UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

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'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's classes of common stock, as of the latest practicable date: 34,114,901 shares of the Company's Common Stock (no par value) were outstanding as of July 23, 2020.
 


Forward-Looking Statements
 
This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “could”, “may”, “should”, “will”, “is likely”, or is “possible” or “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, those related to the risks and uncertainties related to, and the impact of, the global coronavirus (COVID-19) pandemic on the business, financial condition and results of operations of our company and our customers, future levels of earning assets, 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'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 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.


INDEX

   
Page
Number
     
Part I.
Financial Information:
 
     
 
Item 1.
 
 
4
     
 
10
     
 
Item 2.
 
 
38
     
 
Item 3.
 
 
55
     
 
Item 4.
 
 
56
     
Part II.
Other Information:
 
     
 
Item 1A
 
 
57
     
 
Item 2.
 
 
58
     
 
Item 6.
 
 
58
     
 
59


Part I  Financial Information
Item 1.

MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2020 (unaudited) and December 31, 2019
(Dollars in thousands, except per share data)
 

   
June 30,
2020
   
December 31,
2019
 
ASSETS
           
Cash and due from banks
 
$
33,079
   
$
31,942
 
Federal funds sold and other short-term investments
   
426,926
     
240,508
 
Cash and cash equivalents
   
460,005
     
272,450
 
Debt securities available for sale, at fair value
   
229,489
     
225,249
 
Debt securities held to maturity (fair value 2020 - $92,539 and 2019 - $85,128)
   
89,195
     
82,720
 
Federal Home Loan Bank (FHLB) stock
   
11,558
     
11,558
 
Loans held for sale, at fair value
   
1,677
     
3,294
 
Total loans
   
1,562,688
     
1,385,627
 
Allowance for loan losses
   
(15,855
)
   
(17,200
)
Net loans
   
1,546,833
     
1,368,427
 
Premises and equipment – net
   
43,052
     
43,417
 
Accrued interest receivable
   
6,014
     
4,866
 
Bank-owned life insurance
   
42,654
     
42,156
 
Other real estate owned - net
   
2,624
     
2,748
 
Net deferred tax asset
   
2,754
     
2,078
 
Other assets
   
15,293
     
9,807
 
Total assets
 
$
2,451,148
   
$
2,068,770
 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Deposits
               
Noninterest-bearing
 
$
748,624
   
$
482,499
 
Interest-bearing
   
1,369,667
     
1,270,795
 
Total deposits
   
2,118,291
     
1,753,294
 
Other borrowed funds
   
70,000
     
60,000
 
Long-term debt
   
20,619
     
20,619
 
Accrued expenses and other liabilities
   
12,900
     
17,388
 
Total liabilities
   
2,221,810
     
1,851,301
 
Commitments and contingent liabilities
   
     
 
Shareholders' equity
               
Common stock, no par value, 200,000,000 shares authorized; 34,114,901 and 34,103,542 shares issued and outstanding at June 30, 2020 and December 31, 2019
   
218,349
     
218,109
 
Retained earnings (deficit)
   
6,425
     
(2,184
)
Accumulated other comprehensive income
   
4,564
     
1,544
 
Total shareholders' equity
   
229,338
     
217,469
 
Total liabilities and shareholders' equity
 
$
2,451,148
   
$
2,068,770
 

See accompanying notes to consolidated financial statements.

-4-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three and six month periods ended June 30, 2020 and 2019
(unaudited)
(Dollars in thousands, except per share data)
 

   
Three Months
Ended
June 30,
2020
   
Three Months
Ended
June 30,
2019
   
Six Months
Ended
June 30,
2020
   
Six Months
Ended
June 30,
2019
 
Interest income
                       
Loans, including fees
 
$
14,488
   
$
16,125
   
$
29,339
   
$
32,576
 
Securities
                               
Taxable
   
954
     
988
     
2,015
     
1,984
 
Tax-exempt
   
864
     
865
     
1,746
     
1,704
 
FHLB Stock
   
115
     
157
     
239
     
317
 
Federal funds sold and other short-term investments
   
86
     
1,104
     
662
     
1,848
 
Total interest income
   
16,507
     
19,239
     
34,001
     
38,429
 
Interest expense
                               
Deposits
   
895
     
2,365
     
2,497
     
4,622
 
Other borrowings
   
356
     
345
     
705
     
672
 
Long-term debt
   
209
     
574
     
449
     
1,159
 
Total interest expense
   
1,460
     
3,284
     
3,651
     
6,453
 
Net interest income
   
15,047
     
15,955
     
30,350
     
31,976
 
Provision for loan losses
   
1,000
     
(200
)
   
