAs to total assets 0.11% 0.12% 0.10% 0.12%


The following table shows the composition and amount of our troubled debt restructurings (TDRs) at March 31,September 30, 2021 and December 31, 2020 (dollars in thousands):


 March 31, 2021  December 31, 2020  September 30, 2021  December 31, 2020 
 Commercial  Consumer  Total  Commercial  Consumer  Total  Commercial  Consumer  Total  Commercial  Consumer  Total 
Performing TDRs $5,875 $3,817 $9,692 $4,959 $4,049 $9,008  $1,802  $3,296  $5,098  $4,959  $4,049  $9,008 
Nonperforming TDRs (1)  432    432  437    437   332      332   437      437 
Total TDRs $6,307 $3,817 $10,124 $5,396 $4,049 $9,445  $2,134  $3,296  $5,430  $5,396  $4,049  $9,445 


(1)
Included in nonperforming asset table above


-46-

We had a total of $10.1$5.4 million and $9.4 million of loans whose terms have been modified in TDRs as of March 31,September 30, 2021 and December 31, 2020, 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 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 increaseddecreased by $679,000$4.0 million from December 31, 2020 to March 31,September 30, 2021 due to an increase in the balances ofpayoffs and paydowns on existing TDRs.  There were no new TDRs added during the quarter.  There were 7059 loans identified as TDRs at March 31,September 30, 2021 compared to 76 loans at December 31, 2020.

-42-

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.


On March 22, 2020, the federal banking agencies issued an “Interagency“Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”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 concludedconclude 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 modificationrelief program are not TDRs.Troubled Debt Restructurings (“TDRs”).  The CARESCoronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past duecurrent as of December 31, 2019 are not TDRs.  The Economic Aid Act passed by Congress on December 27, 2020 extended the date for such modifications to not be treated as TDRs to the earlier of 60 days after date on which the national emergency declared as a result of COVID-19 is terminated or January 1, 2022.  Through March 31,September 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  The majority of these modifications involved three-month extensions.

By September 30, 2021, all of these modifications had expired and the loans returned to their contractual payment terms.

Allowance for loan losses: The allowance for loan losses at March 31,September 30, 2021 was $17.5$16.5 million, an increasea decrease of $44,000$876,000 from December 31, 2020.  The allowance for loan losses represented 1.26%1.45% of total portfolio loans at March 31,September 30, 2021 and 1.22% at December 31, 2020.  The ratios at March 31,September 30, 2021 and December 31, 2020 wereare impacted by $253.8$77.6 million and $229.1 million of remaining PPP loans which are fully guaranteed and receive no allowance allocation.  The ratios excluding these loans were 1.55% at March 31, 20211.56% and 1.45% at September 30, 2021 and December 31, 2020.2020, respectively.  The allowance for loan losses to nonperforming loan coverage ratio increased from 3266%3266.0% at December 31, 2020 to 3324%3936.2% at March 31,September 30, 2021.

The table below shows the changes in certain credit metrics over the past five quarters:quarters (dollars in thousands):


(Dollars in millions) 
Quarter Ended
March 31,
2021
  
Quarter Ended
December 31,
2020
  
Quarter Ended
September 30,
2020
  
Quarter Ended
June 30,
2020
  
Quarter Ended
March 31,
2020
 
Commercial loans $1,186.6 $1,217.6 $1,311.9 $1,310.7 $1,120.2 
 
Quarter Ended
September 30,
2021
  
Quarter Ended
June 30,
2021
  
Quarter Ended
March 31,
2021
  
Quarter Ended
December 31,
2020
  
Quarter Ended
September 30,
2020
 
Nonperforming loans 0.5 0.5 0.2 3.0 7.2  $
420  $
433  $
525  $
533  $
195 
Other real estate owned and repo assets 2.4 2.5 2.6 2.6 2.6  2,343  2,343  2,371  2,537  2,624 
Total nonperforming assets 2.9 3.0 2.8 5.6 9.9  2,763  2,776  2,896  3,070  2,819 
Net charge-offs (recoveries) (0.4) (0.5) (0.2) 4.0 (1.0) (276) (104) (44) (50) (203)
Total delinquencies 0.2 0.6 0.5 3.3 0.5  437  126  217  581  524 


