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 September 30, 2022

☐ 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: 34,246,283 shares of the Company’s Common Stock (no par value) were outstanding as of October 27, 2022.

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 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, future amounts of unrecognized tax benefits and the future level of other revenue sources. Management’s determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Our ability to sell other real estate owned at its carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, maintain our current levels of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, increase loan volume, originate high quality loans, maintain or improve mortgage banking income, realize the benefit of our deferred tax assets, continue payment of dividends and improve profitability, is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

INDEX

		Page Number

Part I.	Financial Information:

	Item 1.
	Consolidated Financial Statements	4

	Notes to Consolidated Financial Statements	10

	Item 2.
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	53

	Item 4.
	Controls and Procedures	54

Part II.	Other Information:

	Item 2.
	Unregistered Sales of Equity Securities and Use of Proceeds	55

	Item 6.
	Exhibits	55

Signatures		56

Index

Part I

Financial Information

Item 1.

MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

As of September 30, 2022 (unaudited) and December 31, 2021

(Dollars in thousands, except per share data)

	September 30, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	33,205		$	23,669
Federal funds sold and other short-term investments		733,347			1,128,119
Cash and cash equivalents		766,552			1,151,788
Debt securities available for sale, at fair value		453,728			416,063
Debt securities held to maturity (fair value 2022 - $330,882 and 2021 - $139,272)		349,481			137,003
Federal Home Loan Bank (FHLB) stock		10,211			11,558
Loans held for sale, at fair value		234			1,407
Total loans		1,138,645			1,108,993
Allowance for loan losses		(14,821	)		(15,889	)
Net loans		1,123,824			1,093,104
Premises and equipment – net		40,670			41,773
Accrued interest receivable		7,202			4,088
Bank-owned life insurance		53,193			52,468
Other real estate owned - net		2,343			2,343
Net deferred tax asset		10,185			2,163
Other assets		17,415			14,993
Total assets	$	2,835,038		$	2,928,751
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	855,744		$	886,115
Interest-bearing		1,700,453			1,691,843
Total deposits		2,556,197			2,577,958
Other borrowed funds		30,000			85,000
Accrued expenses and other liabilities		12,287			11,788
Total liabilities		2,598,484			2,674,746
Commitments and contingent liabilities		—			—
Shareholders’ equity
Common stock, no par value, 200,000,000 shares authorized; 34,251,485 and 34,259,945 shares issued and outstanding at September 30, 2022 and December 31, 2021		219,583			219,082
Retained earnings		49,648			35,220
Accumulated other comprehensive loss		(32,677	)		(297	)
Total shareholders’ equity		236,554			254,005
Total liabilities and shareholders’ equity	$	2,835,038		$	2,928,751

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three and nine month periods ended September 30, 2022 and 2021

(unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Interest income
Loans, including fees	$	12,164	$	12,761		$	32,905		$	39,530
Securities
Taxable		3,323		786			7,375			2,365
Tax-exempt		668		777			2,102			2,295
FHLB Stock		53		44			155			162
Federal funds sold and other short-term investments		4,667		474			6,915			948
Total interest income		20,875		14,842			49,452			45,300
Interest expense
Deposits		944		209			1,346			732
Other borrowings		160		325			827			1,006
Long-term debt		—		12			—			319
Total interest expense		1,104		546			2,173			2,057
Net interest income		19,771		14,296			47,279			43,243
Provision for loan losses		—		(550	)		(1,500	)		(1,300	)
Net interest income after provision for loan losses		19,771		14,846			48,779			44,543
Noninterest income
Service charges and fees		1,263		1,183			3,693			3,240
Net gains on mortgage loans		166		851			673			4,177
Trust fees		969		1,079			3,153			3,217
ATM and debit card fees		1,724		1,676			5,084			4,844
Bank owned life insurance (“BOLI”) income		217		260			687			787
Other		550		593			1,695			2,084
Total noninterest income		4,889		5,642			14,985			18,349
Noninterest expense
Salaries and benefits		6,639		6,278			19,331			19,192
Occupancy of premises		989		992			3,232			3,023
Furniture and equipment		1,014		1,014			3,017			2,929
Legal and professional		268		272			733			768
Marketing and promotion		196		175			586			525
Data processing		984		839			2,792			2,602
FDIC assessment		201		204			578			532
Interchange and other card expense		405		391			1,184			1,137
Bond and D&O Insurance		129		112			389			334
Other		1,302		1,273			3,936			3,711
Total noninterest expenses		12,127		11,550			35,778			34,753
Income before income tax		12,533		8,938			27,986			28,139
Income tax expense		2,488		1,736			5,372			5,341
Net income	$	10,045	$	7,202		$	22,614		$	22,798
Basic earnings per common share	$	0.29	$	0.21		$	0.66		$	0.67
Diluted earnings per common share	$	0.29	$	0.21		$	0.66		$	0.67
Cash dividends per common share	$	0.08	$	0.08		$	0.24		$	0.24

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and nine month periods ended September 30, 2022 and 2021

(unaudited)

(Dollars in thousands)

	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Net income	$	10,045		$	7,202		$	22,614		$	22,798
Other comprehensive income (loss):
Unrealized gains (losses):
Net change in unrealized gains (losses) on debt securities available for sale		(17,714	)		(792	)		(41,085	)		(3,443	)
Net unrealized gain at time of transfer on securities transferred to held-to-maturity		—			—			113			—
Amortization of net unrealized gains on securities transferred to held-to-maturity		(5	)		—			(16	)		—
Tax effect		3,721			166			8,608			723
Net change in unrealized gains (losses) on debt securities available for sale, net of tax		(13,998	)		(626	)		(32,380	)		(2,720	)
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		(13,998	)		(626	)		(32,380	)		(2,720	)
Comprehensive income (loss)	$	(3,953	)	$	6,576		$	(9,766	)	$	20,078

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three and nine month periods ended September 30, 2022 and 2021

(unaudited)

(Dollars in thousands, except per share data)

	Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, July 1, 2021	$	218,846		$	27,251		$	2,120		$	248,217
Net income for the three months ended September 30, 2021		—			7,202			—			7,202
Cash dividends at $0.08 per share		—			(2,725	)		—			(2,725	)
Repurchase of 2,518 shares for taxes withheld on vested restricted stock		(21	)		—			—			(21	)
Other comprehensive income, net of tax		—			—			(626	)		(626	)
Stock compensation expense		166			—			—			166
Balance, September 30, 2021	$	218,991		$	31,728		$	1,494		$	252,213


Balance, July 1, 2022	$	219,456		$	42,332		$	(18,679	)	$	243,109
Net income for the three months ended September 30, 2022		—			10,045			—			10,045
Cash dividends at $0.08 per share		—			(2,729	)		—			(2,729	)
Repurchase of 1,662 shares for taxes withheld on vested restricted stock		(15	)		—			—			(15	)
Other comprehensive income, net of tax		—			—			(13,998	)		(13,998	)
Stock compensation expense		142			—			—			142
Balance, September 30, 2022	$	219,583		$	49,648		$	(32,677	)	$	236,554

	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 nine months ended September 30, 2021		—			22,798			—			22,798
Cash dividends at $0.24 per share		—			(8,171	)		—			(8,171	)
Repurchase of 3,859 shares for taxes withheld on vested restricted stock		(34	)		—			—			(34	)
Other comprehensive income, net of tax		—			—			(2,720	)		(2,720	)
Stock compensation expense		497			—			—			497
Balance, September 30, 2021	$	218,991		$	31,728		$	1,494		$	252,213


Balance, January 1, 2022	$	219,082		$	35,220		$	(297	)	$	254,005
Net income for the nine months ended September 30, 2022		—			22,614			—			22,614
Cash dividends at $0.24 per share		—			(8,186	)		—			(8,186	)
Repurchase of 3,815 shares for taxes withheld on vested restricted stock		(35	)		—			—			(35	)
Other comprehensive income, net of tax		—			—			(32,380	)		(32,380	)
Stock compensation expense		536			—			—			536
Balance, September 30, 2022	$	219,583		$	49,648		$	(32,677	)	$	236,554

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine month periods ended September 30, 2022 and 2021

(unaudited)

(Dollars in thousands)

	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Cash flows from operating activities
Net income	$	22,614		$	22,798
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		1,493			1,863
Stock compensation expense		536			497
Provision for loan losses		(1,500	)		(1,300	)
Origination of loans for sale		(25,009	)		(107,845	)
Proceeds from sales of loans originated for sale		26,855			114,809
Net gains on mortgage loans		(673	)		(4,177	)
Write-down of other real estate		—			4
Net (gain) / loss on sales of other real estate		(47	)		20
Deferred income tax expense		585			656
Earnings in bank-owned life insurance		(687	)		(787	)
Change in accrued interest receivable and other assets		(5,536	)		4,071
Change in accrued expenses and other liabilities		1,499			(1,865	)
Net cash from operating activities		20,130			28,744
Cash flows from investing activities
Loan originations and payments, net		(29,220	)		293,142
Purchases of securities available for sale		(232,108	)		(71,864	)
Purchases of securities held to maturity		(160,481	)		(72,916	)
Purchase of bank-owned life insurance		—			(10,000	)
Proceeds from:
Maturities and calls of securities available for sale		17,486			38,964
Maturities and calls of securities held to maturity		37,998			8,256
Principal paydowns on securities available for sale		12,003			24,758
Principal paydowns on securities held to maturity		33,149			6,559
Sales of other real estate		47			170
Redemption of FHLB stock		1,347			—
Payout of bank-owned insurance claim		—			560
Additions to premises and equipment		(605	)		(935	)
Net cash from investing activities		(320,384	)		216,694
Cash flows from financing activities
Change in deposits		(21,761	)		254,588
Repayments and maturities of other borrowed funds		(80,000	)		(30,619	)
Proceeds from other borrowed funds		25,000			25,000
Repurchase of shares for taxes withheld on vested restricted stock		(35	)		(34	)
Cash dividends paid		(8,186	)		(8,171	)
Net cash from financing activities		(84,982	)		240,764
Net change in cash and cash equivalents		(385,236	)		486,202
Cash and cash equivalents at beginning of period		1,151,788			783,736
Cash and cash equivalents at end of period	$	766,552		$	1,269,938

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine month periods ended September 30, 2022 and 2021

(unaudited)

(Dollars in thousands)

	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Supplemental cash flow information
Interest paid	$	2,204	$	2,227
Income taxes paid		5,000		4,750
Supplemental noncash disclosures:
Security settlement		1,000		—
Transfer of securities from available for sale to held to maturity		123,469		—

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Recent Events: In response to the COVID-19 pandemic, federal state and local governments have taken and continue to take actions designed to mitigate the effect on public health and to address the economic impact from the virus. The effects of COVID-19 and its related variants could, among other risks, result in a material increase in requests from the Company’s customers for loan deferrals, modifications to the terms of loans, or other borrower accommodations; have a material adverse impact on the financial condition of the Company’s customers, potentially impacting their ability to make payments to the Company as scheduled driving an increase in delinquencies and loan losses; result in additional material provision for loan losses; result in a decreased demand for the Company’s loans; or negatively impact the Company’s ability to access capital on attractive terms or at all. Those effects could have a material adverse impact on the Company’s and its customers’ business, financial condition, and results of operations.

The Bank was a participating lender in the Small Business Administration’s (“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. Fees generated based on the origination of PPP loans 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.