1,700
     
(450
)
Net interest income after provision for loan losses
   
14,047
     
16,155
     
28,650
     
32,426
 
Noninterest income
                               
Service charges and fees
   
860
     
1,078
     
1,970
     
2,128
 
Net gains on mortgage loans
   
1,849
     
614
     
2,499
     
825
 
Trust fees
   
945
     
1,003
     
1,880
     
1,893
 
ATM and debit card fees
   
1,321
     
1,481
     
2,658
     
2,808
 
Gain on sales of securities
   
     
     
     
 
Bank owned life insurance ("BOLI") income
   
231
     
249
     
472
     
485
 
Other
   
648
     
673
     
1,334
     
1,287
 
Total noninterest income
   
5,854
     
5,098
     
10,813
     
9,426
 
Noninterest expense
                               
Salaries and benefits
   
5,766
     
6,379
     
12,457
     
12,623
 
Occupancy of premises
   
949
     
996
     
1,958
     
2,089
 
Furniture and equipment
   
882
     
866
     
1,737
     
1,710
 
Legal and professional
   
247
     
211
     
538
     
441
 
Marketing and promotion
   
239
     
233
     
477
     
461
 
Data processing
   
787
     
761
     
1,547
     
1,491
 
FDIC assessment
   
76
     
119
     
76
     
239
 
Interchange and other card expense
   
327
     
365
     
674
     
711
 
Bond and D&O Insurance
   
104
     
103
     
209
     
206
 
Net (gains) losses on repossessed and foreclosed properties
   
2
     
(34
)
   
32
     
(69
)
Administration and disposition of problem assets
   
15
     
49
     
46
     
137
 
Other
   
1,110
     
1,286
     
2,475
     
2,534
 
Total noninterest expenses
   
10,504
     
11,334
     
22,226
     
22,573
 
Income before income tax
   
9,397
     
9,919
     
17,237
     
19,279
 
Income tax expense
   
1,759
     
1,916
     
3,188
     
3,630
 
Net income
 
$
7,638
   
$
8,003
   
$
14,049
   
$
15,649
 
Basic earnings per common share
 
$
0.22
   
$
0.24
   
$
0.41
   
$
0.46
 
Diluted earnings per common share
 
$
0.22
   
$
0.24
   
$
0.41
   
$
0.46
 
Cash dividends per common share
 
$
0.08
   
$
0.07
   
$
0.16
   
$
0.14
 

See accompanying notes to consolidated financial statements.

-5-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and six month periods ended June 30, 2020 and 2019
(unaudited)
(Dollars in thousands)
 

   
Three Months
Ended
June 30,
2020
   
Three Months
Ended
June 30,
2019
   
Six Months
Ended
June 30,
2020
   
Six Months
Ended
June 30,
2019
 
Net income
 
$
7,638
   
$
8,003
   
$
14,049
   
$
15,649
 
Other comprehensive income:
                               
Unrealized gains (losses):
                               
Net change in unrealized gains (losses) on debt securities available for sale
   
884
     
2,320
     
3,823
     
4,581
 
Tax effect
   
(186
)
   
(487
)
   
(803
)
   
(962
)
Net change in unrealized gains (losses) on debt securities available for sale, net of tax
   
698
     
1,833
     
3,020
     
3,619
 
Less: reclassification adjustments:
                               
Reclassification for gains included in net income
   
     
     
     
 
Tax effect
   
     
     
     
 
Reclassification for gains included in net income, net of tax
   
     
     
     
 
Other comprehensive income (loss), net of tax
   
698
     
1,833
     
3,020
     
3,619
 
Comprehensive income
 
$
8,336
   
$
9,836
   
$
17,069
   
$
19,268
 

See accompanying notes to consolidated financial statements.

