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 SeptemberJune 30, 20172021


OR


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


For the transition period from _______ to _______


Commission file number: 000-25927


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


Michigan


38-3391345

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


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


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

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



Title of each class
Trading Symbol
Name of each exchange on which registered

Common stock

MCBC

NASDAQ

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


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. (Check one):


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


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

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


The number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date: 33,941,20334,192,317 shares of the Company'sCompany’s Common Stock (no par value) were outstanding as of October 26, 2017.July 22, 2021.

Forward-Looking Statements


This report contains forward-looking statements that are based on management'smanagement’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “could”, “may”, “should”, “will”, “is likely”, or is “possible” or “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, those related to the risks and uncertainties related to, and the impact of, the global coronavirus (COVID-19) pandemic on the business, financial condition and results of operations of our company and our customers, future levels of earning assets, statements related to stabilizationfuture composition of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, including the impact of Basel III, real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for loan losses and reserve recoveries, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future FDIC assessmentinterest rate levels, future net interest margin levels, building and improving our investment portfolio, diversifying our credit risk, the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, future balances of short-term investments, future loan demand and loan growth future levels of mortgage banking revenue and the future level of other revenue sources. Management'sManagement’s determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. 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“Item 1A - Risk Factors"Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016.2020. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

INDINDEX




Page
Number


Number

Part I.Financial Information: 
   

Item 1.


Consolidated Financial Statements
4




Notes to Consolidated Financial Statements
10




Item 2.


Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
4037




Item 3.


Quantitative and Qualitative Disclosures About Market Risk
5551




Item 4.


Controls and Procedures
5652



Part II.Other Information:




Item 6.
2.

Unregistered Sales of Equity Securities and Use of Proceeds
53




Item 6.

Exhibits
5753



Signatures
58
54

Part I Financial Information
Part IFinancial Information
Item 1.
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
As of SeptemberJune 30, 20172021 (unaudited) and December 31, 20162020
(Dollars in thousands, except per share data)

  
June 30,
2021
  
December 31,
2020
 
ASSETS      
Cash and due from banks $31,051  $31,480 
Federal funds sold and other short-term investments  1,189,266   752,256 
Cash and cash equivalents  1,220,317   783,736 
Debt securities available for sale, at fair value  239,955   236,832 
Debt securities held to maturity (fair value 2021 - $124,972 and 2020 - $83,246)
  121,867   79,468 
Federal Home Loan Bank (FHLB) stock  11,558   11,558 
Loans held for sale, at fair value  4,752   5,422 
Total loans  1,238,327   1,429,331 
Allowance for loan losses  (16,806)  (17,408)
Net loans  1,221,521   1,411,923 
Premises and equipment – net  42,906   43,254 
Accrued interest receivable  4,539   5,625 
Bank-owned life insurance  52,507   42,516 
Other real estate owned - net  2,343   2,537 
Net deferred tax asset  2,759   2,059 
Other assets  16,062   17,096 
Total assets $2,941,086  $2,642,026 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Deposits        
Noninterest-bearing $956,961  $809,437 
Interest-bearing  1,643,115   1,489,150 
Total deposits  2,600,076   2,298,587 
Other borrowed funds  60,000   70,000 
Long-term debt  20,619   20,619 
Accrued expenses and other liabilities  12,174   12,977 
Total liabilities  2,692,869   2,402,183 
Commitments and contingent liabilities  0   0 
Shareholders’ equity        
Common stock, 0 par value, 200,000,000 shares authorized; 34,192,317 and 34,197,519 shares issued and outstanding at June 30, 2021 and December 31, 2020
  218,846   218,528 
Retained earnings  27,251   17,101 
Accumulated other comprehensive income  2,120   4,214 
Total shareholders’ equity  248,217   239,843 
Total liabilities and shareholders’ equity $2,941,086  $2,642,026 


  
September 30,
2017
  
December 31,
2016
 
ASSETS      
Cash and due from banks $28,318  $27,690 
Federal funds sold and other short-term investments  131,571   62,129 
Cash and cash equivalents  159,889   89,819 
Securities available for sale, at fair value  214,182   184,433 
Securities held to maturity (fair value 2017 - $62,854 and 2016 - $69,849)  61,927   69,378 
Federal Home Loan Bank (FHLB) stock  11,558   11,558 
Loans held for sale, at fair value  2,199   2,181 
Total loans  1,260,037   1,280,812 
Allowance for loan losses  (16,434)  (16,962)
Net loans  1,243,603   1,263,850 
Premises and equipment – net  46,822   50,026 
Accrued interest receivable  4,532   4,092 
Bank-owned life insurance  40,042   39,274 
Other real estate owned - net  6,661   12,253 
Net deferred tax asset  5,992   8,863 
Other assets  5,639   5,286 
Total assets $1,803,046  $1,741,013 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Deposits        
Noninterest-bearing $497,310  $501,478 
Interest-bearing  1,008,868   947,246 
Total deposits  1,506,178   1,448,724 
Other borrowed funds  72,118   84,173 
Long-term debt  41,238   41,238 
Accrued expenses and other liabilities  10,048   4,639 
Total liabilities  1,629,582   1,578,774 
         
Commitments and contingent liabilities  ---   --- 
         
Shareholders' equity        
Common stock, no par value, 200,000,000 shares authorized;  33,941,953 and 33,940,788 shares issued and outstanding at September 30, 2017 and December 31, 2016  217,099   216,731 
Retained deficit  (43,307)  (53,008)
Accumulated other comprehensive income (loss)  (328)  (1,484)
Total shareholders' equity  173,464   162,239 
Total liabilities and shareholders' equity $1,803,046  $1,741,013 
See accompanying notes to consolidated financial statements.

-4-
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Month Periods Ended Septembersix month periods ended June 30, 20172021 and 20162020
(unaudited)
(Dollars in thousands, except per share data)

  
Three Months
Ended
June 30,
2021
  
Three Months
Ended
June 30,
2020
  
Six Months
Ended
June 30,
2021
  
Six Months
Ended
June 30,
2020
 
Interest income            
Loans, including fees $13,303  $14,488  $26,770  $29,339 
Securities                
Taxable  792   954   1,579   2,015 
Tax-exempt  760   864   1,518   1,746 
FHLB Stock  56   115   117   239 
Federal funds sold and other short-term investments  273   86   474   662 
Total interest income  15,184   16,507   30,458   34,001 
Interest expense                
Deposits  244   895   523   2,497 
Other borrowings  328   356   681   705 
Long-term debt  155   209   307   449 
Total interest expense  727   1,460   1,511   3,651 
Net interest income  14,457   15,047   28,947   30,350 
Provision for loan losses  (750)  1,000   (750)  1,700 
Net interest income after provision for loan losses  15,207   14,047   29,697   28,650 
Noninterest income                
Service charges and fees  1,065   860   2,057   1,970 
Net gains on mortgage loans  1,311   1,849   3,326   2,499 
Trust fees  1,133   945   2,138   1,880 
ATM and debit card fees  1,683   1,321   3,168   2,658 
Bank owned life insurance (“BOLI”) income  250   231   526   472 
Other  727   648   1,492   1,334 
Total noninterest income  6,169   5,854   12,707   10,813 
Noninterest expense                
Salaries and benefits  6,502   5,766   12,914   12,457 
Occupancy of premises  994   949   2,031   1,958 
Furniture and equipment  978   882   1,915   1,737 
Legal and professional  274   247   496   538 
Marketing and promotion  175   239   350   477 
Data processing  855   787   1,762   1,547 
FDIC assessment  159   76   329   76 
Interchange and other card expense  388   327   746   674 
Bond and D&O Insurance  111   104   222   209 
Other  1,282   1,127   2,438   2,553 
Total noninterest expenses  11,718   10,504   23,203   22,226 
Income before income tax  9,658   9,397   19,201   17,237 
Income tax expense  1,840   1,759   3,605   3,188 
Net income $7,818  $7,638  $15,596  $14,049 
Basic earnings per common share $0.23  $0.22  $0.46  $0.41 
Diluted earnings per common share $0.23  $0.22  $0.46  $0.41 
Cash dividends per common share $0.08  $0.08  $0.16  $0.16 

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

See accompanying notes to consolidated financial statements.