At March 31,September 30, 2021, we have had net loan recoveries in twenty-threetwenty-five of the past twenty-fivetwenty-seven quarters.  Our total delinquencies have continued to be negligible and were $217,000$437,000 at March 31,September 30, 2021 and $581,000 at December 31, 2020.  Our delinquency percentage at March 31,September 30, 2021 was only 0.02%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 increased $44,000decreased $876,000 in the first threenine months of 2020.2021.  We recorded a provision for loan losses benefit of $0$1.3 million for the threenine months ended March 31,September 30, 2021 compared to $700,000$2.2 million in provision expense for the same period of 2020.  Net loan recoveries were $44,000$424,000 for the threenine months ended March 31,September 30, 2021, compared to net recoveriesloan charge-offs of $989,000$2.8 million for the same period in 2020. The ratio of net recoveriescharge-offs (recoveries) to average loans was -0.01%-0.04% on an annualized basis for the first threenine months of 2021 compared to -0.29%and 0.25% for the first threenine months of 2020.

We
-47-

Despite the large charge-off taken in the second quarter of 2020, we are pleased withencouraged by the lowreduced 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.

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.

-43-

Overall, impaired loans increaseddeclined by $666,000$5.2 million to $11.3$5.4 million at March 31,September 30, 2021 compared to $10.6 million at December 31, 2020.  The specific allowance for impaired loans decreased $224,000$636,000 to $1.0 million$574,000 at March 31,September 30, 2021, compared to $1.2 million at December 31, 2020.  The specific allowance for impaired loans represented 8.7%10.6% of total impaired loans at March 31,September 30, 2021 and 11.4% at December 31, 2020.

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 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 chargeoffcharge-off history as the base for our computation.  Over the past few years, the 18 month period computations have reflected sizeable decreases in net chargeoffcharge-off experience.  We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. We also considered the extended period of strong asset quality in assessing the overall qualitative component.

At March 31, 2020, weWe also have considered the effect that the global economic shutdown to combatof COVID-19 was having on our loan borrowers and our local economy.  While significant stimulus and mitigation efforts were expected to soften the impact, we believed a downgrade to our economic qualitative factor was appropriate and we added 7 basis points to this qualitative factor at March 31, 2020. Additional allocations were provided in the second, third and fourth quarters of 2020.  In the first quarter of 2021, this factor was decreased by 2 basis points in recognition of improved economic conditions but additional allocations were made to other factors for a net increase of 8 basis points in the quarter.  In the second quarter 2021, we added 20 basis points to our consumer loan portfolio qualitative factors to address the risk that economic impact payments may be masking consumer delinquency and default.  We maintained these qualitative factors in the third quarter of 2021.

Certain industry sectors will behave been 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,others such as hospitality, restaurants and sporting events will likely incur longer negative effects than other industries.events.  We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (25%(28.6%), followed by Manufacturing (15.0%) and Retail Trade (16%(8.1%).

-48-

The table below breaks down our commercial loan portfolio by industry type at March 31,September 30, 2021 and identifies the percentage of loans in each type that have a pass rating within our grading system (4 or better) and criticized rating (5 or worse) (dollars in thousands):

 March 31, 2021  September 30, 2021 
 Excluding PPP  PPP Loans  Total  
Percent of
Total Loans
  Percent Grade 4 or Better  Percent Grade 5 or Worse  Excluding PPP  PPP Loans  Total  
Percent of
Total Loans
  