In 2020:

•

The Bank originated 1,738 PPP loans totaling $346.7 million in principal.

•

Fees generated totaled $10.0 million.

•

765 PPP loans totaling $113.5 million were forgiven.

•

Total net fees of $5.4 million were recognized.

In 2021:

•

The Bank originated 1,000 PPP loans totaling $128.1 million in principal.

•

Fees generated totaled $5.6 million.

•

1,722 PPP loans totaling $318.4 million were forgiven.

•

Total net fees of $8.3 million were recognized.

In the nine months ended September 30, 2022:

•

251 PPP loans totaling $43.1 million were forgiven.

•

Total net fees of $1.3 million were recognized.

As of September 30, 2022, just one PPP loan totaling $37,000 in principal remained outstanding and total net fees of $5,000 remained unrecognized.

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Index

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 periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021.

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

Allowance for Loan Losses: The allowance for loan losses (allowance) is a valuation allowance for probable incurred credit losses inherent in our loan portfolio, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans. Management believes the allowance for loan losses balance to be adequate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, economic conditions and other relevant factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance for loan losses.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. At September 30, 2022, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

A loan is impaired when, based on current information and events, it is believed to be probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified and a concession has been made, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

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.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

The Company generally satisfies its performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

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

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 two 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. The Bank has a master netting arrangement with its correspondent bank and has opted to record the fair value of these instruments on a gross basis. At September 30, 2022 and December 31, 2021, the total notional amount of such agreements was $127.3 million and $140.7 million, respectively, and resulted in a derivative asset with a fair value of $6.9 million and $3.3 million, respectively, which were included in other assets and a derivative liability of $6.9 million and $3.3 million, respectively, which were included in other liabilities. The net fair value position of these instruments was $6.9 million at September 30, 2022 and $1.0 million at December 31, 2021.

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as derivatives not qualifying for hedge accounting. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest 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.

-12-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Changes in the fair values of these interest rate lock and mortgage backed security and forward commitment derivatives are included in net gains on mortgage loans. The fair value of interest rate lock commitments was $(19,000) at September 30, 2022 and $25,000 at December 31, 2021. The net fair value of mortgage backed security derivatives was $74,000 at September 30, 2022 and $(13,000) at December 31, 2021.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. As of September 30, 2022 and December 31, 2021, these loans had net unrealized gains (losses) of $(17,000) and $51,000, respectively, which are reflected in their carrying value. Changes in fair value of loans held for sale are included in net gains on mortgage loans. Loans are sold with servicing released; therefore no mortgage servicing right assets are established.

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.

This ASU expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by year of origination. 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. In the periods since, the Company modeled the various methods prescribed in the ASU against the Company’s identified loan segments. Based on the modeling conducted through September 30, 2022, the Company does not believe the effect of adoption of the new standard will materially affect the level of the allowance for loan losses or valuation reserves on available-for-sale debt securities or debt securities held to maturity. The Company anticipates continuing to run parallel computations as it continues to evaluate the impact of adoption of the new standard.

ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. Entities that make such elections would not have to remeasure contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. We are utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. We have discontinued the use of new LIBOR-based loans and interest rate derivatives, according to regulatory guidelines. The amended guidance under Topic 848 and our ability to elect its temporary optional expedients and exceptions are effective for us through December 31, 2022. We have adopted the LIBOR transition relief allowed under this standard.

-13-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ASU No. 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. This ASU expands the current last-of-layer method of hedge accounting that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. To reflect this expansion, the last-of-layer method is renamed the portfolio layer method. This ASU expands the scope of the portfolio layer method to include nonprepayable assets, specifies eligible hedging instruments in a single-layer hedge, provides additional guidance on the accounting for and disclosure of hedge basis adjustments and specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. This ASU is effective for public business entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. As the Company does not engage in this type of hedging activity, the Company does not believe adoption of this ASU will have any impact on its financial results or disclosures.

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

-14-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2022
Available for Sale
U.S. Treasury and federal agency securities	$	222,223	$	—	$	(16,960	)	$	205,263
U.S. Agency MBS and CMOs		109,385		—		(14,173	)		95,212
Tax-exempt state and municipal bonds		39,431		—		(1,226	)		38,205
Taxable state and municipal bonds		109,511		—		(8,576	)		100,935
Corporate bonds and other debt securities		14,639		—		(526	)		14,113
	$	495,189	$	—	$	(41,461	)	$	453,728

Held to Maturity
U.S. Treasury	$	251,329	$	—	$	(14,401	)	$	236,928
Tax-exempt state and municipal bonds		98,152		66		(4,264	)		93,954
	$	349,481	$	66	$	(18,665	)	$	330,882

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2021
Available for Sale
U.S. Treasury and federal agency securities	$	208,153	$	215	$	(1,523	)	$	206,845
U.S. Agency MBS and CMOs		87,343		416		(962	)		86,797
Tax-exempt state and municipal bonds		36,298		1,258		—			37,556
Taxable state and municipal bonds		79,394		812		(645	)		79,561
Corporate bonds and other debt securities		5,251		63		(10	)		5,304
	$	416,439	$	2,764	$	(3,140	)	$	416,063
Held to Maturity
Tax-exempt state and municipal bonds	$	137,003	$	2,484	$	(215	)	$	139,272

There were no sales of securities in the three and nine month periods ended September 30, 2022 and 2021.

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

Contractual maturities of debt securities at September 30, 2022 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	$	32,069	$	31,534	$	13,800	$	13,729
Due from one to five years		295,170		278,658		312,058		293,127
Due from five to ten years		22,242		20,690		61,476		53,113
Due after ten years		—		—		107,855		93,759
	$	349,481	$	330,882	$	495,189	$	453,728

-15-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (Continued)

Securities with unrealized losses at September 30, 2022 and December 31, 2021, 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
September 30, 2022	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available for Sale
U.S. Treasury and federal agency securities	$	156,862	$	(8,233	)	$	50,150	$	(8,754	)	$	207,012	$	(16,987	)
U.S. Agency MBS and CMOs		71,741		(8,464	)		23,472		(5,709	)		95,213		(14,173	)
Tax-exempt state and municipal bonds		37,576		(1,218	)		—		—			37,576		(1,218	)
Taxable state and municipal bonds		82,149		(5,335	)		19,025		(3,249	)		101,174		(8,584	)
Corporate bonds and other debt securities		12,363		(499	)		—		—			12,363		(499	)
Total	$	360,691	$	(23,749	)	$	92,647	$	(17,712	)	$	453,338	$	(41,461	)

Held to Maturity
U.S. Treasury	$	236,927	$	(14,401	)	$	—	$	—		$	236,927	$	(14,401	)
Tax-exempt state and municipal bonds		84,863		(4,243	)		2,804		(21	)		87,667		(4,264	)
	$	321,790	$	(18,644	)	$	2,804	$	(21	)	$	324,594	$	(18,665	)

	Less than 12 Months					12 Months or More					Total
December 31, 2021	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available for Sale
U.S. Treasury and federal agency securities	$	77,066	$	(955	)	$	18,432	$	(568	)	$	95,498	$	(1,523	)
U.S. Agency MBS and CMOs		52,254		(830	)		4,190		(132	)		56,444		(962	)
Tax-exempt state and municipal bonds		—		—			—		—			—		—
Taxable state and municipal bonds		37,648		(638	)		498		(7	)		38,146		(645	)
Corporate bonds and other debt securities		1,352		(10	)		—		—			1,352		(10	)
Total	$	168,320	$	(2,433	)	$	23,120	$	(707	)	$	191,440	$	(3,140	)

Held to Maturity
Tax-exempt state and municipal bonds	$	61,166	$	(215	)	$	—	$	—		$	61,166	$	(215	)

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 September 30, 2022, 457 securities available for sale with fair values totaling $453.3 million had unrealized losses totaling $41.5 million. At September 30, 2022, 97 securities held to maturity with fair values totaling $324.6 million had unrealized losses totaling $18.7 million. 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 each period and each investment 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 $3.5 million and $4.9 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at September 30, 2022 and December 31, 2021, respectively.

-16-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

	September 30 , 2022			December 31, 2021
Commercial and industrial:
Commercial and industrial, excluding PPP	$	427,034		$	378,318
PPP		32			41,939
Total commercial and industrial		427,066			420,257
Commercial real estate:
Residential developed		6,830			4,862
Unsecured to residential developers		—			5,000
Vacant and unimproved		34,737			36,240
Commercial development		107			171
Residential improved		107,782			100,077
Commercial improved		257,144			259,039
Manufacturing and industrial		115,624			110,712
Total commercial real estate		522,224			516,101
Consumer:
Residential mortgage		130,138			117,800
Unsecured		111			210
Home equity		55,618			51,269
Other secured		3,488			3,356
Total consumer		189,355			172,635
Total loans		1,138,645			1,108,993
Allowance for loan losses		(14,821	)		(15,889	)
	$	1,123,824		$	1,093,104

The totals above are shown net of deferred fees and costs. Deferred fees on loans totaled $1.3 million and $2.6 million at September 30, 2022 and December 31, 2021, respectively. Deferred costs on loans totaled $1.4 million and $1.3 million at September 30, 2022 and December 31, 2021, respectively.

-17-

Index

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 September 30, 2022	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	5,256	$	7,022		$	2,316		$	37		$	14,631
Charge-offs		—		—			(46	)		—			(46	)
Recoveries		175		5			56			—			236
Provision for loan losses		179		(147	)		(14	)		(18	)		—
Ending Balance	$	5,610	$	6,880		$	2,312		$	19		$	14,821

Three months ended September 30, 2021	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance	$	5,206		$	8,740		$	2,856		$	4	$	16,806
Charge-offs		—			—			(22	)		—		(22	)
Recoveries		265			11			22			—		298
Provision for loan losses		(259	)		(250	)		(68	)		27		(550	)
Ending Balance	$	5,212		$	8,501		$	2,788		$	31	$	16,532

Nine months ended September 30, 2022	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	5,176		$	8,051		$	2,633		$	29		$	15,889
Charge-offs		(38	)		—			(103	)		—			(141	)
Recoveries		185			276			112			—			573
Provision for loan losses		287			(1,447	)		(330	)		(10	)		(1,500	)
Ending Balance	$	5,610		$	6,880		$	2,312		$	19		$	14,821

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		—			—		(102	)		—		(102	)
Recoveries		320			122		84			—		526
Provision for loan losses		(1,740	)		380		48			12		(1,300	)
Ending Balance	$	5,212		$	8,501	$	2,788		$	31	$	16,532

-18-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

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

September 30, 2022	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	54	$	17	$	223	$	—	$	294
Collectively evaluated for impairment		5,556		6,863		2,089		19		14,527
Total ending allowance balance	$	5,610	$	6,880	$	2,312	$	19	$	14,821
Loans:
Individually reviewed for impairment	$	1,823	$	568	$	2,942	$	—	$	5,333
Collectively evaluated for impairment		425,243		521,656		186,413		—		1,133,312
Total ending loans balance	$	427,066	$	522,224	$	189,355	$	—	$	1,138,645

December 31, 2021	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	303	$	24	$	238	$	—	$	565
Collectively evaluated for impairment		4,873		8,027		2,395		29		15,324
Total ending allowance balance	$	5,176	$	8,051	$	2,633	$	29	$	15,889
Loans:
Individually reviewed for impairment	$	3,375	$	1,127	$	3,024	$	—	$	7,526
Collectively evaluated for impairment		416,882		514,974		169,611		—		1,101,467
Total ending loans balance	$	420,257	$	516,101	$	172,635	$	—	$	1,108,993