-5-
Index
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Month Periods Ended Septembersix month periods ended June 30, 20172021 and 20162020
(unaudited)
(Dollars in thousands)

  
Three Months
Ended
June 30,
2021
  
Three Months
Ended
June 30,
2020
  
Six Months
Ended
June 30,
2021
  
Six Months
Ended
June 30,
2020
 
Net income $7,818  $7,638  $15,596  $14,049 
Other comprehensive income:                
Unrealized gains (losses):                
Net change in unrealized gains (losses) on debt securities available for sale  739   884   (2,651)  3,823 
Tax effect  (155)  (186)  557   (803)
Net change in unrealized gains (losses) on debt securities available for sale, net of tax  584   698   (2,094)  3,020 
Less: reclassification adjustments:                
Reclassification for gains included in net income  0   0   0   0 
Tax effect  0   0   0   0 
Reclassification for gains included in net income, net of tax  0   0   0   0 
Other comprehensive income (loss), net of tax  584   698   (2,094)  3,020 
Comprehensive income $8,402  $8,336  $13,502  $17,069 

  
Three Months
Ended
September 30,
 
Three Months
Ended
September 30,
 
Nine Months
Ended
September 30,
 
Nine Months
Ended
September 30,
  2017 2016 2017 2016
         
Net income $ 4,875 $ 4,604 $ 14,098 $ 11,844
             
Other comprehensive income:            
             
Unrealized gains (losses):            
Net change in unrealized gains (losses) on securities available for sale   (53)   120   1,782   1,774
Tax effect   19   (42)   (624)   (621)
Net change in unrealized gains (losses) on securities available for sale, net of tax   (34)   78   1,158   1,153
             
Less: reclassification adjustments:            
Reclassification for gains included in net income   ---   ---   3   99
Tax effect   ---   ---   (1)   (35)
Reclassification for gains included in net income, net of tax   ---   ---   2   64
             
Other comprehensive income (loss), net of tax   (34)   78   1,156   1,089
Comprehensive income $ 4,841 $ 4,682 $ 15,254 $ 12,933

See accompanying notes to consolidated financial statements.

-6-
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITY
Nine Month Periods Ended SeptemberThree and six month periods ended June 30, 20172021 and 20162020
(unaudited)
(Dollars in thousands, except per share data)

 
Common
Stock
 Retained Earnings 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Balance, April 1, 2020 $218,207  $1,507  $3,866  $223,580 
Net income for the three months ended June 30, 2020  0   7,638   0   7,638 
Cash dividends at $0.08 per share  0   (2,720)  0   (2,720)
Net change in unrealized gain on debt securities available for sale, net of tax  0   0   698   698 
Stock compensation expense  142   0   0   142 
Balance, June 30, 2020 $218,349  $6,425  $4,564  $229,338 
                 
                 
Balance, April 1, 2021 $218,687  $22,156  $1,536  $242,379 
Net income for the three months ended June 30, 2021  0   7,818   0   7,818 
Cash dividends at $0.08 per share  0   (2,723)  0   (2,723)
Repurchase of 815 shares for taxes withheld on vested restricted stock  (7)  0   0   (7)
Net change in unrealized gain on debt securities available for sale, net of tax  0   0   584   584 
Stock compensation expense  166   0   0   166 
Balance, June 30, 2021 $218,846  $27,251  $2,120  $248,217 

  
Common
Stock
    
Retained
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
Balance, January 1, 2016 $ 216,540 $ (64,910) $ 347 $ 151,977
Net income for the nine months ended September 30, 2016   ---   11,844   ---   11,844
Cash dividends at $.09 per share   ---   (3,042)   ---   (3,042)
Repurchase of 4,373 shares for taxes withheld on vested restricted stock   (31)   ---   ---   (31)
Net change in unrealized gain on securities available for sale, net of tax   ---   ---   1,089   1,089
Stock compensation expense   408   ---   ---   408
Balance, September 30, 2016 $ 216,917 $ (56,108) $ 1,436 $ 162,245
             
Balance, January 1, 2017 $ 216,731 $ (53,008) $ (1,484) $ 162,239
Net income for the nine months ended September 30, 2017   ---   14,098   ---   14,098
Cash dividends at $.13 per share   ---   (4,397)   ---   (4,397)
Repurchase of 533 shares for taxes withheld on vested restricted stock   (5)   ---   ---   (5)
Issuance of 4,000 shares for stock option exercise   34   ---   ---   34
Net change in unrealized loss on securities available for sale, net of tax   ---   ---   1,156   1,156
Stock compensation expense   339   ---   ---   339
Balance, September 30, 2017 $ 217,099 $ (43,307) $ (328) $ 173,464
 
Common
Stock
 Retained Earnings 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Balance, January 1, 2020 $218,109  $(2,184) $1,544  $217,469 
Net income for the six months ended June 30, 2020  0   14,049   0   14,049 
Cash dividends at $0.16 per share  0   (5,440)  0   (5,440)
Repurchase of 1,608 shares for taxes withheld on vested restricted stock  (11)  0   0   (11)
Net change in unrealized gain on debt securities available for sale, net of tax  0   0   3,020   3,020 
Stock compensation expense  251   0   0   251 
Balance, June 30, 2020 $218,349  $6,425  $4,564  $229,338 
                 
                 
Balance, January 1, 2021 $218,528  $17,101  $4,214  $239,843 
Net income for the six months ended June 30, 2021  0   15,596   0   15,596 
Cash dividends at $0.16 per share  0   (5,446)  0   (5,446)
Repurchase of 1,341 shares for taxes withheld on vested restricted stock  (12)  0   0   (12)
Net change in unrealized gain on debt securities available for sale, net of tax  0   0   (2,094)  (2,094)
Stock compensation expense  330   0   0   330 
Balance, June 30, 2021 $218,846  $27,251  $2,120  $248,217 

See accompanying notes to consolidated financial statements.