-6-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three and six month periods ended June 30, 2020 and 2019
(unaudited)
(Dollars in thousands, except per share data)
 

 
Common
Stock
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
 
Balance, April 1, 2019
 
$
217,842
   
$
(19,384
)
 
$
(492
)
 
$
197,966
 
Net income for the three months ended June 30, 2019
   
     
8,003
     
     
8,003
 
Cash dividends at $.07 per share
   
     
(2,383
)
   
     
(2,383
)
Repurchase of 452 shares for taxes withheld on vested restricted stock
   
(5
)
   
     
     
(5
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
1,833
     
1,833
 
Stock compensation expense
   
105
     
     
     
105
 
Balance, June 30, 2019
 
$
217,942
   
$
(13,764
)
 
$
1,341
   
$
205,519
 
                                 
                                 
Balance, April 1, 2020
 
$
218,207
   
$
1,507
   
$
3,866
   
$
223,580
 
Net income for the three months ended June 30, 2020
   
     
7,638
     
     
7,638
 
Cash dividends at $.08 per share
   
     
(2,720
)
   
     
(2,720
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
698
     
698
 
Stock compensation expense
   
142
     
     
     
142
 
Balance, June 30, 2020
 
$
218,349
   
$
6,425
   
$
4,564
   
$
229,338
 

 
Common
Stock
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
 
Balance, January 1, 2019
 
$
217,783
   
$
(24,652
)
 
$
(2,278
)
 
$
190,853
 
Net income for the six months ended June 30, 2019
   
     
15,649
     
     
15,649
 
Cash dividends at $.14 per share
   
     
(4,761
)
   
     
(4,761
)
Repurchase of 452 shares for taxes withheld on vested restricted stock
   
(5
)
   
     
     
(5
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
3,619
     
3,619
 
Stock compensation expense
   
164
     
     
     
164
 
Balance, June 30, 2019
 
$
217,942
   
$
(13,764
)
 
$
1,341
   
$
205,519
 
                                 
                                 
Balance, January 1, 2020
 
$
218,109
   
$
(2,184
)
 
$
1,544
   
$
217,469
 
Net income for the six months ended June 30, 2020
   
     
14,049
     
     
14,049
 
Cash dividends at $.16 per share
   
     
(5,440
)
   
     
(5,440
)
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
   
     
     
3,020
     
3,020
 
Stock compensation expense
   
251
     
     
     
251
 
Balance, June 30, 2020
 
$
218,349
   
$
6,425
   
$
4,564
   
$
229,338
 

See accompanying notes to consolidated financial statements.

-7-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six month periods ended June 30, 2020 and 2019
(unaudited)
(Dollars in thousands)
 

   
Six Months
Ended
June 30,
2020
   
Six Months
Ended
June 30,
2019
 
Cash flows from operating activities
           
Net income
 
$
14,049
   
$
15,649
 
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization
   
1,457
     
1,328
 
Stock compensation expense
   
251
     
164
 
Provision for loan losses
   
1,700
     
(450
)
Origination of loans for sale
   
(79,415
)
   
(28,815
)
Proceeds from sales of loans originated for sale
   
83,531
     
29,039
 
Net gains on mortgage loans
   
(2,499
)
   
(825
)
Write-down of other real estate
   
32
     
10
 
Net (gain) loss on sales of other real estate
   
     
(79
)
Deferred income tax expense
   
(1,483
)
   
311
 
Change in accrued interest receivable and other assets
   
(6,634
)
   
(2,217
)
Earnings in bank-owned life insurance
   
(472
)
   
(485
)
Change in accrued expenses and other liabilities
   
5,190
     
2,501
 
Net cash from operating activities
   
15,707
     
16,131
 
Cash flows from investing activities
               
Loan originations and payments, net
   
(180,106
)
   
62,606
 
Purchases of securities available for sale
   
(77,214
)
   
(14,869
)
Purchases of securities held to maturity
   
(19,815
)
   
(12,497
)
Proceeds from:
               
Maturities and calls of securities
   
64,342
     
25,142
 
Principal paydowns on securities
   
15,808
     
3,944
 
Sales of other real estate
   
92
     
382
 
Additions to premises and equipment
   
(805
)
   
(841
)
Net cash from investing activities
   
(197,698
)
   
63,867
 
Cash flows from financing activities
               
Change in deposits
   
364,997
     
(15,633
)
Repayments and maturities of other borrowed funds
   
     
(10,000
)
Proceeds from other borrowed funds
   
10,000
     
10,000
 
Proceeds from exercise of stock options
   
     
 
Repurchase of shares for taxes withheld on vested restricted stock
   
(11
)
   
(5
)
Cash dividends paid
   
(5,440
)
   
(4,761
)
Net cash from financing activities
   
369,546
     
(20,399
)
Net change in cash and cash equivalents
   
187,555
     
59,599
 
Cash and cash equivalents at beginning of period
   
272,450
     
171,284
 
Cash and cash equivalents at end of period
 
$
460,005
   
$
230,883
 

See accompanying notes to consolidated financial statements.