-19-

Index

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 September 30, 2022 (dollars in thousands):

September 30, 2022	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	1,476	$	1,476	$	—
Commercial real estate:
Residential improved		32		32		—
Commercial improved		42		42		—
		74		74		—
Consumer		—		—		—
Total with no related allowance recorded	$	1,550	$	1,550	$	—

With an allowance recorded:
Commercial and industrial	$	347	$	347	$	54
Commercial real estate:
Commercial improved		311		311		6
Manufacturing and industrial		183		183		11
		494		494		17
Consumer:
Residential mortgage		2,686		2,686		204
Unsecured		31		31		2
Home equity		225		225		17
		2,942		2,942		223
Total with an allowance recorded	$	3,783	$	3,783	$	294
Total	$	5,333	$	5,333	$	294

-20-

Index

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, 2021 (dollars in thousands):

December 31, 2021	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	669	$	669	$	—
Commercial real estate:
Residential improved		41		41		—
Commercial improved		577		577		—
		618		618		—
Consumer		—		—		—
Total with no related allowance recorded	$	1,287	$	1,287	$	—

With an allowance recorded:
Commercial and industrial	$	2,706	$	2,706	$	303
Commercial real estate:
Commercial improved		318		318		14
Manufacturing and industrial		191		191		10
		509		509		24
Consumer:
Residential mortgage		2,726		2,726		214
Unsecured		64		64		5
Home equity		234		234		19
		3,024		3,024		238
Total with an allowance recorded	$	6,239	$	6,239	$	565
Total	$	7,526	$	7,526	$	565

-21-

Index

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 nine month periods ended September 30, 2022 and 2021 (dollars in thousands):

	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Average of impaired loans during the period:
Commercial and industrial	$	1,277	$	749	$	2,580	$	2,417
Commercial real estate:
Residential developed		—		—		—		15
Residential improved		52		18		44		46
Commercial improved		356		1,349		420		1,909
Manufacturing and industrial		184		195		187		197
Consumer		3,005		3,362		2,884		3,641
Interest income recognized during impairment:
Commercial and industrial		30		40		300		336
Commercial real estate		9		22		31		88
Consumer		32		28		86		97
Cash-basis interest income recognized
Commercial and industrial		22		37		313		356
Commercial real estate		9		22		31		88
Consumer		34		30		60		98

-22-

Index

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 September 30, 2022 and December 31, 2021:

September 30, 2022	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	—	$	—
Commercial real estate:
Residential improved		—		—
		—		—
Consumer:
Residential mortgage		85		—
		85		—
Total	$	85	$	—

December 31, 2021	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	—	$	—
Commercial real estate:
Residential improved		5		—
		5		—
Consumer:
Residential mortgage		86		—
		86		—
Total	$	91	$	—

-23-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The following table presents the aging of the recorded investment in past due loans as of September 30, 2022 and December 31, 2021 by class of loans (dollars in thousands):

September 30, 2022	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	—	$	—	$	—	$	427,066	$	427,066
Commercial real estate:
Residential developed		—		—		—		6,830		6,830
Unsecured to residential developers		—		—		—		—		—
Vacant and unimproved		—		—		—		34,737		34,737
Commercial development		—		—		—		107		107
Residential improved		—		—		—		107,782		107,782
Commercial improved		—		—		—		257,144		257,144
Manufacturing and industrial		—		—		—		115,624		115,624
		—		—		—		522,224		522,224
Consumer:
Residential mortgage		—		84		84		130,054		130,138
Unsecured		—		—		—		111		111
Home equity		—		—		—		55,618		55,618
Other secured		—		—		—		3,488		3,488
		—		84		84		189,271		189,355
Total	$	—	$	84	$	84	$	1,138,561	$	1,138,645

December 31, 2021	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	39	$	1	$	40	$	420,217	$	420,257
Commercial real estate:
Residential developed		—		—		—		4,862		4,862
Unsecured to residential developers		—		—		—		5,000		5,000
Vacant and unimproved		—		—		—		36,240		36,240
Commercial development		—		—		—		171		171
Residential improved		—		5		5		100,072		100,077
Commercial improved		—		—		—		259,039		259,039
Manufacturing and industrial		—		—		—		110,712		110,712
		—		5		5		516,096		516,101
Consumer:
Residential mortgage		—		84		84		117,716		117,800
Unsecured		—		—		—		210		210
Home equity		—		—		—		51,269		51,269
Other secured		—		—		—		3,356		3,356
		—		84		84		172,551		172,635
Total	$	39	$	90	$	129	$	1,108,864	$	1,108,993

-24-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The Company had allocated $294,000 and $565,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of September 30, 2022 and December 31, 2021, 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 two 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 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 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.

The following table presents information regarding troubled debt restructurings as of September 30, 2022 and December 31, 2021 (dollars in thousands):

	September 30, 2022				December 31, 2021
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		4	$	1,823		4	$	3,375
Commercial real estate		4		568		6		1,127
Consumer		33		2,942		44		3,024
		41	$	5,333		54	$	7,526

-25-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The following table presents information related to accruing TDRs as of September 30, 2022 and December 31, 2021. 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):

	September 30, 2022		December 31, 2021
Accruing TDR - nonaccrual at restructuring	$	—	$	—
Accruing TDR - accruing at restructuring		4,982		4,552
Accruing TDR - upgraded to accruing after six consecutive payments		351		2,968
	$	5,333	$	7,520

There was one mortgage loan TDR executed during the three month period ended September 30, 2022. The pre-TDR balance of this loan totaled $278,000 and there were no writedowns upon TDR. There was one consumer loan TDR and one mortgage loan TDR executed during the nine month period ended September 30, 2022. The pre-TDR balance of these loans totaled $377,000 and there were no writedowns upon TDR. There were no TDRs executed during the three and nine month periods ended September 30, 2021.

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 September 30, 2022 and 2021 and 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 March 2020, guidance issued by the federal banking agencies in consultation with FASB and the Coronavirus Aid, Relief and Economic Security (“CARES”) Act collectively 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. Through September 30, 2022, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million. As of September 30, 2022, all of these modifications had expired and the loans had returned to their contractual payment terms.

-26-

Index

MACATAWA BANK CORPORATION

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 eight 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.

-27-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

As of September 30, 2022 and December 31, 2021, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

September 30, 2022		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	15,063	$	13,129	$	181,578	$	208,693	$	8,312	$	291	$	—	$	—	$	427,066

Commercial real estate:
Residential developed		—		—		—		6,830		—		—		—		—		6,830
Unsecured to residential developers		—		—		—		—		—		—		—		—		—
Vacant and unimproved		—		429		17,151		17,157		—		—		—		—		34,737
Commercial development		—		—		107		—		—		—		—		—		107
Residential improved		—		—		24,867		82,858		57		—		—		—		107,782
Commercial improved		—		18,122		79,871		152,189		6,651		311		—		—		257,144
Manufacturing & industrial		—		9,029		28,264		74,284		1,715		2,332		—		—		115,624
	$	15,063	$	40,709	$	331,838	$	542,011	$	16,735	$	2,934	$	—	$	—	$	949,290

December 31, 2021		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	56,979	$	19,300	$	110,877	$	227,087	$	2,700	$	3,314	$	—	$	—	$	420,257

Commercial real estate:
Residential developed		—		—		—		4,862		—		—		—		—		4,862
Unsecured to residential developers		—		—		—		5,000		—		—		—		—		5,000
Vacant and unimproved		—		1,763		13,492		20,985		—		—		—		—		36,240
Commercial development		—		—		171		—		—		—		—		—		171
Residential improved		—		—		24,450		75,503		119		—		5		—		100,077
Commercial improved		—		15,115		71,211		165,268		7,127		318		—		—		259,039
Manufacturing & industrial		—		—		41,757		65,601		3,354		—		—		—		110,712
	$	56,979	$	36,178	$	261,958	$	564,306	$	13,300	$	3,632	$	5	$	—	$	936,358

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):

	September 30, 2022		December 31, 2021
Not classified as impaired	$	2,551	$	233
Classified as impaired		383		3,404
Total commercial loans classified substandard or worse	$	2,934	$	3,637

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):

September 30, 2022	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	130,054	$	111	$	55,618	$	3,488
Nonperforming		84		—		—		—
Total	$	130,138	$	111	$	55,618	$	3,488

-28-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

December 31, 2021	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	117,716	$	210	$	51,269	$	3,356
Nonperforming		84		—		—		—
Total	$	117,800	$	210	$	51,269	$	3,356

NOTE 4 – 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’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’ 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 charge-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, less costs to sell. 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.

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.

-29-

Index

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)
September 30, 2022
Available for sale securities
U.S. Treasury and federal agency securities	$	205,263		$	—	$	205,263	$	—
U.S. Agency MBS and CMOs		95,212			—		95,212		—
Tax-exempt state and municipal bonds		38,205			—		38,205		—
Taxable state and municipal bonds		100,935			—		100,935		—
Corporate bonds and other debt securities		14,113			—		14,113		—
Other equity securities		1,297			—		1,297		—
Loans held for sale		234			—		234		—
Interest rate swaps		6,920			—		—		6,920
Interest rate swaps		(6,920	)		—		—		(6,920	)

December 31, 2021
Available for sale securities
U.S. Treasury and federal agency securities	$	206,845		$	—	$	206,845	$	—
U.S. Agency MBS and CMOs		86,797			—		86,797		—
Tax-exempt state and municipal bonds		37,556			—		37,556		—
Taxable state and municipal bonds		79,561			—		79,561		—
Corporate bonds and other debt securities		5,304			—		5,304		—
Other equity securities		1,470			—		1,470		—
Loans held for sale		1,407			—		1,407		—
Interest rate swaps		3,277			—		—		3,277
Interest rate swaps		(3,277	)		—		—		(3,277	)

The items identified as measured under Level 3 do not impact other comprehensive income. There were no items transferred in or out of Level 3 classification between December 31, 2021 and September 30, 2022, nor were there any new swap agreements entered into during that period. There was one swap terminated during that period. That swap had a fair value of $168,000 at December 31, 2021.

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)
September 30, 2022
Impaired loans	$	336	$	—	$	—	$	336

December 31, 2021
Impaired loans	$	2,903	$	—	$	—	$	2,903

-30-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 – 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 (%)
September 30, 2022
Impaired Loans	$	336	Sales comparison approach	Adjustment for differences between comparable sales	1.5 to 20.0
			Income approach	Capitalization rate	9.5 to 11.0

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
December 31, 2021
Impaired Loans	$	2,903	Sales comparison approach	Adjustment for differences between comparable sales	1.5 to 20.0
			Income approach	Capitalization rate	9.5 to 11.0

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at September 30, 2022 and December 31, 2021 (dollars in thousands):

		September 30, 2022						December 31, 2021
	Level in Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and due from banks	Level 1	$	33,205		$	33,205		$	23,669		$	23,669
Federal funds sold and other short-term investments	Level 1		733,347			733,347			1,128,119			1,128,119
Securities held to maturity	Level 3		349,481			330,882			137,003			139,272
FHLB stock	Level 3		10,211			10,211			11,558			11,558
Loans, net	Level 2		1,123,488			1,094,345			1,090,201			1,106,324
Bank owned life insurance	Level 3		53,193			53,193			52,468			52,468
Accrued interest receivable	Level 2		7,202			7,202			4,088			4,088
Financial liabilities
Deposits	Level 2		(2,556,197	)		(2,556,011	)		(2,577,958	)		(2,577,885	)
Other borrowed funds	Level 2		(30,000	)		(28,950	)		(85,000	)		(86,322	)
Accrued interest payable	Level 2		(41	)		(41	)		(72	)		(72	)
Off-balance sheet credit-related items
Loan commitments			—			—			—			—

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

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

-31-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 - DERIVATIVES

Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. The Company executes interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings. Since they offset perfectly, there is no net impact to earnings.