-7-
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Month Periods Ended SeptemberSix month periods ended June 30, 20172021 and 20162020
(unaudited)
(Dollars in thousands)

  
Nine Months
Ended
September 30,
2017
    
Nine Months
Ended
September 30,
2016
  
Cash flows from operating activities      
Net income $14,098  $11,844 
Adjustments to reconcile net income to net cash from operating activities:        
Depreciation and amortization  1,435   2,149 
Stock compensation expense  339   408 
Provision for loan losses  (1,350)  (1,100)
Origination of loans for sale  (45,018)  (76,096)
Proceeds from sales of loans originated for sale  46,273   79,094 
Net gains on mortgage loans  (1,273)  (2,235)
Gain on sales of securities  (3)  (99)
Write-down of other real estate  85   774 
Net gain on sales of other real estate  (660)  (365)
Net loss on sale of premises and equipment  240   --- 
Deferred income tax expense (benefit)  2,249   (167)
Change in accrued interest receivable and other assets  (794)  (1,142)
Earnings in bank-owned life insurance  (730)  (748)
Change in accrued expenses and other liabilities  4,041   1,341 
Net cash from operating activities  18,932   13,658 
         
Cash flows from investing activities        
Loan originations and payments, net  21,537   (37,699)
Change in interest-bearing deposits in other financial institutions  ---   20,000 
Purchases of securities available for sale  (48,409)  (72,107)
Purchases of securities held to maturity  (16,411)  (21,977)
Purchase of bank-owned life insurance  ---   (10,000)
Proceeds from:        
Maturities and calls of securities  35,763   59,680 
Sales of securities available for sale  5,807   9,648 
Principal paydowns on securities  4,585   3,027 
Sales of other real estate  6,227   4,155 
Sales of premises and equipment  1,742   --- 
Death benefit from bank-owned life insurance  ---   518 
Additions to premises and equipment  (734)  (674)
Net cash from investing activities  10,107   (45,429)
         
Cash flows from financing activities        
Change in deposits  57,454   (76,885)
Repayments and maturities of other borrowed funds  (32,055)  (21,996)
Proceeds from other borrowed funds  20,000   10,000 
Proceeds from issuance of common stock  34   --- 
Repurchase of shares for taxes withheld on vested restricted stock  (5)  (31)
Cash dividends paid  (4,397)  (3,042)
Net cash from financing activities  41,031   (91,954)
Net change in cash and cash equivalents  70,070   (123,725)
Cash and cash equivalents at beginning of period  89,819   181,476 
Cash and cash equivalents at end of period $159,889  $57,751 
  
Six Months
Ended
June 30,
2021
  
Six Months
Ended
June 30,
2020
 
Cash flows from operating activities      
Net income $15,596  $14,049 
Adjustments to reconcile net income to net cash from operating activities:        
Depreciation and amortization  1,143   1,457 
Stock compensation expense  330   251 
Provision for loan losses  (750))  1,700 
Origination of loans for sale  (86,498))  (79,415))
Proceeds from sales of loans originated for sale  90,494   83,531 
Net gains on mortgage loans  (3,326))  (2,499))
Write-down of other real estate  4   32 
Net loss on sales of other real estate  20   0 
Deferred income tax expense  (144))  (1,483))
Change in accrued interest receivable and other assets  1,384   (6,634))
Earnings in bank-owned life insurance  (526))  (472))
Change in accrued expenses and other liabilities  (803))  5,190 
Net cash from operating activities  16,924   15,707 
Cash flows from investing activities        
Loan originations and payments, net  191,152   (180,106))
Purchases of securities available for sale  (50,605))  (77,214))
Purchases of securities held to maturity  (51,232))  (19,815))
Purchase of bank-owned life insurance  (10,000))  0 
Proceeds from:        
Maturities and calls of securities  31,013   64,342 
Principal paydowns on securities  23,429   15,808 
Sales of other real estate  170   92 
Proceeds from payout of bank-owned insurance claim  560   0 
Additions to premises and equipment  (861))  (805))
Net cash from investing activities  133,626   (197,698))
Cash flows from financing activities        
Change in deposits  301,489   364,997 
Repayments and maturities of other borrowed funds  (10,000))  0 
Proceeds from other borrowed funds  0   10,000 
Repurchase of shares for taxes withheld on vested restricted stock  (12))  (11))
Cash dividends paid  (5,446))  (5,440))
Net cash from financing activities  286,031   369,546 
Net change in cash and cash equivalents  436,581   187,555 
Cash and cash equivalents at beginning of period  783,736   272,450 
Cash and cash equivalents at end of period $1,220,317  $460,005 

See accompanying notes to consolidated financial statements.

-8-
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine Month Periods Ended SeptemberSix month periods ended June 30, 20172021 and 20162020
(unaudited)
(Dollars in thousands)

  
Nine Months
Ended
September 30,
 
Nine Months
Ended
September 30,
  2017 2016
Supplemental cash flow information      
Interest paid $ 3,827 $ 3,770
Income taxes paid   3,525   4,960
Supplemental noncash disclosures:      
Transfers from loans to other real estate   60   102
Security settlement   (1,368)   (1,315)
  
Six Months
Ended
June 30,
2021
  
Six Months
Ended
June 30,
2020
 
Supplemental cash flow information      
Interest paid $1,535  $3,793 
Income taxes paid  4,000   3,515 
Supplemental noncash disclosures:        
Security settlement  736   475 

See accompanying notes to consolidated financial statements.

-9-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

-9-
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


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


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


The Company owns all of the common stock of Macatawa Statutory Trust I and Macatawa Statutory Trust II. These areThis is a grantor truststrust that issued trust preferred securities and areis not consolidated with the Company under accounting principles generally accepted in the United States of America.  On July 7, 2021, the Company redeemed the $20.0 million outstanding trust preferred securities and $619,000 common securities associated with this trust.


Recent Events: On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”  The guidance explained that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”).  The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs.  On December 27, 2020, another COVID-19 relief bill was signed that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated.  Through June 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  As of June 30, 2021, all of these modifications had expired and the loans returned to their contractual payment terms.

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

On December 27, 2020, another COVID-19 relief bill was signed that extended and modified several provisions of the PPP.  This included an additional allocation of $284 billion.  The SBA reactivated the PPP on January 11, 2021.  The Bank originated additional loans through the PPP, which expired on May 31, 2021.  In the six months ended June 30, 2021, the Bank had generated and received SBA approval on 1,000 PPP loans totaling $128.4 million and generated $5.6 million in related deferred PPP fees.  In the six months ended June 30, 2021, 833 PPP loans totaling $187.5 million had been forgiven by the SBA and a total of $4.4 million in PPP fees had been recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP originations.

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

-10-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of Presentation: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 ninesix month periods ended SeptemberJune 30, 20172021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2021. For further information, refer to the consolidated financial statements and related notes included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016.2020.


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


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

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


The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. At SeptemberJune 30, 2017,2021, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.  At June 30, 2021, the qualitative factor allocations for economic trends related to the COVID-19 that had been increased significantly during 2020 were maintained reflecting continued uncertainty of economic conditions with the reopening of the economy.  PPP loans receive $0 allocation as they are fully guaranteed by the SBA and are subject to be forgiven under the SBA forgiveness criteria.


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

-10-
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Commercial and commercial real estate loans with relationship balances exceeding $500,000 and an internal risk grading of 6 or worse are evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated and the loan is reported at the present value of estimated future cash flows using the loan’s existing interest rate or at the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and they are not separately identified for impairment disclosures.


Troubled debt restructurings are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.


-11-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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


Income Taxes:Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

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


Revenue Recognition:  The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured.  The Company’s primary source of revenue is interest income from the Bank’s loans and investment securities.  The Company also earns noninterest revenue from various banking services offered by the Bank.