-8-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six month periods ended June 30, 2020 and 2019
(unaudited)
(Dollars in thousands)
 

   
Six Months
Ended
June 30,
2020
   
Six Months
Ended
June 30,
2019
 
Supplemental cash flow information
           
Interest paid
 
$
3,793
   
$
6,047
 
Income taxes paid
   
3,515
     
825
 
Supplemental noncash disclosures:
               
Transfers from loans to other real estate
   
     
 
Security settlement
   
475
     
1,747
 

See accompanying notes to consolidated financial statements.

-9-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Macatawa Bank Corporation ("the Company", "our", "we") and its wholly-owned subsidiary, Macatawa Bank ("the Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank operates 26 full service branch offices providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan.
 
The Company owns all of the common stock of Macatawa Statutory Trust II. This is a grantor trust that issued trust preferred securities and is not consolidated with the Company under accounting principles generally accepted in the United States of America.

Recent Events: In December 2019, news began to surface regarding an influenza pandemic in China, known as the novel coronavirus, or COVID-19. In January 2020, the United States restricted entry to anyone traveling from China.  In February 2020, the pandemic spread broadly and swiftly throughout Europe and the Middle East, particularly in Italy and Iran. Cases began to surface in the United States in February 2020 and accelerated in early March 2020.  The Federal Reserve reduced the overnight federal funds rate by 50 basis points on March 3, 2020 and by another 100 basis points on March 15, 2020 and announced the resumption of quantitative easing.  During the week of March 9, 2020, individual states began implementing restrictions and promoting “social distancing”.  These restrictions included closure of schools, restrictions on the number of public gatherings, encouragement of work at home arrangements and other measures.

In Michigan, beginning March 24, 2020, Governor Gretchen Whitmer issued a series of “stay home, stay safe” executive orders, which required residents to remain at home "to the maximum extent feasible" and prohibited in-person work that "is not necessary to sustain or protect life."  These “stay home, stay safe” executive orders severely limited economic activity in Michigan, requiring businesses not deemed to be essential, to severely limit or shut down operations.  Under later “stay home, stay safe” executive orders, Governor Whitmer permitted certain industries, such as automotive, manufacturing, construction and retail, to begin to reopen, subject to stringent health and safety requirements and strict social distancing measures.  On June 1, 2020, Governor Whitmer issued a “reopen” executive order, which rescinded the then current “stay home, stay safe” executive order, and which permitted limited activities under the Michigan Safe Start Plan. On June 5, 2020, Governor Whitmer issued a supplemental reopen executive order, which did not rescind the reopen order, but modified it for regions in the northern lower peninsula and the upper peninsula of Michigan by permitting larger social gatherings and additional activities. The supplemental reopen order also allowed non-essential personal care services in all of Michigan. The reopen order was further modified by another executive order that addresses restarting professional sports and another executive order that closed indoor services at bars in all of Michigan.  As of June 30 2020, most businesses in Michigan, other than fitness centers and certain leisure and entertainment businesses, were allowed to be open in some capacity, subject to stringent health and safety requirements, strict social distancing measures and nonsurgical face mask requirements.

Congress passed a number of measures in late March 2020, designed to infuse cash into the economy to offset the negative impacts of business closings and restrictions.  The COVID-19 pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a negative material impact on the Company’s business, financial condition and results of operations and has had, and is likely to continue to have, a negative impact on many of our customers’ business, financial condition and results of operations.  Additionally, the negative consequences of the unprecedented economic shutdown nationally and in Michigan is likely to result in a higher level of future delinquencies, loan impairments and loan losses and require additional provisions for loan losses, which will have a negative impact on our results of operations.