The notional and fair value of derivative instruments as of September 30, 2022 and December 31, 2021 are reflected in the following table (dollars in thousands):

	Notional Amount		Balance Sheet Location	Fair Value
September 30, 2022
Derivative assets
Interest rate swaps	$	63,650	Other Assets	$	6,920

Derivative liabilities
Interest rate swaps		63,650	Other Liabilities		6,920

	Notional Amount		Balance Sheet Location	Fair Value
December 31, 2021
Derivative assets
Interest rate swaps	$	70,356	Other Assets	$	3,277

Derivative liabilities
Interest rate swaps		70,356	Other Liabilities		3,277

The fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $6.9 million and $3.3 million as of September 30, 2022 and December 31, 2021, respectively. Securities pledged as collateral totaling $3.5 million and $3.0 million were provided to the counterparty correspondent bank as of September 30, 2022 and December 31, 2021, respectively. These pledged securities were held at the correspondent bank.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $63.7 million as of September 30, 2022 and $70.4 million at December 31, 2021. Associated credit exposure is generally mitigated by securing the interest rate swaps with the underlying collateral of the loan instrument that has been hedged.

-32-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 – DEPOSITS

Deposits are summarized as follows (dollars in thousands):

	September 30, 2022		December 31, 2021
Noninterest-bearing demand	$	855,744	$	886,115
Interest bearing demand		731,796		736,573
Savings and money market accounts		891,675		865,528
Certificates of deposit		76,982		89,742
	$	2,556,197	$	2,577,958

Time deposits that exceed the FDIC insurance limit of $250,000 were approximately $22.4 million at September 30, 2022 and $28.2 million at December 31, 2021.

NOTE 7 - 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
September 30, 2022
Single maturity fixed rate advances	$	10,000	February 2024		2.63	%
Putable advances		20,000	November 2024		1.81	%
	$	30,000

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
December 31, 2021
Single maturity fixed rate advances	$	30,000	May 2023 to July 2024		2.87	%
Putable advances		55,000	November 2024 to July 2031		0.74	%
	$	85,000

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 $442.6 million and $361.9 million under a blanket lien arrangement at September 30, 2022 and December 31, 2021, respectively.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 - OTHER BORROWED FUNDS (Continued)

Scheduled repayments of FHLB advances as of September 30, 2022 were as follows (in thousands):

2022	$	—
2023		—
2024		30,000
2025		—
2026		—
Thereafter		—
	$	30,000

On January 21, 2022, the FHLB exercised its option to put an advance totaling $25.0 million to the Company. This advance carried an interest rate of 0.01% and had a maturity date of July 21, 2031. The Company paid off this advance as required on January 21, 2022. On January 21, 2022, the Company executed a new $25.0 million advance with the FHLB with similar terms. This advance carried an interest rate of 0.05% and a maturity date of January 21, 2032. The first put date for this advance was April 21, 2022. The FHLB exercised its put option on this advance and it was paid off by the Company as required on April 21, 2022. On May 27, 2022, the FHLB exercised its put option on a $10.0 million advance that carried an interest rate of 0.45% and the Company paid the advance off as required on May 27, 2022. On May 27, 2022, the Company prepaid three other advances, totaling $20.0 million, with rates ranging from 2.91% to 3.05%, resulting in a prepayment penalty of $87,000, which is included in interest expense in the nine months ended September 30, 2022.

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank. There were no borrowings outstanding at September 30, 2022 and December 31, 2021, and the Company had approximately $3.6 million and $4.0 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $3.9 million and $4.4 million at September 30, 2022 and December 31, 2021, respectively.

NOTE 8 - EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three and nine month periods ended September 30, 2022 and 2021 are as follows (dollars in thousands, except per share data):

	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Net income available to common shares	$	10,045	$	7,202	$	22,614	$	22,798
Weighted average shares outstanding, including participating stock awards - Basic		34,251,792		34,190,264		34,253,459		34,192,916
Dilutive potential common shares:
Stock options		—		—		—		—
Weighted average shares outstanding - Diluted		34,251,792		34,190,264		34,253,459		34,192,916
Basic earnings per common share	$	0.29	$	0.21	$	0.66	$	0.67
Diluted earnings per common share	$	0.29	$	0.21	$	0.66	$	0.67

There were no antidilutive shares of common stock in the three and nine month periods ended September 30, 2022 and 2021.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9 - FEDERAL INCOME TAXES

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

	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Current	$	2,436	$	936	$	4,787	$	4,685
Deferred		52		800		585		656
	$	2,488	$	1,736	$	5,372	$	5,341

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

	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Statutory rate		21	%		21	%		21	%		21	%
Statutory rate applied to income before taxes	$	2,632		$	1,877		$	5,877		$	5,909
Deduct
Tax-exempt interest income		(137	)		(162	)		(434	)		(477	)
Bank-owned life insurance		(45	)		(54	)		(144	)		(165	)
Other, net		38			75			73			74
	$	2,488		$	1,736		$	5,372		$	5,341

The realization of deferred tax assets is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. Management believes it is more likely than not that all of the deferred tax assets at September 30, 2022 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):

	September 30, 2022			December 31, 2021
Deferred tax assets
Allowance for loan losses	$	3,113		$	3,337
Net deferred loan fees		—			275
Nonaccrual loan interest		16			57
Valuation allowance on other real estate owned		—			6
Unrealized loss on securities available for sale and transferred to held to maturity		8,686			79
Other		347			311
Gross deferred tax assets		12,162			4,065
Valuation allowance		—			—
Total net deferred tax assets		12,162			4,065
Deferred tax liabilities
Depreciation		(1,123	)		(1,199	)
Net deferred loan fees		(12	)		—
Prepaid expenses		(284	)		(288	)
Other		(558	)		(415	)
Gross deferred tax liabilities		(1,977	)		(1,902	)
Net deferred tax asset	$	10,185		$	2,163

There were no unrecognized tax benefits at September 30, 2022 or December 31, 2021 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 2018.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 – COMMITMENTS AND OFF BALANCE-SHEET RISK

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

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

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

	September 30, 2022		December 31, 2021
Commitments to make loans	$	88,937	$	128,648
Letters of credit		15,847		10,141
Unused lines of credit		740,310		677,902

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was $0 and approximately $1.3 million at September 30, 2022 and December 31, 2021, 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 $2.5 million and $9.5 million at September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022, approximately 67.5% 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 term SOFR and generally expire within 30 days. The majority of the unused lines of credit were at variable rates tied to prime.

NOTE 11 – CONTINGENCIES

The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. As of September 30, 2022, 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 12 – SHAREHOLDERS’ EQUITY

Regulatory Capital

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

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

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – SHAREHOLDERS’ EQUITY (Continued)

The regulatory capital requirements 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). The minimum leverage ratio is 4.0%.

At September 30, 2022 and December 31, 2021, actual capital levels and minimum required levels were (dollars in thousands):

						Minimum Capital					Minimum Capital Adequacy With					To Be Well Capitalized Under Prompt Corrective
	Actual					Adequacy					Capital Buffer					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2022
CET1 capital (to risk weighted assets)
Consolidated	$	269,231		16.7	%	$	72,455		4.5	%	$	112,708		7.0	%		N/A		N/A
Bank		261,445		16.2			72,442		4.5			112,688		7.0		$	104,639		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		269,231		16.7			96,607		6.0			136,860		8.5			N/A		N/A
Bank		261,445		16.2			96,589		6.0			136,835		8.5			128,786		8.0
Total capital (to risk weighted assets)
Consolidated		284,052		17.6			128,810		8.0			169,063		10.5			N/A		N/A
Bank		276,266		17.2			128,786		8.0			169,031		10.5			160,982		10.0
Tier 1 capital (to average assets)
Consolidated		269,331		9.3			115,941		4.0			N/A		N/A			N/A		N/A
Bank		261,445		9.0			115,930		4.0			N/A		N/A			144,912		5.0

December 31, 2021
CET1 capital (to risk weighted assets)
Consolidated	$	254,302		17.2	%	$	66,381		4.5	%	$	103,259		7.0	%		N/A		N/A
Bank		246,239		16.7			66,370		4.5			103,242		7.0		$	95,867		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		254,302		17.2			88,508		6.0			125,386		8.5			N/A		N/A
Bank		246,239		16.7			88,493		6.0			125,365		8.5			117,991		8.0
Total capital (to risk weighted assets)
Consolidated		270,191		18.3			118,011		8.0			154,889		10.5			N/A		N/A
Bank		262,128		17.8			117,991		8.0			154,863		10.5			147,488		10.0
Tier 1 capital (to average assets)
Consolidated		254,302		8.7			116,664		4.0			N/A		N/A			N/A		N/A
Bank		246,239		8.4			116,654		4.0			N/A		N/A			145,818		5.0

The Bank was categorized as “well capitalized” at September 30, 2022 and December 31, 2021.

-37-

Index

Item 2.

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

Macatawa Bank Corporation is a Michigan corporation and a registered bank holding company. It wholly-owns Macatawa Bank. Macatawa 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. For further information regarding consolidation, see the Notes to Consolidated Financial Statements.

At September 30, 2022, we had total assets of $2.84 billion, total loans of $1.14 billion, total deposits of $2.56 billion and shareholders' equity of $236.6 million. For the three months ended September 30, 2022, we recognized net income of $10.0 million compared to $7.2 million for the same period in 2021. For the nine months ended September 30, 2022, we recognized net income of $22.6 million compared to $22.8 million for the same period in 2021. The Bank was categorized as “well capitalized” under regulatory capital standards at September 30, 2022.

We paid a dividend of $0.08 per share in each quarter in 2021 and in each of the first three quarters of 2022.

RESULTS OF OPERATIONS

Summary: Net income for the three months ended September 30, 2022 was $10.0 million, compared to $7.2 million for the same period in 2021. Net income per share on a diluted basis for the three months ended September 30, 2022 was $0.29 compared to $0.21 for the same period in 2021. Net income for the nine months ended September 30, 2022 was $22.6 million compared to $22.8 million for the same period in 2021. Net income per share on a diluted basis for the nine months ended September 30, 2022 was $0.66 compared to $0.67 for the same period in 2021.

Earnings in the three and nine month periods ended September 30, 2022 improved over the same periods in the prior year primarily through growth in net interest income which was positively impacted by the 300 basis point increase in the federal funds rates during 2022. This offset the impact of lower income from PPP loans during the first nine months of 2022. Net interest income increased to $19.8 million in the three months ended September 30, 2022 compared to $14.3 million in the same period in 2021. Net interest income increased to $47.3 million in the nine months ended September 30, 2022 compared to $43.2 million in the same period in 2021. As federal funds rates increase, our net interest income improves given the asset-sensitive profile of our balance sheet. We anticipate further improvement in net interest income as a result of these and future expected federal funds rate increases. Net interest income also benefitted in the 2022 periods from growth in our investment portfolio, which was up $250.1 million since December 31, 2021. Net gains on sales of mortgage loans decreased to $166,000 in the three months ended September 30, 2022 compared to $851,000 in the same period in 2021. Net gains on sales of mortgage loans decreased to $673,000 in the nine months ended September 30, 2022 compared to $4.2 million in the same period in 2021.