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

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

Derivatives:  Certain of ourthe Bank’s commercial loan customers have entered into interest rate swap agreements directly with the Bank.  At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer.   This is known as a back-to-back swap agreement.  Under this arrangement the Bank has two2 freestanding interest rate swaps, botheach of which areis carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At SeptemberJune 30, 20172021 and December 31, 2016,2020, the total notional amount of such agreements was $42.7$145.6 million and $48.1$156.4 million, respectively, and resulted in a derivative asset with a fair value of $351,000$3.6 million and $494,000,$4.2 million, respectively, which were included in other assets and a derivative liability of $351,000$3.6 million and $494,000,$4.2 million, respectively, which were included in other liabilities.

Reclassifications:

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.
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 net fair value of mortgage banking derivatives was approximately $(4,000) and $(130,000) at June 30, 2021 and December 31, 2020, respectively.

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

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

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

-11--12-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)


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

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

Standards:FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.Instruments.  This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. This

ASU isNo. 2019-10 Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) – Effective Dates updated the effective date of this ASU for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2019, and for interim periods within those years.2022.  The Company is currently evaluating the impact ofselected a software vendor for applying this new ASU on its consolidated financial statements.

FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensusfor Current Expected Credit Losses (“CECL”), began implementation of the FASB Emerging Issues Task Force).  This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classifiedsoftware in the statementsecond quarter of cash flows.  In particular,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 ASU addresses eight specific cash flow issuessoftware beginning in an effortJanuary 2019 for its monthly incurred loss computations and began modeling the new current expected credit loss model assumptions to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlementthe allowance for loan losses computation.  During 2019, 2020 and the first six months of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.  The amendments are effective for annual periods beginning after December 15, 2017, and for interim periods within those annual periods.  The impact of adoption of this ASU by2021, the Company is not expected to be material.
-12-
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.  This ASU simplifies and expandsmodeled the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Topic 815, Derivatives and Hedging, through targeted improvementsvarious methods prescribed in key practice areas.  This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships.  In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures.  These changes are intended to allow preparers more flexibility and to enhanceagainst the transparency of how hedging results are presented and disclosed.  Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period.  The ASU is effective for years beginning after December 15, 2018, and interim periods within those years.Company’s identified loan segments.  The Company does not expectanticipates continuing to run parallel computations and fine tune assumptions as it continues to evaluate the impact of adoption of this ASU tothe new standard.  The COVID-19 pandemic that broke out in the United States in the first quarter of 2020 and continued into 2021 may have a significant impact on allowance computations under the incurred loss model which could be material.amplified under the new standard.

-13-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Index
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SECURITIES


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


Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
September 30, 2017
        
Available for Sale:
        
June 30, 2021
            
Available for Sale            
U.S. Treasury and federal agency securities $ 98,386 $ 58 $ (709) $ 97,735 $67,990  $128  $(726) $67,392 
U.S. Agency MBS and CMOs  20,281  13  (161)  20,133  63,766   895   (414)  64,247 
Tax-exempt state and municipal bonds  41,255  677  (133)  41,799  39,165   1,560   0   40,725 
Taxable state and municipal bonds  43,100  89  (315)  42,874  62,031   1,317   (216)  63,132 
Corporate bonds and other debt securities  10,165  16  (20)  10,161  4,320   139   0   4,459 
Other equity securities   1,500   ---   (20)   1,480
 $ 214,687 $ 853 $ (1,358) $ 214,182 $237,272  $4,039  $(1,356) $239,955 
Held to Maturity
                        
Tax-exempt state and municipal bonds $ 61,927 $ 927 $ --- $ 62,854 $121,867  $3,108  $(3) $124,972 

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
December 31, 2016
        
Available for Sale:
            
December 31, 2020
            
Available for Sale            
U.S. Treasury and federal agency securities $ 85,582 $ 49 $ (1,281) $ 84,350 $63,993  $287  $(170) $64,110 
U. S. Agency MBS and CMOs  12,037  11  (231)  11,817
U.S. Agency MBS and CMOs  63,652   1,376   (45)  64,983 
Tax-exempt state and municipal bonds  39,578  212  (603)  39,187  43,739   1,903   0   45,642 
Taxable state and municipal bonds  34,255  65  (437)  33,883  55,383   1,801   (7)  57,177 
Corporate bonds and other debt securities   13,765  16  (55)  13,726  4,731   189   0   4,920 
Other equity securities   1,500   ---   (30)   1,470
 $ 186,717 $ 353 $ (2,637) $ 184,433 $231,498  $5,556  $(222) $236,832 
Held to Maturity:
        
Held to Maturity                
Tax-exempt state and municipal bonds $ 69,378 $ 573 $ (102) $ 69,849 $79,468  $3,778  $0  $83,246 


There were no sale of securities available for sale in the three month periods ended September 30, 2017 and 2016.  Proceeds from the sale of securities were $5.8 million in the nine month period ended September 30, 2017 resulting in net gains of $3,000, as reported in the Consolidated Statements of Income.  This resulted in reclassifications of $3,000 ($2,000 net of tax) from accumulated other comprehensive income to gain on sale0 sales of securities in the Consolidated Statements of Income in the ninethree and six month periodperiods ended SeptemberJune 30, 2017.  Proceeds from the sale of securities available for sale were $9.6 million in the nine month period ended September 30, 2016 resulting in net gains on sale of $99,000 as reported in the Consolidated Statements of Income.  This resulted in reclassifications of $99,000 ($64,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the nine month period ended September 30, 2016.2021 and 2020.
-14-
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SECURITIES (Continued)

Contractual maturities of debt securities at SeptemberJune 30, 20172021 were as follows (dollars in thousands):


 Held–to-Maturity Securities Available-for-Sale Securities Held–to-Maturity Securities  Available-for-Sale Securities 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Due in one year or less $ 14,012 $ 14,019 $ 18,486 $ 18,493 $25,788  $25,908  $24,921  $25,137 
Due from one to five years  13,622  14,055  115,857  115,387  64,665   65,661   61,955   63,806 
Due from five to ten years  10,687  11,019  55,693  55,805  13,834   14,960   89,028   89,258 
Due after ten years   23,606   23,761   23,151   23,017  17,580   18,443   61,368   61,754 
 $ 61,927 $ 62,854 $ 213,187 $ 212,702 $121,867  $124,972  $237,272  $239,955 


-14-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SECURITIES (Continued)

Securities with unrealized losses at SeptemberJune 30, 20172021 and December 31, 2016,2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (dollars in thousands):

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

 
December 31, 2016
  Less than 12 Months  12 Months or More  Total
Fair
Value
  
Unrealized
Loss
Fair
Value
  
Unrealized
Loss
Fair
Value
  
Unrealized
Loss
U.S. Treasury and federal agency securities $ 59,129 $ (1,271) $ 3,053 $ (10) $ 62,182 $ (1,281)
U.S. Agency MBS and CMOs   10,702   (231)   ---   ---   10,702   (231)
Tax-exempt state and municipal bonds   49,508   (698)   1,672   (7)   51,180   (705)
Taxable state and municipal bonds   22,633   (437)   ---   ---   22,633   (437)
Corporate bonds and other debt securities   5,745   (50)   500   (5)   6,245   (55)
Other equity securities   1,470   (30)   ---   ---   1,470   (30)
Total temporarily impaired $ 149,187 $ (2,717) $ 5,225 $ (22) $ 154,412 $ (2,739)