The Company quickly responded to the changing environment by executing its business continuity plan and purchasing and deploying additional equipment to allow for a majority of its workforce to work remotely. The Bank’s branch facilities remained open, but lobbies were closed with transactions being conducted through drive-up windows or on-line channels. The Company implemented rotations for onsite personnel, implemented enhanced daily cleaning of facilities and instructed personnel to maintain appropriate social distancing in its offices.  As of June 30, 2020, branches were fully open with additional health and safety requirements to comply with Governor Whitmer’s current executive orders, 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 may be unable to meet their contractual obligations because of the effects of COVID-19.  The guidance goes on to explain that in consultation with the FASB staff the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not Troubled Debt Restructurings (“TDRs”).  The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs.  Through June 30, 2020, the Bank had applied this guidance and modified 724 individual loans with aggregate principal balances totaling $336.8 million.  The majority of these modifications involved three-month extensions.

-10-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The CARES Act, as amended, included an allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”).   PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP.  These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part.  Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through June 30, 2020, the Bank had originated 1,643 PPP loans totaling $335.7 million, with an average loan size of $209,500.   Fees totaling $9.8 million were collected from the SBA for these loans in the three months ended June 30, 2020.  These fees are deferred and amortized into interest income over the contractual period of 24 months or 70 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 the second quarter of 2020 and will continue to impact both asset mix and net interest income for the remainder of 2020.  The PPP program has been extended until August 8, 2020, and may be extended again.  The Bank may have additional PPP loan originations in the third quarter of 2020, but not likely at the pace experienced in the second quarter of 2020 as applications have slowed dramatically beginning in June 2020.  At June 30, 2020, the Bank had $427.0 million in overnight funds and $331.9 million of available borrowing capacity from its correspondent banks.  In addition, the Federal Reserve has implemented a liquidity facility available to financial institutions participating in the PPP.
 
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 six month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
 
Use of Estimates:  To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.  The allowance for loan losses, valuation of deferred tax assets, loss contingencies, fair value of other real estate owned and fair values of financial instruments are particularly subject to change.
 
Allowance for Loan Losses: The allowance for loan losses (allowance) is a valuation allowance for probable incurred credit losses inherent in our loan portfolio, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans. Management believes the allowance for loan losses balance to be adequate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, economic conditions and other relevant factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance for loan losses.
 
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. PPP loans receive $0 allocation as they are fully guaranteed by the SBA and are subject to be forgiven under the SBA forgiveness criteria.  At June 30, 2020, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.  At March 31, 2020 and June 30, 2020, the qualitative factor allocations for economic trends were increased to provide additional coverage related to the COVID-19 pandemic.
 
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.

-11-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Commercial and commercial real estate loans with relationship balances exceeding $500,000 and an internal risk grading of 6 or worse are evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated and the loan is reported at the present value of estimated future cash flows using the loan’s existing interest rate or at the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and they are not separately identified for impairment disclosures.
 
Troubled debt restructurings are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed unless they add value to the property.
 
Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
 
The Company recognizes a tax position as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. 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 five freestanding interest rate swaps, each of which is carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At June 30, 2020 and December 31, 2019, the total notional amount of such agreements was $96.5 million and $70.3 million, respectively, and resulted in a derivative asset with a fair value of $5.0 million and $1.8 million, respectively, which were included in other assets and a derivative liability of $5.0 million and $1.8 million, respectively, which were included in other liabilities.
 
Reclassifications: Some items in the prior period financial statements were reclassified to conform to the current presentation.

-12-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

ASU No. 2019-10 Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) – Effective Dates updated the effective date of this ASU for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022.  The Company selected a software vendor for applying this new ASU, began implementation of the software in the second quarter of 2018, completed integration during the third quarter of 2018 and ran parallel computations with both systems using the current GAAP incurred loss model in the fourth quarter of 2018.  The Company went live with this software beginning in January 2019 for its monthly incurred loss computations and began modeling the new current expected credit loss model assumptions to the allowance for loan losses computation.  In the second, third and fourth quarters of 2019, 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 may have a significant impact on allowance computations under the incurred loss model which would be amplified under the new standard.  Efforts are underway in Congress and with banking regulators to require a further deferral of implementation of ASU No. 2016-13.