Percent Grade
4 or Better
  
Percent Grade
5 or Worse
 
Industry:                               
Agricultural Products $59,073 $8,518 $67,591 5.70% 93.32% 6.68% $41,605  $394  $41,999   4.37%  98.71%  1.29%
Mining and Oil Extraction 864 62 926 0.08% 100.00% 0.00%  947   63   1,010   0.11%  100.00%  0.00%
Utilities    0.00% 0.00% 0.00%
Construction 59,875 36,343 96,218 8.11% 99.06% 0.94%  68,309   8,803   77,112   8.02%  98.60%  1.40%
Manufacturing 129,233 64,173 193,406 16.30% 97.64% 2.36%  128,466   16,682   145,148   15.09%  97.51%  2.49%
Wholesale Trade 42,943 8,319 51,262 4.32% 99.84% 0.16%  61,267   704   61,971   6.44%  100.00%  0.00%
Retail Trade 105,559 9,903 115,462 9.73% 99.91% 0.09%  75,009   2,744   77,753   8.09%  99.89%  0.11%
Transportation and Warehousing 46,452 17,229 63,681 5.37% 98.19% 1.81%  43,367   3,998   47,365   4.93%  98.11%  1.89%
Information 720 526 1,246 0.11% 46.79% 53.21%  682   323   1,005   0.10%  37.21%  62.79%
Finance and Insurance 41,036 4,168 45,204 3.81% 100.00% 0.00%  32,592   187   32,779   3.41%  100.00%  0.00%
Real Estate and Rental and Leasing 295,016 2,497 297,513 25.07% 99.77% 0.23%  274,304   900   275,204   28.62%  99.77%  0.23%
Professional, Scientific and Technical Services 7,430 16,583 24,013 2.02% 99.01% 0.99%  7,042   3,241   10,283   1.07%  97.77%  2.23%
Management of Companies and Enterprises 3,842  3,842 0.32% 100.00% 0.00%           0.00%  0.00%  0.00%
Administrative and Support Services 18,029 28,195 46,224 3.90% 99.76% 0.24%  17,265   10,187   27,452   2.85%  99.62%  0.38%
Education Services 2,654 8,477 11,131 0.94% 99.18% 0.82%  2,645   1,882   4,527   0.47%  98.08%  1.92%
Health Care and Social Assistance 51,904 20,498 72,402 6.10% 100.00% 0.00%  50,709   16,366   67,075   6.98%  100.00%  0.00%
Arts, Entertainment and Recreation 7,113 3,033 10,146 0.86% 96.60% 3.40%  7,720   473   8,193   0.85%  96.01%  3.99%
Accommodations and Food Services 37,573 14,350 51,923 4.38% 84.86% 15.14%  40,830   6,326   47,156   4.90%  86.85%  13.15%
Other Services 23,494 10,902 34,396 2.90% 99.03% 0.97%  31,265   4,296   35,561   3.70%  99.47%  0.53%
Public Administration    0.00% 0.00% 0.00%
Private Households    35  35  0.00% 100.00% 0.00%
Total commercial loans $932,810 $253,811 $1,186,621  100.00% 98.18% 1.82% $884,024  $77,569  $961,593   100.00%  98.48%  1.52%
Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was $14.0$13.2 million at March 31,September 30, 2021 and $13.7$13.8 million at December 31, 2020.  The qualitative component of our allowance allocated to commercial loans was $14.0$13.3 million at March 31,September 30, 2021, up $281,000down $399,000 from $13.7 million at December 31, 2020.

-44-

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 $2.4$2.5 million at March 31,September 30, 2021 and $2.4 million at December 31, 2020.
 
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.

Bank-Owned Life Insurance:  Bank-owned life insurance increased $10.3 million from December 31, 2020 to September 30, 2021 due to an additional $10.0 million in policies acquired in the second quarter of 2021 and earnings on the underlying policies.
Premises and Equipment:   Premises and equipment totaled $43.1$42.3 million at March 31,September 30, 2021, down $141,000$911,000 from $43.3 million at December 31, 2020.

Bank Owned Life Insurance (BOLI):  The Bank has purchased life insurance on certain officers.  BOLI is recorded at its currently realizable cash surrender value and totaled $42.2 million at March 31, 2021 compared to $42.5 million at December 31, 2020.  The net decrease of $272,000 from December 31, 2020 was due to BOLI earnings during the quarter, offset by the payout of $560,000 on a death claim received during the quarter.  In early April 2021, the Bank purchased an additional $10.0 million of BOLI policies.