  Less than 12 Months  12 Months or More  Total 
June 30, 2021
 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
Available for Sale                  
U.S. Treasury and federal agency securities $45,674  $(726) $0  $0  $45,674  $(726)
U.S. Agency MBS and CMOs  25,171   (414)  0   0   25,171   (414)
Tax-exempt state and municipal bonds  0   0   0   0   0   0 
Taxable state and municipal bonds  18,689   (216)  0   0   18,689   (216)
Corporate bonds and other debt securities  0   0   0   0   0   0 
Total $89,534  $(1,356) $0  $0  $89,534  $(1,356)
                         
Held to Maturity                        
Tax-exempt state and municipal bonds $13,774  $(3) $0  $0  $13,774  $(3)

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

-15-
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SECURITIES (Continued)

Other-Than-Temporary-Impairment


Management evaluates securities for other-than-temporary impairment ("OTTI"(“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. At June 30, 2021, 69 securities available for sale with fair values totaling $89.5 million had unrealized losses totaling $1.4 million.  At June 30, 2021, 2 securities held to maturity with fair values totaling $13.8 million had unrealized losses totaling $3,000.  Management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities.  In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost.  Management determined that the unrealized losses for each periodthe three and six month periods ended June 30, 2021 and 2020 were attributable to changes in interest rates and not due to credit quality.  As such, no0 OTTI charges were necessary during the three and nine month periods ended September 30, 2017 and 2016.each period.


Securities with a carrying value of approximately $2.0$5.0 million and $6.1 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at SeptemberJune 30, 20172021 and December 31, 2016.2020, respectively.



-15-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3 – LOANS




Portfolio loans were as follows (dollars in thousands):
   
September 30,
2017
  
December 31,
2016
 
Commercial and industrial $418,838  $449,342 
         
Commercial real estate:        
Residential developed  9,077   11,970 
Unsecured to residential developers  2,410   4,734 
Vacant and unimproved  38,677   40,286 
Commercial development  486   378 
Residential improved  83,441   75,348 
Commercial improved  295,924   289,478 
Manufacturing and industrial  100,347   95,787 
Total commercial real estate  530,362   517,981 
         
Consumer        
Residential mortgage  221,829   217,614 
Unsecured  254   396 
Home equity  82,296   88,113 
Other secured  6,458   7,366 
Total consumer  310,837   313,489 
         
Total loans  1,260,037   1,280,812 
Allowance for loan losses  (16,434)  (16,962)
  $1,243,603  $1,263,850 


  
June 30,
2021
  
December 31,
2020
 
Commercial and industrial:      
Commercial and industrial, excluding PPP $359,821  $436,331 
PPP  169,679   229,079 
Total commercial and industrial  529,500   665,410 
Commercial real estate:        
Residential developed  7,279   8,549 
Unsecured to residential developers  60   0 
Vacant and unimproved  36,797   47,122 
Commercial development  673   857 
Residential improved  98,217   114,392 
Commercial improved  273,229   266,006 
Manufacturing and industrial  113,644   115,247 
Total commercial real estate  529,899   552,173 
Consumer:        
Residential mortgage  124,156   149,556 
Unsecured  129   161 
Home equity  50,826   57,975 
Other secured  3,817   4,056 
Total consumer  178,928   211,748 
Total loans  1,238,327   1,429,331 
Allowance for loan losses  (16,806
)
  (17,408
)
  $1,221,521  $1,411,923 


-16-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2017
  
Commercial
and
Industrial
  
Commercial
Real Estate
    Consumer    Unallocated    Total
Beginning balance $ 6,336 $ 6,583 $ 3,621 $ 30 $ 16,570
Charge-offs   ---   ---   (55)   ---   (55)
Recoveries   32   199   38   ---   269
Provision for loan losses   (212)   (94)   (43)   (1)   (350)
Ending Balance $ 6,156 $ 6,688 $ 3,561 $ 29 $ 16,434


Three months ended September 30, 2016
 
Commercial
and
Industrial
 
Commercial
Real Estate
 Consumer Unallocated Total
Beginning balance $ 4,960 $ 8,065 $ 3,894 $ 40 $ 16,959
Charge-offs   ---   ---   (46)   ---   (46)
Recoveries   50   95   39   ---   184
Provision for loan losses   515   (548)   (190)   (27)   (250)
Ending Balance $ 5,525 $ 7,612 $ 3,697 $ 13 $ 16,847


 
Nine months ended September 30, 2017
  
Commercial
and
Industrial
  
Commercial
Real Estate
    Consumer    Unallocated    Total
Beginning balance $ 6,345 $ 6,703 $ 3,871 $ 43 $ 16,962
Charge-offs   (108)   ---   (113)   ---   (221)
Recoveries   96   818   129   ---   1,043
Provision for loan losses   (177)   (833)   (326)   (14)   (1,350)
Ending Balance $ 6,156 $ 6,688 $ 3,561 $ 29 $ 16,434

Nine months ended September 30, 2016
  
Commercial
and
Industrial
  
Commercial
Real Estate
    Consumer    Unallocated    Total
Three months ended June 30, 2021 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $ 4,826 $ 8,457 $ 3,761 $ 37 $ 17,081 $5,801  $8,898  $2,718  $35  $17,452 
Charge-offs  ---  ---  (158)  ---  (158)  0   0   (30)  0   (30)
Recoveries  123  772  129  ---  1,024  35   72   27   0   134 
Provision for loan losses   576   (1,617)   (35)   (24)   (1,100)  (630)  (230)  141   (31)  (750)
Ending Balance $ 5,525 $ 7,612 $ 3,697 $ 13 $ 16,847 $5,206  $8,740  $2,856  $4  $16,806 


Three months ended June 30, 2020 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $8,807  $6,913  $3,130  $39  $18,889 
Charge-offs  (1,192)  (2,957)  (34)  0   (4,183)
Recoveries  83   17   49   0   149 
Provision for loan losses  (2,267)  3,289   (7)  (15)  1,000 
Ending Balance $5,431  $7,262  $3,138  $24  $15,855 


Six months ended June 30, 2021 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $6,632  $7,999  $2,758  $19  $17,408 
Charge-offs  0   0   (80)  0   (80)
Recoveries  55   111   62   0   228 
Provision for loan losses  (1,481)  630   116   (15)  (750)
Ending Balance $5,206  $8,740  $2,856  $4  $16,806 


Six months ended June 30, 2020 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Beginning balance $7,658  $6,521  $3,009  $12  $17,200 
Charge-offs  (1,192)  (2,957)  (73)  0   (4,222)
Recoveries  102   991   84   0   1,177 
Provision for loan losses  (1,137)  2,707   118   12   1,700 
Ending Balance $5,431  $7,262  $3,138  $24  $15,855 


-17-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS(Continued)



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

 
September 30, 2017
 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Allowance for loan losses:               
Ending allowance attributable to loans:               
Individually reviewed for impairment $568  $244  $534  $---  $1,346 
Collectively evaluated for impairment  5,588   6,444   3,027   29   15,088 
Total ending allowance balance $6,156  $6,688  $3,561  $29  $16,434 
Loans:                    
Individually reviewed for impairment $4,555  $8,742  $8,663  $---  $21,960 
Collectively evaluated for impairment  414,283   521,620   302,174   ---   1,238,077 
Total ending loans balance $418,838  $530,362  $310,837  $---  $1,260,037 


December 31, 2016
 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Allowance for loan losses:               
Ending allowance attributable to loans:               
Individually reviewed for impairment $605  $368  $723  $---  $1,696 
Collectively evaluated for impairment  5,740   6,335   3,148   43   15,266 
Total ending allowance balance $6,345  $6,703  $3,871  $43  $16,962 
                     