-13-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

NOTE 2 – SECURITIES
 
The amortized cost and fair value of securities at period-end were as follows (dollars in thousands):

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
June 30, 2020
                       
Available for Sale
                       
U.S. Treasury and federal agency securities
 
$
55,633
   
$
499
   
$
(1
)
 
$
56,131
 
U.S. Agency MBS and CMOs
   
62,687
     
1,849
     
(3
)
   
64,533
 
Tax-exempt state and municipal bonds
   
46,315
     
1,910
     
(6
)
   
48,219
 
Taxable state and municipal bonds
   
52,287
     
1,353
     
(32
)
   
53,608
 
Corporate bonds and other debt securities
   
6,789
     
209
     
     
6,998
 
   
$
223,711
   
$
5,820
   
$
(42
)
 
$
229,489
 
Held to Maturity
                               
Tax-exempt state and municipal bonds
 
$
89,195
   
$
3,344
   
$
   
$
92,539
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
December 31, 2019
                       
Available for Sale
                       
U.S. Treasury and federal agency securities
 
$
74,839
   
$
95
   
$
(185
)
 
$
74,749
 
U.S. Agency MBS and CMOs
   
45,795
     
474
     
(68
)
   
46,201
 
Tax-exempt state and municipal bonds
   
44,718
     
1,244
     
     
45,962
 
Taxable state and municipal bonds
   
51,683
     
404
     
(65
)
   
52,022
 
Corporate bonds and other debt securities
   
6,263
     
55
     
(3
)
   
6,315
 
   
$
223,298
   
$
2,272
   
$
(321
)
 
$
225,249
 
Held to Maturity
                               
Tax-exempt state and municipal bonds
 
$
82,720
   
$
2,408
   
$
   
$
85,128
 

There were no sales of securities in the three and six month periods ended June 30, 2020 and 2019.

Contractual maturities of debt securities at June 30, 2020 were as follows (dollars in thousands):

   
Held–to-Maturity Securities
   
Available-for-Sale Securities
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
Due in one year or less
 
$
23,576
   
$
23,683
   
$
31,973
   
$
32,199
 
Due from one to five years
   
33,796
     
34,952
     
70,139
     
72,260
 
Due from five to ten years
   
13,198
     
14,276
     
58,747
     
60,394
 
Due after ten years
   
18,625
     
19,628
     
62,852
     
64,636
 
   
$
89,195
   
$
92,539
   
$
223,711
   
$
229,489
 

-14-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

NOTE 2 – SECURITIES (Continued)

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

   
Less than 12 Months
   
12 Months or More
   
Total
 
June 30, 2020
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Available for Sale
                                   
U.S. Treasury and federal agency securities
 
$
1,999
   
$
(1
)
 
$
   
$
   
$
1,999
   
$
(1
)
U.S. Agency MBS and CMOs
   
2,054
     
(3
)
   
     
     
2,054
     
(3
)
Tax-exempt state and municipal bonds
   
1,545
     
(6
)
   
     
     
1,545
     
(6
)
Taxable state and municipal bonds
   
2,064
     
(32
)
   
     
     
2,064
     
(32
)
Corporate bonds and other debt securities
   
     
     
     
     
     
 
Total
 
$
7,662
   
$
(42
)
 
$
   
$
   
$
7,662
   
$
(42
)
                                                 
Held to Maturity
                                               
Tax-exempt state and municipal bonds
 
$
   
$
   
$
   
$
   
$
   
$
 

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

Other-Than-Temporary-Impairment
 
Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. At June 30, 2020, 8 securities available for sale with fair values totaling $7.7 million had unrealized losses totaling $42,000.  At June 30, 2020, there were no securities held to maturity which had unrealized losses.  Management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities.  In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost.  Management determined that the unrealized losses for the three and six month periods ended June 30, 2020 and 2019 were attributable to changes in interest rates and not due to credit quality.  As such, no OTTI charges were necessary during each period.
 
Securities with a carrying value of approximately $5.1 million and $3.0 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at June 30, 2020 and December 31, 2019, respectively.