The provision for loan losses was $0 for the three months ended September 30, 2022, compared to a benefit of $550,000 for the same period in 2021. We were in a net loan recovery position for the three months ended September 30, 2022, with $190,000 in net loan recoveries, compared to $276,000 in net loan recoveries in the same period in 2021. The provision for loan losses was a benefit of $1.5 million for the nine months ended September 30, 2022 compared to a benefit of $1.3 million for the same period in 2021. We were also in a net loan recovery position for the nine months ended September 30, 2022, with $432,000 in net recoveries compared to $424,000 in net recoveries in the same period in 2021. The provision for loan losses in 2021 was also impacted by higher levels of qualitative environmental factors to address uncertainty and increased risk of loss attributable to the COVID-19 pandemic. Several of these factors were reduced in the first nine months of 2022, reflecting improvement in economic conditions and mitigating effects of the COVID-19 pandemic.

Net Interest Income: Net interest income totaled $19.8 million for the three months ended September 30, 2022 compared to $14.3 million for the same period in 2021. Net interest income increased to $47.3 million in the nine months ended September 30, 2022 compared to $43.2 million in the nine months ended September 30, 2021. Net interest income for the three and nine month periods ended September 30, 2022 benefitted from increases in the federal funds rate and growth in our investment securities portfolio. The federal funds rate increased by 300 basis points from March 2022 through September 2022.

-38-

Index

Net interest income for the third quarter of 2022 increased $5.5 million compared to the same period in 2021. Of this increase, $5.6 million was from changes in rates earned or paid, partially offset by a decrease of $170,000 from changes in the volume of average interest earning assets and interest bearing liabilities. The largest positive change in interest income occurred in our federal funds sold and other short-term investments. The net change in interest income for federal funds sold and other short-term investments was an increase of $4.2 million, of which $4.4 million was due to an increase in rate, partially offset by a reduction of $217,000 due to a decrease in volume. The net change in interest income for taxable securities was an increase of $2.5 million, with $2.3 million due to an increase in average balances and an increase of $260,000 due to rate. The net change in interest income for commercial loans (excluding PPP loans) was an increase of $2.2 million, of which an increase of $620,000 was due to portfolio growth, and an increase of $1.5 million due to rate. Compared to the third quarter of 2021, PPP loans caused a reduction of $3.0 million in net interest income in the third quarter of 2022 primarily due to significant principal forgiveness and lower PPP fee recognition. Consumer loan interest income increased by $191,000 in the third quarter of 2022 compared to the same period in 2021. Of the $191,000 increase in interest income on consumer loans, $34,000 was due to an increase in average balances and $157,000 was due to higher loan rates. Interest expense changes in the third quarter of 2022 were primarily rate related as we did make some changes to interest rates paid on our deposit balances in response to increased federal funds rates.

Net interest income for the nine months ended September 30, 2022 increased $4.0 million compared to the same period in 2021. Of this increase, $6.8 million was from changes in the rates earned or paid, partially offset by a decrease of $2.7 million from changes in volume of average interest earning assets and interest bearing liabilities. The largest changes occurred in interest income on federal funds, interest income on PPP loans and interest income in our investment portfolio as we deployed some of our excess investable funds primarily into taxable securities. Interest income from federal funds sold and other short-term investments increased by $6.0 million in the first nine months of 2022 compared to the same period in 2021 due to the 300 basis point increase in federal funds rate from March 2022 through September 2022. This caused a $6.1 million increase in interest income, partially offset by a decrease in average balances of federal funds sold and other short-term investments in the first nine months of 2022, which subtracted $90,000. The net change in interest income for PPP loans was a decrease of $7.3 million in the first nine months of 2022 as compared to the same period in 2021. The net change in interest income for commercial loans (excluding PPP loans) was a $1.1 million increase with $698,000 due to rate and $410,000 due to portfolio growth. The net change in interest income for taxable securities was an increase of $5.0 million with $4.7 million due to an increase in average balances and $262,000 due to rate. Of the $507,000 decrease in interest income on residential mortgage loans, $361,000 was due to a decrease in average balances and $146,000 was due to rate.

-39-

Index

The cost of funds increased to 0.26% in the third quarter of 2022 compared to 0.13% in the third quarter of 2021. For the first nine months of 2022, the cost of funds increased to 0.17% compared to 0.16% for the same period in 2021. Increases in the rates paid on our interest bearing demand deposits and our savings and money market deposits in response to the increase in market rates over the last several months caused the increase in our cost of funds.

The following table shows an analysis of net interest margin for the three month periods ended September 30, 2022 and 2021 (dollars in thousands):

	For the three months ended September 30,
	2022								2021
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost
Assets
Taxable securities	$	670,832		$	3,323		1.98	%	$	200,981		$	786		1.56	%
Tax-exempt securities (1)		137,645			668		2.50			172,372			777		2.32
Commercial loans (2)		937,125			10,223		4.27			873,248			8,055		3.61
PPP loans (3)		1,745			94		21.08			133,413			3,104		9.10
Residential mortgage loans		128,611			1,093		3.39			123,574			1,039		3.36
Consumer loans		57,724			754		5.18			54,591			563		4.09
Federal Home Loan Bank stock		10,211			53		2.04			11,558			44		1.51
Federal funds sold and other short-term investments		803,082			4,667		2.27			1,234,420			474		0.15
Total interest earning assets (1)		2,746,975			20,875		3.02			2,804,157			14,842		2.12
Noninterest earning assets:
Cash and due from banks		42,454								39,725
Other		84,914								104,782
Total assets	$	2,874,343							$	2,948,664
Liabilities
Deposits:
Interest bearing demand	$	713,913		$	247		0.14	%	$	723,516		$	49		0.03	%
Savings and money market accounts		871,508			636		0.29			817,307			60		0.03
Time deposits		83,192			61		0.29			99,312			100		0.40
Borrowings:
Other borrowed funds		30,000			160		2.08			79,565			325		1.60
Long-term debt		—			—		—			1,345			12		3.42
Total interest bearing liabilities		1,698,613			1,104		0.26			1,721,045			546		0.13
Noninterest bearing liabilities:
Noninterest bearing demand accounts		917,552								964,908
Other noninterest bearing liabilities		13,321								12,717
Shareholders' equity		244,857								249,994
Total liabilities and shareholders' equity	$	2,874,343							$	2,948,664
Net interest income				$	19,771							$	14,296
Net interest spread (1)							2.76	%							1.99	%
Net interest margin (1)							2.86	%							2.04	%
Ratio of average interest earning assets to average interest bearing liabilities		161.72	%							162.93	%

(1)	Yields are presented on a tax equivalent basis using an assumed tax rate of 21% at September 30, 2022 and 2021.

(2)	Includes loan fees of $178,000 and $103,000 for the three months ended September 30, 2022 and 2021, respectively. Includes average nonaccrual loans of approximately $87,000 and $426,000 for the three months ended September 30, 2022 and 2021, respectively. Excludes PPP loans.

(3)	Includes loan fees of $90,000 and $2.8 million for the three months ended September 30, 2022 and 2021, respectively.

-40-

Index

The following table shows an analysis of net interest margin for the nine month periods ended September 30, 2022 and 2021 (dollars in thousands):

	For the nine months ended September 30,
	2022								2021
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost
Assets
Taxable securities	$	554,670		$	7,375		1.77	%	$	195,867		$	2,365		1.61	%
Tax-exempt securities (1)		157,095			2,101		2.30			145,571			2,295		2.71
Commercial loans (2)		920,883			26,698		3.82			906,493			25,590		3.72
PPP loans (3)		8,980			1,345		19.75			206,941			8,690		5.54
Residential mortgage loans		122,029			3,019		3.29			136,435			3,526		3.44
Consumer loans		55,912			1,843		4.41			56,373			1,724		4.09
Federal Home Loan Bank stock		10,478			155		1.95			11,558			162		1.84
Federal funds sold and other short-term investments		923,153			6,916		0.99			1,012,179			948		0.12
Total interest earning assets (1)		2,753,200			49,452		2.41			2,671,417			45,300		2.28
Noninterest earning assets:
Cash and due from banks		36,979								35,084
Other		89,392								102,849
Total assets	$	2,879,571							$	2,809,350
Liabilities
Deposits:
Interest bearing demand	$	700,010		$	341		0.06	%	$	670,029		$	122		0.02	%
Savings and money market accounts		879,368			846		0.13			811,381			183		0.03
Time deposits		87,892			159		0.24			103,271			428		0.55
Borrowings:
Other borrowed funds		56,234			827		1.94			70,623			1,005		1.88
Long-term debt		—			—		—			14,123			319		2.98
Total interest bearing liabilities		1,723,504			2,173		0.17			1,669,427			2,057		0.16
Noninterest bearing liabilities:
Noninterest bearing demand accounts		896,989								881,177
Other noninterest bearing liabilities		12,499								13,535
Shareholders' equity		246,579								245,211
Total liabilities and shareholders' equity	$	2,879,571							$	2,809,350
Net interest income				$	47,279							$	43,243
Net interest spread (1)							2.24	%							2.12	%
Net interest margin (1)							2.30	%							2.18	%
Ratio of average interest earning assets to average interest bearing liabilities		159.74	%							160.02	%

(1)	Yields are presented on a tax equivalent basis using an assumed tax rate of 21% at September 30, 2022 and 2021.

(2)	Includes loan fees of $435,000 and $628,000 for the nine months ended September 30, 2022 and 2021, respectively. Includes average nonaccrual loans of approximately $89,000 and $472,000 for the nine months ended September 30, 2022 and 2021, respectively. Excludes PPP loans.

(3)	Includes loan fees of $1.3 million and $7.1 million for the nine months ended September 30, 2022 and 2021, respectively.

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

	For the three months ended September 30, 2022 vs 2021 Increase (Decrease) Due to									For the nine months ended September 30, 2022 vs 2021 Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total

Interest income
Taxable securities	$	2,277		$	260		$	2,537		$	4,748		$	262		$	5,010
Tax-exempt securities		(190	)		81			(109	)		240			(434	)		(194	)
Commercial loans, excluding PPP loans		620			1,548			2,168			410			698			1,108
PPP loans		(2,997	)		(13	)		(3,010	)		(8,222	)		877			(7,345	)
Residential mortgage loans		43			11			54			(361	)		(146	)		(507	)
Consumer loans		34			157			191			(14	)		133			119
Federal Home Loan Bank stock		(5	)		14			9			(16	)		9			(7	)
Federal funds sold and other short-term investments		(217	)		4,410			4,193			(90	)		6,058			5,968
Total interest income		(435	)		6,468			6,033			(3,305	)		7,457			4,152
Interest expense
Interest bearing demand	$	(1	)	$	199		$	198		$	6		$	213			219
Savings and money market accounts		4			572			576			17			646			663
Time deposits		(15	)		(24	)		(39	)		(56	)		(213	)		(269	)
Other borrowed funds		(241	)		76			(165	)		(210	)		32			(178	)
Long-term debt		(12	)		—			(12	)		(319	)		—			(319	)
Total interest expense		(265	)		823			558			(562	)		678			116
Net interest income	$	(170	)	$	5,645		$	5,475		$	(2,743	)	$	6,779		$	4,036

Provision for Loan Losses: The provision for loan losses for the three months ended September 30, 2022 was $0 compared to a benefit of $550,000 for the same period in 2021. The provision for loan losses for the first nine months of 2022 was a benefit of $1.5 million compared to a benefit of $1.3 million for the same period in 2021. Net loan recoveries were $190,000 in the three months ended September 30, 2022 compared to net loan recoveries of $276,000 in the same period in 2021. Net loan recoveries were $432,000 in the nine months ended September 30, 2022 compared to $424,000 in the same period in 2021.