Deposits and Other Borrowings: Total deposits increased $89.4$254.6 million to $2.39$2.55 billion at March 31,September 30, 2021, as compared to $2.30 billion at December 31, 2020.  Non-interest checking account balances increased $39.4$125.0 million during the first threenine months of 2021.  Interest bearing demand account balances decreased $28.6increased $63.3 million and savings and money market account balances increased $79.8$75.8 million in the first threenine months of 2021 as municipal and business customers have held higher balances during the COVID-19 pandemic.  Certificates of deposits decreased by $1.2$9.6 million in the first threenine months of 2021 reflecting the continued low 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 36% of total deposits at March 31,September 30, 2021 and 35% of total deposits at December 31, 2020.  These balances typically increase at year end for many of our commercial customers, then decline in the first quarter.half of the next year.  This didn’t happen in the first quarterhalf of 2021 due to customers of all types holding higher balances during the COVID-19 pandemic.  In addition, because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types.  We also see a seasonal increase in deposits in the third quarter each year from municipal customers from property tax collections.  Interest bearing demand, including money market and savings accounts, comprised 60% of total deposits at March 31,September 30, 2021 and 60% at December 31, 2020. Time accounts as a percentage of total deposits were 4% at March 31,September 30, 2021 and 5% at December 31, 2020.

-49-

Borrowed funds totaled $90.6 million at March 31,September 30, 2021 including $70.0consisted of $85.0 million of Federal Home Loan Bank (“FHLB”) advances and $20.6 million in long-term debt associated with trust preferred securities.advances.  Borrowed funds totaled $90.6 million at December 31, 2020, including $70.0 million of FHLB advances and $20.6 million in long-term debt associated with trust preferred securities.  On July 7, 2021, the Company redeemed all of the long-term debt associated with trust preferred securities.

CAPITAL RESOURCES

Total shareholders' equity of $242.4$252.2 million at March 31,September 30, 2021 increased $2.5represented an increase of $12.4 million from $239.8 million at December 31, 2020. The increase was primarily a result of net income of $7.8$22.8 million earned in the first threenine months of 2021, partially offset by a decrease of $2.7 million in accumulated other comprehensive income and a payment of $2.7$8.2 million in cash dividends to shareholders.  The Bank was categorized as “well capitalized” at March 31,September 30, 2021.

Capital guidelines for U.S. banks are commonly known as Basel III guidelines. The rules include a 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, effectively resulting in a minimum CET1 ratio of 7.0%. The Basel III minimum ratio of Tier 1 capital to risk-weighted assets is 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5%), and the minimum total capital to risk-weighted assets ratio is 10.5% (with the capital conservation buffer), and Basel III requires a minimum leverage ratio of 4.0%. The capital ratios for the Company and the Bank under Basel III have continued to exceed the well capitalized minimum capital requirements.

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


Macatawa Bank Corporation
 
March 31,
2021
  
Dec 31,
2020
  
Sept 30,
2020
  
June 30,
2020
  
March 31,
2020
  
Sept 30,
2021
  
June 30,
2021
  
March 31,
2021
  
Dec 31,
2020
  
Sept 30,
2020
 
Total capital to risk weighted assets 19.3% 18.3% 17.7% 17.3% 15.8% 18.6% 19.7% 19.3% 18.3% 17.7%
Common Equity Tier 1 to risk weighted assets 16.7 15.8 15.3 14.9 13.4  17.4  17.1  16.7  15.8  15.3 
Tier 1 capital to risk weighted assets 18.1 17.1 16.6 16.3 14.7  17.4  18.5  18.1  17.1  16.6 
Tier 1 capital to average assets 9.8 9.9 9.8 10.5 11.9  8.5  9.5  9.8  9.9  9.8 


AllOn July 7, 2021, the Company redeemed all of the $20.0 million ofremaining outstanding trust preferred securities outstanding at March 31, 2021 qualified as Tier 1 capital.securities.

-45--50-

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.

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 March 31,September 30, 2021, the Bank held $885.0 million$1.24 billion of federal funds sold and other short-term investments.  In addition, the Bank had available borrowing capacity from correspondent banks of approximately $269.3$242.5 million as of March 31,September 30, 2021.

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 March 31,September 30, 2021 (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 $ $ $ $20,619  $  $  $  $ 
Time deposit maturities 86,297 14,912 1,072 57   77,814   14,807   1,247   58 
Other borrowed funds $10,000 20,000 30,000 10,000      30,000   20,000   35,000 
Operating lease obligations  385  404  262     310   364   144    
Total $96,682 $35,316 $31,334 $30,676  $78,124  $45,171  $21,391  $35,058 


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 March 31,September 30, 2021, we had a total of $644.4$691.9 million in unused lines of credit, $77.5$103.6 million in unfunded loan commitments and $12.4$11.8 million in standby letters of credit.