-15-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

NOTE 3 – LOANS
 
Portfolio loans were as follows (dollars in thousands):

   
June 30,
2020
   
December 31,
2019
 
Commercial and industrial:
           
Commercial and industrial, excluding PPP
 
$
405,093
   
$
499,572
 
Paycheck protection program (PPP)
   
335,668
     
 
Total commercial and industrial
   
740,761
     
499,572
 
Commercial real estate:
               
Residential developed
   
10,930
     
14,705
 
Unsecured to residential developers
   
     
 
Vacant and unimproved
   
42,275
     
41,796
 
Commercial development
   
615
     
665
 
Residential improved
   
122,712
     
130,861
 
Commercial improved
   
281,620
     
292,799
 
Manufacturing and industrial
   
111,804
     
117,632
 
Total commercial real estate
   
569,956
     
598,458
 
Consumer
               
Residential mortgage
   
182,816
     
211,049
 
Unsecured
   
217
     
274
 
Home equity
   
64,554
     
70,936
 
Other secured
   
4,384
     
5,338
 
Total consumer
   
251,971
     
287,597
 
Total loans
   
1,562,688
     
1,385,627
 
Allowance for loan losses
   
(15,855
)
   
(17,200
)
   
$
1,546,833
   
$
1,368,427
 

Included in commercial and industrial loans at June 30, 2020 are $335.7 million in loans issued under the PPP. This program was created by the CARES Act in March 2020 to support businesses through the COVID-19 pandemic.  Under the program, borrowers who use the funds for payroll and certain other expenses are eligible to have the loan balances forgiven by the SBA.  Applications for forgiveness can be submitted to the Bank beginning 8 weeks after loan disbursement.  The loans are 100% guaranteed by the SBA.  We expect the majority of PPP loans to qualify for and receive forgiveness from the SBA by December 31, 2020.  This expectation is subject to change due to borrower behavior, changing SBA requirements and processes related to loan forgiveness and other relevant factors.

-16-

MACATAWA BANK CORPORATION
 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 June 30, 2020
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
8,807
   
$
6,913
   
$
3,130
   
$
39
   
$
18,889
 
Charge-offs
   
(1,192
)
   
(2,957
)
   
(34
)
   
     
(4,183
)
Recoveries
   
83
     
17
     
49
     
     
149
 
Provision for loan losses
   
(2,267
)
   
3,289
     
(7
)
   
(15
)
   
1,000
 
Ending Balance
 
$
5,431
   
$
7,262
   
$
3,138
   
$
24
   
$
15,855
 

Three months ended June 30, 2019
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,989
   
$
6,447
   
$
3,426
   
$
30
   
$
16,892
 
Charge-offs
   
     
     
(41
)
   
     
(41
)
Recoveries
   
141
     
67
     
27
     
     
235
 
Provision for loan losses
   
101
     
(205
)
   
(116
)
   
20
     
(200
)
Ending Balance
 
$
7,231
   
$
6,309
   
$
3,296
   
$
50
   
$
16,886
 

Six months ended June 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
)
   
(73
)
   
     
(4,222
)
Recoveries
   
102
     
991
     
84
     
     
1,177
 
Provision for loan losses
   
(1,137
)
   
2,707
     
118
     
12
     
1,700
 
Ending Balance
 
$
5,431
   
$
7,262
   
$
3,138
   
$
24
   
$
15,855
 

Six months ended June 30, 2019
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,856
   
$
6,544
   
$
3,449
   
$
27
   
$
16,876
 
Charge-offs
   
     
(132
)
   
(66
)
   
     
(198
)
Recoveries
   
277
     
291
     
90
     
     
658
 
Provision for loan losses
   
98
     
(394
)
   
(177
)
   
23
     
(450
)
Ending Balance
 
$
7,231
   
$
6,309
   
$
3,296
   
$
50
   
$
16,886
 

-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):

June 30, 2020
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                             
Ending allowance attributable to loans:
                             
Individually reviewed for impairment
 
$
517
   
$
37
   
$
350
   
$
   
$
904
 
Collectively evaluated for impairment
   
4,914
     
7,225
     
2,788
     
24
     
14,951
 
Total ending allowance balance
 
$
5,431
   
$
7,262
   
$
3,138
   
$
24
   
$
15,855
 
Loans:
                                       
Individually reviewed for impairment
 
$
1,714
   
$
5,052
   
$
4,688
   
$
   
$
11,454
 
Collectively evaluated for impairment
   
739,047
     
564,904
     
247,283
     
     
1,551,234
 
Total ending loans balance
 
$
740,761
   
$
569,956
   
$
251,971
   
$
   
$
1,562,688
 

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

-18-

MACATAWA BANK CORPORATION
 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 June 30, 2020 (dollars in thousands):

June 30, 2020
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
Allocated
 
With no related allowance recorded:
                 
Commercial and industrial
 
$
168
   
$
168
   
$
 
Commercial real estate:
                       