Gross loan recoveries were $236,000 for the three months ended September 30, 2022 and $298,000 for the same period in 2021. In the three months ended September 30, 2022, we had $46,000 in gross loan charge-offs, compared to $22,000 in the same period in 2021. For the nine months ended September 30, 2022, we experienced gross loan recoveries of $573,000 compared to $526,000 for the same period in 2021. Gross loan charge-offs for the nine months ended September 30, 2022 were $141,000 compared to $102,000 for the same period in 2021.

The amounts of loan loss provision in each period were the result of establishing our allowance for loan losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The provision for loan losses for the three and nine month periods ended September 30, 2022 was impacted by net reductions to certain qualitative factors. More information about our allowance for loan losses and our methodology for establishing its level may be found under the heading "Allowance for Loan Losses" below.

Noninterest Income: Noninterest income for the three and nine month periods ended September 30, 2022 was $4.9 million and $15.0 million compared to $5.6 million and $18.3 million for the same periods in 2021, respectively. The components of noninterest income are shown in the table below (in thousands):

	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Service charges and fees on deposit accounts	$	1,263	$	1,183	$	3,693	$	3,240
Net gains on mortgage loans		166		851		673		4,177
Trust fees		969		1,079		3,153		3,217
ATM and debit card fees		1,724		1,676		5,084		4,844
Bank owned life insurance (“BOLI”) income		217		260		687		787
Investment services fees		339		330		997		1,146
Other income		211		263		698		938
Total noninterest income	$	4,889	$	5,642	$	14,985	$	18,349

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Service charges on deposit accounts increased in the three and nine month periods ended September 30, 2022 as compared to the same periods in 2021 as customers returned to more normal behaviors in 2022 after having curtailed spending in 2021 due to uncertainty related to the COVID-19 pandemic. Service charges were up $80,000 in the three months ended September 30, 2022 and were up $453,000 in the nine months ended September 30, 2022 compared to the same periods in 2021.

Net gains on mortgage loans were down $685,000 in the three months ended September 30, 2022 and were down $3.5 million in the nine months ended September 30, 2022 compared to the same periods in 2021 as a result of changes in the volume of loans originated for sale. In the previous two years, volumes had been high due to a lower interest rate environment, spurring more refinancing of fixed rate loans which we sell into the secondary market. Mortgage rates increased in the latter part of 2021 and the first nine months of 2022, causing a sharp reduction in mortgage volume, and a shift to variable rate products, which we place in portfolio rather than sell in the secondary market. Mortgage loans originated for sale in the three months ended September 30, 2022 were $6.5 million, compared to $21.3 million in the same period in 2021. For the first nine months of 2022, mortgage loans originated for sale were $25.0 million, compared to $107.8 million for the same period in 2021.

Trust fees were down $110,000 in the three months ended September 30, 2022 and were down $64,000 in the nine months ended September 30, 2022 compared to the same periods in 2021. The changes for the three and nine months ended September 30, 2022 were largely due to fluctuations in market valuations of trust assets resulting from overall stock market conditions. ATM and debit card fees were up in the three and nine months ended September 30, 2022 as compared to the same periods in 2021 due to higher volume of usage by our customers. These volumes and resulting income have returned to more normal levels in the 2022 period following the COVID-19 related economic slowdown.

Noninterest Expense: Noninterest expense increased by $577,000 to $12.1 million for the three month period ended September 30, 2022 as compared to $11.6 million in the same period in 2021. Noninterest expense increased by $1.0 million to $35.8 million for the nine month period ended September 30, 2022 compared to $34.8 million for the same period in 2021. The components of noninterest expense are shown in the table below (in thousands):

	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Salaries and benefits	$	6,639	$	6,278	$	19,331	$	19,192
Occupancy of premises		989		992		3,232		3,023
Furniture and equipment		1,014		1,014		3,017		2,929
Legal and professional		268		272		733		768
Marketing and promotion		196		175		586		525
Data processing		984		839		2,792		2,602
FDIC assessment		201		204		578		532
Interchange and other card expense		405		391		1,184		1,137
Bond and D&O insurance		129		112		389		334
Outside services		502		510		1,516		1,434
Other noninterest expense		800		763		2,420		2,277
Total noninterest expense	$	12,127	$	11,550	$	35,778	$	34,753

Most categories of noninterest expense were relatively unchanged compared to the three and nine months ended September 30, 2021 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased by $361,000 in the three months ended September 30, 2022 from the same period in 2021. This increase is primarily due to higher annual merit and inflationary increases in base pay, higher 401k matching contributions and higher medical insurance costs more than offsetting a decrease in variable-based compensation due to lower mortgage origination volume. Salaries and benefits increased by $139,000 for the nine months ended September 30, 2022 compared to the same period in 2021 due to the same combination of factors. The table below identifies the primary components of salaries and benefits (in thousands):

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	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Salaries and other compensation	$	5,878			5,708		$	17,277			17,174
Salary deferral from commercial loan originations		(211	)		(204	)		(644	)		(825	)
Bonus accrual		344			289			786			688
Mortgage production - variable comp		91			187			376			903
401k matching contributions		187			98			586			327
Medical insurance costs		350			200			950			925
Total salaries and benefits	$	6,639		$	6,278		$	19,331		$	19,192

Occupancy expenses were down $3,000 in the three months ended September 30, 2022 and were up $209,000 in the nine month period ended September 30, 2022 compared to the same periods in 2021 due to fluctuations in maintenance costs incurred. Furniture and equipment expenses were unchanged in the three months ended September 30, 2022 and were up $88,000 in the nine months ended September 30, 2022 compared to the same periods in 2021 due to costs associated with equipment and service contracts primarily to improve information security.

Data processing costs were up $145,000 and $190,000 in the three and nine month periods ended September 30, 2022, respectively, compared to the same periods in 2021 due to higher usage of electronic banking services and debit cards by our customers.

Interchange and other card expenses were up $14,000 and $47,000 in the three and nine month periods ended September 30, 2022, respectively, compared to the same periods in 2021 due to a higher number of debit cards issued and higher usage by our deposit customers. The increase in expense correlates to the increase in our debit card interchange income in these periods.

Outside services were down $8,000 in the three months ended September 30, 2022 and were up $82,000 in the nine month period ended September 30, 2022, respectively, compared to the same periods in 2021. The increase for the nine month period was due to increased vendor costs and consultation related to improving efficiency in certain departments.

Federal Income Tax Expense: We recorded $2.5 million and $5.4 million in federal income tax expense for the three and nine month periods ended September 30, 2022 compared to $1.7 million and $5.3 million for the same periods in 2021. Our effective tax rates for the three and nine month periods ended September 30, 2022 were 19.85% and 19.20% compared to 19.42% and 18.98% for the same periods in 2021. The increase in our effective tax rate in the 2022 periods was due to higher levels of taxable income from both growth in taxable securities held in our investment portfolio and growth in taxable income from rising interest rates while our tax-exempt income has remained relatively flat.

FINANCIAL CONDITION

Total assets were $2.84 billion at September 30, 2022, a decrease of $93.7 million from December 31, 2021. This change reflected increases of $37.7 million in debt securities available for sale, $212.5 million in debt securities held to maturity and $29.7 million in our loan portfolio more than offset by a decrease of $385.2 million in cash and cash equivalents. Total deposits decreased by $21.8 million at September 30, 2022 compared to December 31, 2021 and FHLB borrowings decreased by $55.0 million from December 31, 2021 to September 30, 2022.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $766.6 million at September 30, 2022 compared to $1.15 billion at December 31, 2021. The decrease in these balances primarily related to an increase in our investment portfolio and decreases in deposit balances and other borrowings.

Securities: Debt securities available for sale were $453.7 million at September 30, 2022 compared to $416.1 million at December 31, 2021. The balance at September 30, 2022 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio was $349.5 million at September 30, 2022 compared to $137.0 million at December 31, 2021. Our held to maturity portfolio is comprised of U.S. Treasury securities and state, municipal and privately placed commercial bonds.

On January 1, 2022, we reclassified ten U.S. Treasury securities with an amortized cost of $123.5 million from available for sale to held to maturity, as we have the intent and ability to hold these securities to maturity. All ten of these U.S. Treasury securities were purchased within the fourth quarter of 2021. Subsequently and upon further analysis of these purchases, management decided to reclassify them to held to maturity given their short-term nature. These securities had net unrealized gains of $113,000 at the date of transfer, which will continue to be reported in accumulated comprehensive income, and will be amortized over the remaining life of the securities as an adjustment of yield. The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred. Total securities increased $250.1 million from $553.1 million at December 31, 2021 to $803.2 million at September 30, 2022 as we continued to deploy excess liquidity into higher yielding assets. We plan further growth of our investment portfolio in the fourth quarter of 2022.

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We classify privately placed municipal and commercial bonds as held to maturity as they are typically non-transferable in the bond market. In addition, going forward we will generally classify short-term U.S. Treasury securities as held to maturity. Typically the final maturity on these short-term Treasury securities will be three years or less. Longer-term Treasury securities and all other marketable debt securities are generally classified as available for sale.

Portfolio Loans and Asset Quality: Total portfolio loans increased by $29.7 million in the first nine months of 2022 and were $1.14 billion at September 30, 2022 compared to $1.11 billion at December 31, 2021. During the first nine months of 2022, our commercial portfolio decreased by $12.9 million. We received forgiveness proceeds on 236 PPP loans totaling $43.1 million in the nine months ended September 30, 2022. Excluding the PPP loans, our commercial loans increased by $54.8 million in the first nine months of 2022. Our consumer portfolio increased by $4.4 million and our residential mortgage portfolio increased by $12.4 million in the first nine months of 2022.

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 nine months of 2022 increased $13.0 million compared to the same period in 2021, from $30.4 million in the first nine months of 2021 to $43.4 million in the same period in 2022.

The table below shows the breakout of our portfolio residential mortgage loans between fixed and variable as of September 30, 2022 and December 31, 2022 (dollars in thousands):

	September 30, 2022		December 31, 2021
Fixed rate residential mortgage loans	$	63,664	$	65,011
Variable rate residential mortgage loans		66,474		52,789
Total residential mortgage loans	$	130,138	$	117,800

The volume of residential mortgage loans originated for sale in the first nine months of 2022 decreased $82.8 million compared to the same period in 2021. Residential mortgage loans originated for sale were $25.0 million in the first nine months of 2022 compared to $107.8 million in the first nine months of 2021.