Loans:                    
Individually reviewed for impairment $5,994  $11,934  $11,726  $---  $29,654 
Collectively evaluated for impairment  443,348   506,047   301,763   ---   1,251,158 
Total ending loans balance $449,342  $517,981  $313,489  $---  $1,280,812 

June 30, 2021 
Commercial
and
Industrial
  
Commercial
Real Estate
  Consumer  Unallocated  Total 
Allowance for loan losses:               
Ending allowance attributable to loans:               
Individually reviewed for impairment $306  $175  $280  $0  $761 
Collectively evaluated for impairment  4,900   8,565   2,576   4   16,045 
Total ending allowance balance $5,206  $8,740  $2,856  $4  $16,806 
Loans:                    
Individually reviewed for impairment $777  $2,357  $3,543  $0  $6,677 
Collectively evaluated for impairment  528,723   527,542   175,385   0   1,231,650 
Total ending loans balance $529,500  $529,899  $178,928  $0  $1,238,327 


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


-18-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 SeptemberJune 30, 20172021 (dollars in thousands):
 
September 30, 2017
 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance
Allocated
 
With no related allowance recorded:         
Commercial and industrial $1,414  $1,414  $--- 
             
Commercial real estate:            
Residential developed  ---   ---   --- 
Unsecured to residential developers  ---   ---   --- 
Vacant and unimproved  ---   ---   --- 
Commercial development  190   190   --- 
Residential improved  5   5   --- 
Commercial improved  ---   ---   --- 
Manufacturing and industrial  ---   ---   --- 
   195   195   --- 
Consumer:            
Residential mortgage  ---   ---   --- 
Unsecured  ---   ---   --- 
Home equity  ---   ---   --- 
Other secured  ---   ---   --- 
   ---   ---   --- 
Total with no related allowance recorded $1,609  $1,609  $--- 
             
With an allowance recorded:            
Commercial and industrial $3,141  $3,141  $568 
             
Commercial real estate:            
Residential developed  181   181   4 
Unsecured to residential developers  ---   ---   --- 
Vacant and unimproved  361   361   12 
Commercial development  ---   ---   --- 
Residential improved  2,212   2,212   88 
Commercial improved  5,609   5,609   139 
Manufacturing and industrial  184   184   1 
   8,547   8,547   244 
Consumer:            
Residential mortgage  6,865   6,846   422 
Unsecured  ---   ---   --- 
Home equity  1,817   1,817   112 
Other secured  ---   ---   --- 
   8,682   8,663   534 
Total with an allowance recorded $20,370  $20,351  $1,346 
Total $21,979  $21,960  $1,346 


June 30, 2021 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance
Allocated
 
With no related allowance recorded:         
Commercial and industrial $0  $0  $— 
Commercial real estate:            
Residential improved  5   5   — 
Commercial improved  1,001   1,001   — 
   1,006   1,006   — 
Consumer  0   0   — 
Total with no related allowance recorded $1,006  $1,006  $— 
             
With an allowance recorded:            
Commercial and industrial $777  $777  $306 
Commercial real estate:            
Commercial improved  1,154   1,154   166 
Manufacturing and industrial  197   197   9 
   1,351   1,351   175 
Consumer:            
Residential mortgage  3,103   3,103   246 
Unsecured  104   104   8 
Home equity  335   335   26 
Other secured  1   1   0 
   3,543   3,543   280 
Total with an allowance recorded $5,671  $5,671  $761 
Total $6,677  $6,677  $761 


-19-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 20162020 (dollars in thousands):

 
December 31, 2016
 
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance
Allocated
 
With no related allowance recorded:         
Commercial and industrial $2,298  $2,298  $--- 
             
Commercial real estate:            
Residential developed  ---   ---   --- 
Unsecured to residential developers  ---   ---   --- 
Vacant and unimproved  ---   ---   --- 
Commercial development  ---   ---   --- 
Residential improved  27   27   --- 
Commercial improved  350   350   --- 
Manufacturing and industrial  ---   ---   --- 
   377   377   --- 
Consumer:            
Residential mortgage  ---   ---   --- 
Unsecured  ---   ---   --- 
Home equity  ---   ---   --- 
Other secured  ---   ---   --- 
   ---   ---   --- 
Total with no related allowance recorded $2,675  $2,675  $--- 
             
With an allowance recorded:            
Commercial and industrial $3,696  $3,696  $605 
             
Commercial real estate:            
Residential developed  187   187   4 
Unsecured to residential developers  ---   ---   --- 
Vacant and unimproved  387   387   9 
Commercial development  189   189   6 
Residential improved  4,687   4,687   216 
Commercial improved  5,879   5,879   128 
Manufacturing and industrial  228   228   5 
   11,557   11,557   368 
Consumer:            
Residential mortgage  7,523   7,523   464 
Unsecured  ---   ---   --- 
Home equity  4,203   4,203   259 
Other secured  ---   ---   --- 
   11,726   11,726   723 
Total with an allowance recorded $26,979  $26,979  $1,696 
Total $29,654  $29,654  $1,696 


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


-20-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 ninesix month periods ended SeptemberJune 30, 20172021 and 20162020 (dollars in thousands):
  
Three
Months
Ended
September 30,
  
Three
Months
Ended
September 30,
  
Nine
Months
Ended
September 30,
  
Nine
Months
Ended
September 30,
 
  2017  2016  2017  2016 
Average of impaired loans during the period:            
Commercial and industrial $4,047  $5,093  $5,410  $6,489 
                 
Commercial real estate:                
Residential developed  181   126   183   42 
Unsecured to residential developers  ---   ---   ---   --- 
Vacant and unimproved  372   418   338   433 
Commercial development  189   190   189   191 
Residential improved  2,255   5,156   3,002   5,396 
Commercial improved  5,925   6,627   6,026   7,660 
Manufacturing and industrial  185   235   246   237 
                 
Consumer  8,793   12,501   10,366   12,828 
                 
Interest income recognized during impairment:                
Commercial and industrial  179   203   697   740 
Commercial real estate  108   172   360   516 
Consumer  80   112   306   350 
                 
Cash-basis interest income recognized                
Commercial and industrial  177   195   708   746 
Commercial real estate  114   169   363   513 
Consumer  79   111   306   346 


  
Three
Months
Ended
June 30,
2021
  
Three
Months
Ended
June 30,
2020
  
Six
Months
Ended
June 30,
2021
  
Six
Months
Ended
June 30,
2020
 
Average of impaired loans during the period:            
Commercial and industrial $1,916  $4,261  $3,251  $5,438 
Commercial real estate:                
Residential developed  0   73   22   73 
Residential improved  33   196   60   232 
Commercial improved  2,170   6,485   2,190   6,154 
Manufacturing and industrial  197   353   198   355 
Consumer  3,619   4,707   3,780   4,810 
Interest income recognized during impairment:                
Commercial and industrial  9   17   143   290 
Commercial real estate  35   157   66   256 
Consumer  31   112   69   169 
Cash-basis interest income recognized                
Commercial and industrial  8   18   134   295 
Commercial real estate  35   181   66   309 
Consumer  32   105   68   165 


-21-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 SeptemberJune 30, 20172021 and December 31, 2016 (dollars in thousands):2020:
 