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 2020, the Bank paid dividends to the Company totaling $11.7 million.  In the same period, the Company paid $10.9 million in dividends to its shareholders.  On February 24, 2021, the Bank paid a dividend totaling $3.7 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on February 25, 2021 to shareholders of record on February 10, 2021.  The cash distributed for this cash dividend payment totaled $2.7 million.  On May 26, 2021, the Bank paid a dividend totaling $3.2 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on May 27, 2021 to shareholders of record on May 12, 2021.  The cash distributed for this cash dividend payment totaled $2.7 million.  On July 6, 2021, the Bank paid a dividend totaling $20.0 million to the Company in anticipation of the redemption of its trust preferred securities.  On July 7, 2021, the Company redeemed all of the outstanding trust preferred securities.  On August 25, 2021, the Bank paid a dividend totaling $3.2 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on August 26, 2021 to shareholders of record on August 11, 2021.  The cash distributed for this cash dividend payment totaled $2.7 million.  The Company retained the remaining balance in each period for general corporate purposes.  At March 31,September 30, 2021, the Bank had a retained earnings balance of $90.7$79.7 million.


During 2020 and 2019, the Company received payments from the Bank totaling $7.7 million and $8.0 million, respectively, representing the Bank’s intercompany tax liability for the 2020 and 2019 tax years, respectively, in accordance with the Company’s tax allocation agreement.
-51-


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 March 31,September 30, 2021 was $7.3$7.9 million.  The Company believes that it has sufficient liquidity to meet its cash flow obligations.

-46-

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 threenine months of 2021.

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 March 31,September 30, 2021, we had gross deferred tax assets of $5.6$4.5 million and gross deferred tax liabilities of $2.3 million resulting in a net deferred tax asset of $3.3$2.1 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.  We concluded at March 31,September 30, 2021 that no valuation allowance on our net deferred tax asset was required.  Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.


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.

-52-

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.

-47-

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 March 31,September 30, 2021 (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 $320,464 4.99% $57,877 12.43% 
$
326,003
   
9.20
%
 
$
54,796
   
19.82
%
Interest rates up 100 basis points 311,660 2.11 54,536 5.94   
312,041
   
4.52
   
50,116
   
9.58
 
No change 305,221  51,476    
298,538
   
   
45,733
   
 
Interest rates down 100 basis points 292,305 (4.23) 51,344 (0.28)  
276,628
   
(7.34
)
  
44,824
   
(1.99
)
Interest rates down 200 basis points 292,695 (4.10) 51,340 (0.27)  
276,703
   
(7.31
)
  
44,547
   
(2.59
)


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 these differingextreme 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.

Item 4:CONTROLS AND PROCEDURES

(a)
Evaluation of Disclosure Controls and 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 March 31,September 30, 2021, 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.


-48--53-

PART II – OTHEROTHER INFORMATION


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 firstthird quarter of 2021.  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
  
Total
Number of
Shares
Purchased
  
Average
Price Paid
Per Share
 
Period
           
January 1 - January 31, 2021     
July 1 - July 31, 2021      
Employee Transactions       2,518  $8.55 
February 1 - February 28, 2021        
August 1 - August 31, 2021      
Employee Transactions  526  $8.72     
March 1 - March 31, 2021        
September 1 - September 30, 2021      
Employee Transactions          
Total for First Quarter ended March 31, 2021        
Total for Third Quarter ended September 30, 2021      
Employee Transactions  526  $8.72  2,518  $8.55 

Item 6.EXHIBITS.


Restated Articles of Incorporation. Previously filed with the Commission on October 27, 2016 in Macatawa Bank Corporation’s Quarterly Report on Form 10-Q, Exhibit 3.1.3.1. Here incorporated by reference.
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 3.2.3.2. Here incorporated by reference.
Restated Articles of Incorporation. Exhibit 3.1 is here incorporated by reference.
Bylaws. Exhibit 3.2 is here incorporated by reference.
4.3Long-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.
Certification of Chief Executive Officer.
Certification of Chief Financial Officer.
Certification pursuant to 18 U.S.C. Section 1350.
101.INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)


-49--54-

SIGNATURESURES
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: April 22,October 28, 2021




-50--55-