The following table shows our loan origination activity for loans to be held in portfolio during the first nine months of 2022 and 2021, broken out by loan type and also shows average originated loan size (dollars in thousands):

	Nine months ended September 30, 2022							Nine months ended September 30, 2021
	Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size
Commercial real estate:
Residential developed	$	6,177		1.7	%	$	562	$	6,369		1.4	%	$	490
Unsecured to residential developers		—		—			—		—		—			—
Vacant and unimproved		10,162		2.8			1,270		8,345		1.9			642
Commercial development		—		—			—		—		—			—
Residential improved		46,652		12.6			583		75,223		16.9			607
Commercial improved		45,620		12.4			1,342		54,609		12.2			1,187
Manufacturing and industrial		55,138		14.9			2,506		24,962		5.6			960
Total commercial real estate		163,749		44.4			1,056		169,508		38.0			764
Commercial and industrial, excluding PPP		115,730		31.3			827		77,019		17.3			770
PPP loans		—		—			—		128,052		28.7			127
Total commercial and commercial real estate		279,479		75.7			947		374,579		84.0			282
Consumer
Residential mortgage		43,381		11.8			319		30,415		6.8			295
Unsecured		—		—			—		—		—			—
Home equity		44,765		12.1			129		39,884		8.9			126
Other secured		1,616		0.4			39		1,452		0.3			25
Total consumer		89,762		24.3			172		71,751		16.0			150
Total loans	$	369,241		100.0	%	$	451	$	446,330		100.0	%	$	247

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Overall, the commercial loan portfolio increased $12.9 million in the first nine months of 2022 with growth more than offsetting forgiveness of PPP loans of $41.9 million in that time period. Excluding PPP forgiveness, commercial loans grew by $54.8 million in the first nine months of 2022 comprised of commercial and industrial portfolio growth of $48.7 million and commercial real estate loan growth of $6.1 million. Included in the commercial production for the first nine months of 2021 is $128.1 million in PPP loans, while there were no such loans originated in the first nine months of 2022. Our overall production of commercial loans decreased by $95.1 million from $374.6 million in the first nine months of 2021 to $279.5 million in the same period of 2022 mostly due to the significantly lower production of PPP loans (down $128.1 million). Excluding PPP production, our commercial loan originations in the first nine months of 2022 were $33.0 million higher than in the first nine months of 2021. This growth came largely from commercial and industrial originations which were up $38.7 million. Commercial real estate originations were down $5.8 million in the first nine months of 2022, primarily in the residential improved category, which were down $28.6 million, and commercial improved, which were down $9.0 million, The manufacturing and industrial category was up $30.2 million and vacant and improved was up $1.8 million as these businesses expand following the pandemic slowdown.

We also have a significant amount of unfunded commercial lines of credit, that can be drawn on by our commercial loan customers. The table below shows the total commitment, the unused portion and the percentage of unused to total commitment at September 30, 2022 and December 31, 2021 (dollars in thousands):

	September 30, 2022			December 31, 2021
Commercial - Lines of credit commitments	$	1,016,707		$	886,577
Commercial - Unused portion of lines of credit		608,291			526,725
Commercial - Unused lines of credit to total commitment		59.83	%		59.41	%

Total commercial lines of credit commitments increased by $130.1 million from December 31, 2021 to September 30, 2022.

Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 83.4% and 84.4% of the total loan portfolio at September 30, 2022 and December 31, 2021, respectively. Residential mortgage and consumer loans comprised approximately 16.6% and 15.6% of total loans at September 30, 2022 and December 31, 2021, respectively.

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

	September 30, 2022					December 31, 2021
	Balance		Percent of Total Loans			Balance		Percent of Total Loans
Commercial real estate: (1)
Residential developed	$	6,830		0.6	%	$	4,862		0.4	%
Unsecured to residential developers		—		—			5,000		0.4
Vacant and unimproved		34,737		3.1			36,240		3.3
Commercial development		107		—			171		—
Residential improved		107,782		9.5			100,077		9.0
Commercial improved		257,144		22.6			259,039		23.4
Manufacturing and industrial		115,624		10.1			110,712		10.0
Total commercial real estate		522,224		45.9			516,101		46.5
Commercial and industrial, excluding PPP		427,034		37.5			378,318		34.1
PPP loans		32		—			41,939		3.8
Total commercial and commercial real estate		949,290		83.4			936,358		84.4
Consumer
Residential mortgage		130,138		11.4			117,800		10.7
Unsecured		111		—			210		—
Home equity		55,618		4.9			51,269		4.6
Other secured		3,488		0.3			3,356		0.3
Total consumer		189,355		16.6			172,635		15.6
Total loans	$	1,138,645		100.0	%	$	1,108,993		100.0	%

(1)

Includes both owner occupied and non-owner occupied commercial real estate.

Commercial real estate loans accounted for 45.9% and 46.5% of the total loan portfolio at September 30, 2022 and December 31, 2021, 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.

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The Bank was a participating lender in the Small Business Administration's (“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. Fees generated based on the origination of PPP loans 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.

In 2020:

•

The Bank originated 1,738 PPP loans totaling $346.7 million in principal.

•

Fees generated totaled $10.0 million.

•

765 PPP loans totaling $113.5 million were forgiven.

•

Total net fees of $5.4 million were recognized.

In 2021:

•

The Bank originated 1,000 PPP loans totaling $128.1 million in principal.

•

Fees generated totaled $5.6 million.

•

1,722 PPP loans totaling $318.4 million were forgiven.

•

Total net fees of $8.3 million were recognized.

In the nine months ended September 30, 2022:

•

251 PPP loans totaling $43.1 million were forgiven.

•

Total net fees of $1.3 million were recognized.

As of September 30, 2022, just one PPP loan totaling $37,000 in principal remained outstanding and total net fees of $5,000 remained unrecognized.

Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised 11.4% of portfolio loans at September 30, 2022 and 10.7% at December 31, 2021. We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan-to-value adjustable rate loans) in an effort to continue to diversify our credit risk and deploy our excess liquidity.

Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. This portfolio increased by $4.4 million to $59.2 million at September 30, 2022 from $54.8 million at December 31, 2021. These other consumer loans comprised 5.2% of our portfolio loans at September 30, 2022 and 4.9% at December 31, 2021.

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

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

Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At September 30, 2022, nonperforming assets totaled $2.4 million, unchanged from $2.4 million at December 31, 2021. There were no additions to other real estate owned in the first nine months of 2022 or in the first nine months of 2021. At September 30, 2022, there were no loans in foreclosure, so we expect there to be few, if any, additions to other real estate owned in the remainder of 2022. Proceeds from sales of foreclosed properties were $47,000 in the first nine months of 2022, resulting in net realized gain on sales of $47,000. Proceeds from sales of foreclosed properties were $170,000 in the first nine months of 2021, resulting in net realized loss on sales of $20,000.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of September 30, 2022, nonperforming loans totaled $85,000, or 0.01% of total portfolio loans, compared to $92,000, or 0.01% of total portfolio loans, at December 31, 2021. The balance at September 30, 2022 consisted of one residential mortgage loan.

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Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $2.3 million at September 30, 2022 and $2.3 million at December 31, 2021. The entire balance at September 30, 2022 was comprised of one commercial real estate 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.

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

	September 30, 2022			December 31, 2021
Nonaccrual loans	$	85		$	91
Loans 90 days or more delinquent and still accruing		—			1
Total nonperforming loans (NPLs)		85			92
Foreclosed assets		2,343			2,343
Repossessed assets		—			—
Total nonperforming assets (NPAs)	$	2,428		$	2,435
NPLs to total loans		0.01	%		0.01	%
NPAs to total assets		0.09	%		0.08	%

The following table shows the composition and amount of our troubled debt restructurings (TDRs) at September 30, 2022 and December 31, 2021 (dollars in thousands):

	September 30, 2022						December 31, 2021
	Commercial		Consumer		Total		Commercial		Consumer		Total
Performing TDRs	$	2,391	$	2,942	$	5,333	$	4,497	$	3,024	$	7,521
Nonperforming TDRs (1)		—		—		—		5		—		5
Total TDRs	$	2,391	$	2,942	$	5,333	$	4,502	$	3,024	$	7,526

(1)	Included in nonperforming asset table above

We had a total of $5.3 million and $7.5 million of loans whose terms have been classified as TDRs as of September 30, 2022 and December 31, 2021, 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 decreased by $2.2 million from December 31, 2021 to September 30, 2022 due primarily to seasonal repayments on one commercial TDR operating line. There were 41 loans classified as TDRs at September 30, 2022 compared to 54 loans at December 31, 2021.

Allowance for loan losses: The allowance for loan losses at September 30, 2022 was $14.8 million, a decrease of $1.1 million from December 31, 2021. The allowance for loan losses represented 1.30% of total portfolio loans at September 30, 2022 and 1.43% at December 31, 2021. The ratios at September 30, 2022 and December 31, 2021 are impacted by $32,000 and $41.9 million of remaining PPP loans, respectively, which are fully guaranteed and receive no allowance allocation. The ratios excluding these loans were 1.30% and 1.49% at September 30, 2022 and December 31, 2021, respectively. The allowance for loan losses to nonperforming loan coverage ratio increased from 17270.7% at December 31, 2021 to 17436.5% at September 30, 2022.

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

	Quarter Ended September 30, 2022			Quarter Ended June 30, 2022			Quarter Ended March 31, 2022			Quarter Ended December 31, 2021			Quarter Ended September 30, 2021
Nonperforming loans	$	85		$	90		$	90		$	92		$	420
Other real estate owned and repo assets		2,343			2,343			2,343			2,343			2,343
Total nonperforming assets		2,428			2,433			2,433			2,435			2,763
Net charge-offs (recoveries)		(190	)		(15	)		(227	)		(107	)		(276	)
Total delinquencies		84			197			171			129			437

At September 30, 2022, we had net loan recoveries in twenty-nine of the past thirty-one quarters. Our total delinquencies were $84,000 at September 30, 2022 and $129,000 at December 31, 2021. Our delinquency percentage at September 30, 2022 was 0.01%.

These factors all impact our necessary level of allowance for loan losses and our provision for loan losses. The allowance for loan losses decreased $1.1 million in the first nine months of 2022. We recorded a provision for loan loss benefit of $1.5 million for the nine months ended September 30, 2022 compared to a benefit of $1.3 million for the same period of 2021. Net loan recoveries were $432,000 for the nine months ended September 30, 2022, compared to net loan recoveries of $424,000 for the same period in 2021. The ratio of net charge-offs (recoveries) to average loans was -0.05% on an annualized basis for the first nine months of 2022 and -0.04% for the first nine months of 2021.

While we have experienced low levels of gross charge-offs over recent quarters, we 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.

Overall, impaired loans decreased by $2.2 million to $5.3 million at September 30, 2022 compared to $7.5 million at December 31, 2021. The specific allowance for impaired loans decreased by $271,000 to $294,000 at September 30, 2022, compared to $565,000 at December 31, 2021. The specific allowance for impaired loans represented 5.5% of total impaired loans at September 30, 2022 and 7.5% at December 31, 2021.

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 charge-off history as the base for our computation. Over the past few years, the 18 month period computations have reflected sizeable decreases in net charge-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.