September 30, 2017
 
Nonaccrual
  
Over 90
days
Accruing
 
       
Commercial and industrial $4  $--- 
         
Commercial real estate:        
Residential developed  ---   --- 
Unsecured to residential developers  ---   --- 
Vacant and unimproved  ---   --- 
Commercial development  239   --- 
Residential improved  91   --- 
Commercial improved  110   --- 
Manufacturing and industrial  ---   --- 
   440   --- 
Consumer:        
Residential mortgage  58   --- 
Unsecured  7   --- 
Home equity  ---   --- 
Other secured  12   --- 
   77   --- 
Total $521  $--- 

 
December 31, 2016
 
Nonaccrual
  
Over 90
days
Accruing
 
       
Commercial and industrial $36  $--- 
         
Commercial real estate:        
Residential developed  ---   --- 
Unsecured to residential developers  ---   --- 
Vacant and unimproved  ---   --- 
Commercial development  49   --- 
Residential improved  6   --- 
Commercial improved  128   --- 
Manufacturing and industrial  ---   --- 
   183   --- 
Consumer:        
Residential mortgage  58   --- 
Unsecured  16   --- 
Home equity  7   --- 
Other secured  ---   --- 
   81   --- 
Total $300  $--- 

June 30, 2021 Nonaccrual  
Over 90
days
Accruing
 
Commercial and industrial $0  $0 
Commercial real estate:        
Residential improved  5   0 
Commercial improved  336   0 
   341   0 
Consumer:        
Residential mortgage  92   0 
   92   0 
Total $433  $0 


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


-22-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 SeptemberJune 30, 20172021 and December 31, 20162020 by class of loans (dollars in thousands):
 
September 30, 2017
 
30-90
Days
  
Greater Than
90 Days
  
Total
Past Due
  
Loans Not
Past Due
  Total 
Commercial and industrial $22  $---  $22  $418,816  $418,838 
                     
Commercial real estate:                    
Residential developed  ---   ---   ---   9,077   9,077 
Unsecured to residential developers  ---   ---   ---   2,410   2,410 
Vacant and unimproved  308   ---   308   38,369   38,677 
Commercial development  ---   239   239   247   486 
Residential improved  ---   91   91   83,350   83,441 
Commercial improved  107   ---   107   295,817   295,924 
Manufacturing and industrial  ---   ---   ---   100,347   100,347 
   415   330   745   529,617   530,362 
Consumer:                    
Residential mortgage  ---   56   56   221,773   221,829 
Unsecured  ---   ---   ---   254   254 
Home equity  33   ---   33   82,263   82,296 
Other secured  5   11   16   6,442   6,458 
   38   67   105   310,732   310,837 
Total $475  $397  $872  $1,259,165  $1,260,037 

 
December 31, 2016
 
30-90
Days
  
Greater Than
90 Days
  
Total
Past Due
  
Loans Not
Past Due
  Total 
Commercial and industrial $425  $28  $453  $448,889  $449,342 
                     
Commercial real estate:                    
Residential developed  ---   ---   ---   11,970   11,970 
Unsecured to residential developers  ---   ---   ---   4,734   4,734 
Vacant and unimproved  ---   ---   ---   40,286   40,286 
Commercial development  ---   49   49   329   378 
Residential improved  74   5   79   75,269   75,348 
Commercial improved  478   ---   478   289,000   289,478 
Manufacturing and industrial  ---   ---   ---   95,787   95,787 
   552   54   606   517,375   517,981 
Consumer:                    
Residential mortgage  64   56   120   217,494   217,614 
Unsecured  ---   ---   ---   396   396 
Home equity  187   ---   187   87,926   88,113 
Other secured  81   ---   81   7,285   7,366 
   332   56   388   313,101   313,489 
Total $1,309  $138  $1,447  $1,279,365  $1,280,812 



June 30, 2021 
30-90
Days
  
Greater Than
90 Days
  
Total
Past Due
  
Loans Not
Past Due
  Total 
Commercial and industrial $30  $0  $30  $529,470  $529,500 
Commercial real estate:                    
Residential developed  0   0   0   7,279   7,279 
Unsecured to residential developers  0   0   0   60   60 
Vacant and unimproved  0   0   0   36,797   36,797 
Commercial development  0   0   0   673   673 
Residential improved  0   5   5   98,212   98,217 
Commercial improved  0   0   0   273,229   273,229 
Manufacturing and industrial  0   0   0   113,644   113,644 
   0   5   5   529,894   529,899 
Consumer:                    
Residential mortgage  0   91   91   124,065   124,156 
Unsecured  0   0   0   129   129 
Home equity  0   0   0   50,826   50,826 
Other secured  0   0   0   3,817   3,817 
   0   91   91   178,837   178,928 
Total $30  $96  $126  $1,238,201  $1,238,327 


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


-23-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)



The Company had allocated $1,346,000$596,000 and $1,696,000$1,210,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure.  For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan.  In some cases, the modification will include separating the note into two2 notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt.  The second note is charged off immediately and collected only after the first note is paid in full.  This modification type is commonly referred to as an A-B note structure.  For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six6 consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.




In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired loan designations may be removed.  In addition, the TDR designation may also be removed from loans modified under an A-B note structure.  If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms.  The market rate relative to the borrower’s credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model.  The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration differences in credit risk.  In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.




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




The following table presents information regarding troubled debt restructurings as of SeptemberJune 30, 20172021 and December 31, 20162020 (dollars in thousands):
  September 30, 2017  December 31, 2016 
  
Number of
Loans
  
Outstanding
Recorded
Balance
  
Number of
Loans
  
Outstanding
Recorded
Balance
 
Commercial and industrial  20  $4,555   25  $5,994 
Commercial real estate  38   8,742   49   11,933 
Consumer  103   8,663   116   12,059 
   161  $21,960   190  $29,986 


  June 30, 2021  December 31, 2020 
  
Number of
Loans
  
Outstanding
Recorded
Balance
  
Number of
Loans
  
Outstanding
Recorded
Balance
 
Commercial and industrial  4  $777   7  $3,957 
Commercial real estate  6   1,202   9   1,439 
Consumer  52   3,544   60   4,049 
   62  $5,523   76  $9,445 


-24-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)



The following table presents information related to accruing troubled debt restructurings as of SeptemberJune 30, 20172021 and December 31, 2016.2020.  The table presents the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of each period reported (dollars in thousands):

  
September 30,
2017
  
December 31,
2016
 
Accruing TDR - nonaccrual at restructuring $---  $--- 
Accruing TDR - accruing at restructuring  18,526   25,665 
Accruing TDR - upgraded to accruing after six consecutive payments  3,057   4,172 
  $21,583  $29,837 

The following tables present information regarding troubled debt restructurings

  
June 30,
2021
  
December 31,
2020
 
Accruing TDR - nonaccrual at restructuring $0  $0 
Accruing TDR - accruing at restructuring  4,851   5,479 
Accruing TDR - upgraded to accruing after six consecutive payments  331   3,529 
  $5,182  $9,008 



There were 0 TDRs executed during the three month and six month periods ended SeptemberJune 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30,
2017
  
Three Months Ended September 30,
2016
 
 # of
Loans
    
Pre-TDR
Balance
   
Writedown
Upon
TDR
       
# of
Loans
    
Pre-TDR
Balance
   
Writedown
Upon
TDR
   
Commercial and industrial  ---  $---  $---   ---  $---  $--- 
Commercial real estate  ---   ---   ---   1   59   --- 
Consumer  2   222   ---   ---   ---   --- 
   2   222  $---   1  $59  $--- 

The following tables present information regarding troubled debt restructurings2021.  There was 1 consumer TDR totaling $27,000 executed during the ninethree month periodsperiod ended SeptemberJune 30, 20172020 and 2016 (dollars in thousands):2 consumer TDRs totaling $30,000 executed during the six month period ended June 30, 2020.