Residential developed
   
     
     
 
Unsecured to residential developers
   
     
     
 
Vacant and unimproved
   
     
     
 
Commercial development
   
     
     
 
Residential improved
   
195
     
195
     
 
Commercial improved
   
4,083
     
4,083
     
 
Manufacturing and industrial
   
     
     
 
     
4,278
     
4,278
     
 
Consumer:
                       
Residential mortgage
   
     
     
 
Unsecured
   
     
     
 
Home equity
   
     
     
 
Other secured
   
     
     
 
     
     
     
 
Total with no related allowance recorded
 
$
4,446
   
$
4,446
   
$
 
With an allowance recorded:
                       
Commercial and industrial
 
$
1,546
   
$
1,546
   
$
517
 
Commercial real estate:
                       
Residential developed
   
73
     
73
     
7
 
Unsecured to residential developers
   
     
     
 
Vacant and unimproved
   
     
     
 
Commercial development
   
     
     
 
Residential improved
   
     
     
 
Commercial improved
   
350
     
350
     
16
 
Manufacturing and industrial
   
351
     
351
     
14
 
     
774
     
774
     
37
 
Consumer:
                       
Residential mortgage
   
4,082
     
4,082
     
305
 
Unsecured
   
161
     
161
     
12
 
Home equity
   
420
     
420
     
31
 
Other secured
   
25
     
25
     
2
 
     
4,688
     
4,688
     
350
 
Total with an allowance recorded
 
$
7,008
   
$
7,008
   
$
904
 
Total
 
$
11,454
   
$
11,454
   
$
904
 

-19-

MACATAWA BANK CORPORATION
 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, 2019 (dollars in thousands):

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

-20-

MACATAWA BANK CORPORATION
 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 six month periods ended June 30, 2020 and 2019 (dollars in thousands):

   
Three
Months
Ended
June 30,
2020
   
Three
Months
Ended
June 30,
2019
   
Six
Months
Ended
June 30,
2020
   
Six
Months
Ended
June 30,
2019
 
Average of impaired loans during the period:
                       
Commercial and industrial
 
$
4,261
   
$
5,039
   
$
5,438
   
$
5,833
 
Commercial real estate:
                               
Residential developed
   
73
     
170
     
73
     
171
 
Unsecured to residential developers
   
     
     
     
 
Vacant and unimproved
   
     
131
     
     
135
 
Commercial development
   
     
     
     
 
Residential improved
   
196
     
417
     
232
     
374
 
Commercial improved
   
6,485
     
2,138
     
6,154
     
2,239
 
Manufacturing and industrial
   
353
     
371
     
355
     
374
 
Consumer
   
4,707
     
5,880
     
4,810
     
6,034
 
Interest income recognized during impairment:
                               
Commercial and industrial
   
17
     
230
     
290
     
518
 
Commercial real estate
   
157
     
52
     
256
     
96
 
Consumer
   
112
     
65
     
169
     
140
 
Cash-basis interest income recognized
                               
Commercial and industrial
   
18
     
265
     
295
     
547
 
Commercial real estate
   
181
     
52
     
309
     
101
 
Consumer
   
105
     
63
     
165
     
139
 

-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 June 30, 2020 and December 31, 2019:

June 30, 2020
 
Nonaccrual
   
Over 90
days
Accruing
 
Commercial and industrial
 
$
   
$
 
Commercial real estate:
               
Residential developed
   
     
 
Unsecured to residential developers
   
     
 
Vacant and unimproved
   
     
 
Commercial development
   
     
 
Residential improved
   
97
     
 
Commercial improved
   
2,760
     
 
Manufacturing and industrial
   
     
 
     
2,857
     
 
Consumer:
               
Residential mortgage
   
100
     
 
Unsecured
   
     
 
Home equity
   
     
 
Other secured
   
     
 
     
100
     
 
Total
 
$
2,957
   
$
 

December 31, 2019
 
Nonaccrual
   
Over 90 days
Accruing
 
Commercial and industrial
 
$
   
$
 
Commercial real estate:
               
Residential developed
   
     
 
Unsecured to residential developers
   
     
 
Vacant and unimproved
   
     
 
Commercial development
   
     
 
Residential improved
   
98
     
 
Commercial improved
   
     
 
Manufacturing and industrial
   
     
 
     
98