We also have considered the effect of COVID-19 on our loan borrowers and our local economy. With the widespread vaccination efforts, coupled with reduction in infection rates, we determined that adjustments to certain qualitative factors were appropriate in the first nine months of 2022. We also considered the economic conditions, including changes in unemployment and actions taken by the Federal Reserve in response to employment and inflation. As a result, we reduced the economic qualitative factor by 3 basis points in the first quarter of 2022. No additional changes were made for this factor in the second quarter of 2022 as the continued high inflation and related concerns offset the positive impact of an improving labor market. In the second quarter 2021, we added 20 basis points to our consumer loan portfolio qualitative factors to address the risk that government stimulus payments may be masking consumer delinquency and default. We removed this 20 basis point allocation in the first quarter of 2022 as we did not experience losses or increased delinquency in these portfolios. We also reduced the qualitative factor for changes in lending personnel by 4 basis points in the first quarter of 2022. Slightly offsetting this was the addition of 2 basis points for our qualitative factor related to the effect of rising interest rates in the first quarter of 2022 and another 3 basis points added in the second quarter of 2022. One additional change to the allowance calculation in the first quarter of 2022 was the removal of a loan pool we had maintained for loans receiving three modifications during the pandemic. These loans have all returned to contractual payment terms over an extended period of time and have returned to their normal loan pools. In the third quarter of 2022, we reduced the qualitative factor for credit quality trends by 2 basis points, decreased the factor related to loan review quality by 1 basis point, decreased the factor related to changes in lending personnel by 1 basis point, reduced the factor for external conditions by 2 basis points and increased the factor for effects of rising interest rates by 2 basis points. The net effect of these changes was a 4 basis point reduction in qualitative factors in the third quarter of 2022.

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We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (30%), followed by Manufacturing (14%) and Retail Trade (10%). The table below breaks down our commercial loan portfolio by industry type at September 30, 2022 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):

	September 30, 2022
	Excluding PPP		PPP Loans		Total		Percent of Total Loans			Percent Grade 4 or Better			Percent Grade 5 or Worse
Industry:
Agricultural Products	$	33,529	$	—	$	33,529		3.53	%		95.60	%		4.40	%
Mining and Oil Extraction		1,288		—		1,288		0.14	%		95.73	%		4.27	%
Construction		81,577		—		81,577		8.59	%		97.38	%		2.62	%
Manufacturing		134,218		—		134,218		14.14	%		94.92	%		5.08	%
Wholesale Trade		69,642		—		69,642		7.34	%		100.00	%		0.00	%
Retail Trade		95,196		—		95,196		10.03	%		99.93	%		0.07	%
Transportation and Warehousing		60,959		—		60,959		6.42	%		98.70	%		1.30	%
Information		557		—		557		0.06	%		6.28	%		93.72	%
Finance and Insurance		46,324		—		46,324		4.88	%		100.00	%		0.00	%
Real Estate and Rental and Leasing		280,415		—		280,415		29.54	%		99.93	%		0.07	%
Professional, Scientific and Technical Services		3,768		—		3,768		0.40	%		94.56	%		5.44	%
Management of Companies and Enterprises		6,519		—		6,519		0.69	%		100.00	%		0.00	%
Administrative and Support Services		20,687		—		20,687		2.18	%		99.55	%		0.45	%
Education Services		4,461		—		4,461		0.47	%		98.30	%		1.70	%
Health Care and Social Assistance		33,728		—		33,728		3.55	%		100.00	%		0.00	%
Arts, Entertainment and Recreation		4,188		—		4,188		0.44	%		92.57	%		7.43	%
Accommodations and Food Services		39,882		32		39,914		4.20	%		82.67	%		17.33	%
Other Services		32,320		—		32,320		3.40	%		100.00	%		0.00	%
Total commercial loans	$	949,258	$	32	$	949,290		100.00	%		97.93	%		2.07	%

Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was $12.3 million at September 30, 2022 and $12.9 million at December 31, 2021. The qualitative component of our allowance allocated to commercial loans was $12.3 million at September 30, 2022, down $624,000 from $12.9 million at December 31, 2021.

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 $2.1 million at September 30, 2022 and $2.4 million at December 31, 2021.

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 $725,000 from December 31, 2021 to September 30, 2022 due to earnings on the underlying policies.

Premises and Equipment: Premises and equipment totaled $40.7 million at September 30, 2022, down $1.1 million from $41.8 million at December 31, 2021.

Deposits and Other Borrowings: Total deposits decreased $21.8 million to $2.56 billion at September 30, 2022, as compared to $2.58 billion at December 31, 2021. Non-interest bearing checking account balances decreased $30.4 million during the first nine months of 2022. Interest bearing demand account balances decreased $4.8 million and savings and money market account balances increased $25.7 million in the first nine months of 2022. The overall decrease in deposits so far in 2022 has related to our business and municipal customers beginning to withdraw the higher balances they have retained during the COVID-19 pandemic. Certificates of deposits decreased by $12.8 million in the first nine months of 2022 reflecting the continued low market interest rates for time deposits. 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.

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Noninterest bearing demand accounts comprised 33% of total deposits at September 30, 2022 and 34% of total deposits at December 31, 2021. These balances typically increase at year end for many of our commercial customers, then decline in the first half of the next year. This didn’t happen in 2021 due to customers of all types holding higher balances due to 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. Interest bearing demand accounts, including money market and savings accounts, comprised 64% of total deposits at September 30, 2022 and 62% at December 31, 2021. Time accounts as a percentage of total deposits were 3% at September 30, 2022 and 3% at December 31, 2021.

Borrowed funds at September 30, 2022 consisted of $30.0 million of FHLB advances. Borrowed funds at December 31, 2021 consisted of $85.0 million of FHLB advances. On January 21, 2022, the FHLB exercised its option to put an advance totaling $25.0 million to the Company. This advance carried an interest rate of 0.01% and had a maturity date of July 21, 2031. The Company paid off this advance as required on January 21, 2022. On January 21, 2022, we executed a new $25.0 million advance with the FHLB with similar terms. This advance carried an interest rate of 0.05% and a maturity date of January 21, 2032. The first put date for this advance was April 21, 2022. The FHLB exercised its put option on this advance and it was paid off by the Company as required on April 21, 2022. The FHLB also exercised its put option on an advance totaling $10.0 million that carried an interest rate of 0.45% and a maturity date of February 27, 2030. We paid off this advance as required on May 27, 2022. Also on May 27, 2022, we prepaid three other advances totaling $20.0 million. These advances had maturities ranging from May 24, 2023 to July 25, 2024 and interest rates ranging from 2.91% to 3.05%. We incurred prepayment fees totaling $87,000, which are included in interest expense. The reduction in future period interest expense from paying off these advances is such that the payback period is less than one quarter.

CAPITAL RESOURCES

Total shareholders' equity of $236.6 million at September 30, 2022 reflected a decrease of $17.5 million from $254.0 million at December 31, 2021. The decrease was primarily a result of a negative swing of $32.4 million in accumulated other comprehensive income ("AOCI") and a payment of $8.2 million in cash dividends to shareholders more than offsetting our net income of $22.6 million earned in the first nine months of 2022. The negative swing in AOCI was attributable to a sharp increase in market interest rates on bonds during the first nine months of 2022 causing a devaluation in market value on our investment securities available for sale. The Bank was categorized as “well capitalized” at September 30, 2022.

Capital guidelines for U.S. banks 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 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). The minimum leverage ratio is 4.0%. The capital ratios for the Company and the Bank 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	Sept 30, 2022			June 30, 2022			March 31, 2022			Dec 31, 2021			Sept 30, 2021
Total capital to risk weighted assets		17.6	%		17.5	%		17.9	%		18.3	%		18.6	%
Common Equity Tier 1 to risk weighted assets		16.7			16.5			16.9			17.2			17.4
Tier 1 capital to risk weighted assets		16.7			16.5			16.9			17.2			17.4
Tier 1 capital to average assets		9.3			9.1			8.8			8.7			8.5

On July 7, 2021, the Company redeemed all of the remaining outstanding trust preferred securities.

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 Federal Reserve Board'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.

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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 September 30, 2022, the Bank held $733.3 million of federal funds sold and other short-term investments. In addition, the Bank had available borrowing capacity from correspondent banks of approximately $304.7 million as of September 30, 2022.

In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan commitments and standby letters of credit. The level and fluctuation of these commitments is also considered in our overall liquidity management. At September 30, 2022, we had a total of $740.3 million in unused lines of credit, $88.9 million in unfunded loan commitments and $15.8 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 2021, the Bank paid dividends to the Company totaling $33.1 million. In the same period, the Company paid $10.9 million in dividends to its shareholders and $20.6 million to redeem outstanding trust preferred securities. On February 23, 2022, the Bank paid a dividend totaling $2.9 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on February 24, 2022 to shareholders of record on February 10, 2022. The cash distributed for this cash dividend payment totaled $2.7 million. On May 25, 2022, the Bank paid a dividend totaling $2.8 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on May 26, 2022 to shareholders of record on May 12, 2022. The cash distributed for this cash dividend payment totaled $2.7 million. On August 24, 2022, the Bank paid a dividend totaling $2.7 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on August 25, 2022 to shareholders of record on August 12, 2022. 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 September 30, 2022, the Bank had a retained earnings balance of $97.9 million.

The Company’s cash balance at September 30, 2022 was $7.5 million. The Company believes that it has sufficient liquidity to meet its cash flow obligations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

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

Our methodology for determining the allowance for loan losses and the related provision for loan losses is described above in the "Allowance for Loan Losses" discussion. This area of accounting requires significant judgment due to the number of factors which can influence the collectability of a loan. Unanticipated changes in these factors could significantly change the level of the allowance for loan losses and the related provision for loan losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loan losses, there can be no assurance that our analysis has properly identified all of the probable losses in our loan portfolio. As a result, we could record future provisions for loan losses that may be significantly different than the levels that we recorded in the first nine months of 2022.

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.

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

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

Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. At September 30, 2022, we had gross deferred tax assets of $12.2 million and gross deferred tax liabilities of $2.0 million resulting in a net deferred tax asset of $10.2 million. Accounting standards require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. We concluded at September 30, 2022 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.

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

The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of September 30, 2022 (dollars in thousands):

Interest Rate Scenario	Economic Value of Equity		Percent Change			Net Interest Income		Percent Change
Interest rates up 200 basis points	$	379,237		(1.93	)%	$	102,058		4.74	%
Interest rates up 100 basis points		383,317		(0.87	)		99,761		2.38
No change		386,683		—			97,442		—
Interest rates down 100 basis points		376,484		(2.64	)		93,478		(4.07	)
Interest rates down 200 basis points		347,299		(10.19	)		87,202		(10.51	)

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

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

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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 September 30, 2022, 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.

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PART II – OTHER 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 third quarter of 2022. All employee transactions are under stock compensation plans. These include shares of Macatawa Bank Corporation common stock surrendered to satisfy tax withholding obligations that occur upon the vesting of restricted shares. The value of the shares withheld is determined based on the closing price of Macatawa Bank Corporation common stock at the date of vesting. The Company has no publicly announced repurchase plans or programs.

	Total Number of Shares Purchased		Average Price Paid Per Share
Period
July 1 - July 31, 2022
Employee Transactions		1,662	$	8.94
August 1 - August 31, 2022
Employee Transactions		—	$	—
September 1 - September 30, 2022
Employee Transactions		—	$	—
Total for Third Quarter ended September 30, 2022
Employee Transactions		1,662	$	8.94

Item 6.

EXHIBITS.

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

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SIGNATURES

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

	MACATAWA BANK CORPORATION

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

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

Dated: October 27, 2022