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




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 ninesix month periods ended SeptemberJune 30, 20172021 and 2016,2020, the balance of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.



In late March 2020, the federal banking regulators issued guidance that modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders do not need to be identified as a TDR if the loan was current at the time a modification plan was implemented.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs.  On December 27, 2020, President Trump signed another COVID-19 relief bill that extends this guidance until the earlier of January 1, 2022 or 60 days after the national emergency termination date.  Through June 30, 2021, the Bank had applied this guidance and had made 726 such modifications with principal balances totaling $337.2 million.  The Bank continues to follow the guidance issued by the banking regulators in making any TDR determinations.  At June 30, 2021, there were 0 such loans still in their modification period.


-25-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 eight8 point grading system, with grades 5 through 8 being considered classified, or watch, credits.  All commercial loans are assigned a grade at origination, at each renewal or any amendment.  When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by the credit department and the loan officer.  All watch credits have an ALR completed quarterly which analyzes the collateral position and cash flow of the borrower and its guarantors.  Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled.  When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR.  Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process.  The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero balance.  The Company uses the following definitions for the risk grades:




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




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




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




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




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




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




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




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

-26-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – LOANS (Continued)



As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):
September 30, 2017
  1   2   3   4   5   6   7   8  Total 
Commercial and industrial $---  $15,104  $103,220  $281,082  $15,603  $3,825  $4  $---  $418,838 
                                     
Commercial real estate:                                    
Residential developed  ---   ---   1,173   7,119   785   ---   ---   ---   9,077 
Unsecured to residential developers  ---   ---   ---   2,410   ---   ---   ---   ---   2,410 
Vacant and unimproved  ---   ---   16,252   18,975   3,450   ---   ---   ---   38,677 
Commercial development  ---   ---   110   137   ---   ---   239   ---   486 
Residential improved  ---   ---   5,218   75,297   1,579   1,256   91   ---   83,441 
Commercial improved  ---   1,287   63,600   226,190   3,798   939   110   ---   295,924 
Manufacturing & industrial  ---   961   44,416   52,150   2,301   519   ---   ---   100,347 
  $---  $17,352  $233,989  $663,360  $27,516  $6,539  $444  $---  $949,200 



December 31, 2016
  1   2   3   4   5   6   7   8  Total 
Commercial and industrial $---  $27,619  $118,243  $282,527  $14,610  $6,307  $36  $---  $449,342 
                                     
Commercial real estate:                                    
Residential developed  ---   ---   2,328   8,786   856   ---   ---   ---   11,970 
Unsecured to residential developers  ---   ---   ---   4,734   ---   ---   ---   ---   4,734 
Vacant and unimproved  ---   ---   17,672   19,028   3,586   ---   ---   ---   40,286 
Commercial development  ---   ---   ---   140   ---   189   49   ---   378 
Residential improved  ---   ---   7,100   63,957   2,628   1,657   6   ---   75,348 
Commercial improved  ---   2,433   66,259   210,449   9,084   1,125   128   ---   289,478 
Manufacturing & industrial  ---   1,665   38,719   51,718   3,076   609   ---   ---   95,787 
  $---  $31,717  $250,321  $641,339  $33,840  $9,887  $219  $---  $967,323 


June 30, 2021
 1
  2
  3
  4
  5
  6
  7
  8
  Total 
Commercial and industrial $184,726  $15,160  $90,079  $235,577  $2,990  $968  $0  $0  $529,500 
                                     
Commercial real estate:                                    
Residential developed  0   0   0   7,279   0   0   0   0   7,279 
Unsecured to residential developers  0   0   60   0   0   0   0   0   60 
Vacant and unimproved  0   1,818   8,833   26,146   0   0   0   0   36,797 
Commercial development  0   0   224   449   0   0   0   0   673 
Residential improved  0   0   20,948   77,066   198   0   5   0   98,217 
Commercial improved  0   7,396   61,708   194,758   7,877   1,154   336   0   273,229 
Manufacturing & industrial  0   2,013   28,637   79,487   3,507   0   0   0   113,644 
  $184,726  $26,387  $210,489  $620,762  $14,572  $2,122  $341  $0  $1,059,399 


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



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

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


  
June 30,
2021
  
December 31,
2020
 
Not classified as impaired $390  $591 
Classified as impaired  2,073   5,159 
Total commercial loans classified substandard or worse $2,463  $5,750 
-27-

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


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, 2017
 
Residential
Mortgage
  
Consumer
Unsecured
  
Home
Equity
  
Consumer
Other
 
Performing $221,773  $254  $82,296  $6,447 
Nonperforming  56   ---   ---   11 
Total $221,829  $254  $82,296  $6,458 


December 31, 2016
 
Residential
Mortgage
  
Consumer
Unsecured
  
Home
Equity
  
Consumer
Other
 
Performing $217,558  $396  $88,113  $7,366 
Nonperforming  56   ---   ---   --- 
Total $217,614  $396  $88,113  $7,366 


June 30, 2021 
Residential
Mortgage
  
Consumer
Unsecured
  
Home
Equity
  
Consumer
Other
 
Performing $124,065  $129  $50,826  $3,817 
Nonperforming  91   0   0   0 
Total $124,156  $129  $50,826  $3,817 


December 31, 2020 
Residential
Mortgage
  
Consumer
Unsecured
  
Home
Equity
  
Consumer
Other
 
Performing $149,462  $161  $57,975  $4,056 
Nonperforming  94   0   0   0 
Total $149,556  $161  $57,975  $4,056 

-27-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – OTHER REAL ESTATE OWNED

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

  
Nine
Months Ended
September 30,
2017
  
Year
Ended
December 31,
2016
  
Nine
Months Ended
September 30,
2016
 
Beginning balance $22,864  $28,377  $28,377 
Additions, transfers from loans  60   339   102 
Proceeds from sales of other real estate owned  (6,227)  (5,339)  (4,155)
Valuation allowance reversal upon sale  (7,003)  (1,158)  (533)
Gain on sales of other real estate owned  660   645   365 
   10,354   22,864   24,156 
Less: valuation allowance  (3,693)  (10,611)  (11,046)
Ending balance $6,661  $12,253  $13,110 
Activity in the valuation allowance was as follows (dollars in thousands):
  
Nine
Months Ended
September 30,
2017
  
Nine
Months Ended
September 30,
2016
 
Beginning balance $10,611  $10,805 
Additions charged to expense  85   774 
Reversals upon sale  (7,003)  (533)
Ending balance $3,693  $11,046 
-28-
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – FAIR VALUE


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



Level 1:Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.


Level 2:Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.


Level 3:Significant unobservable inputs that reflect a reporting entity'sentity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.


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


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


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


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


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

-29--28-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 54 – FAIR VALUE (Continued)


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

 Fair  
Quoted Prices in
Active Markets
for Identical
Assets
  
Significant Other
Observable
Inputs
  
Significant
Unobservable
Inputs
  
Fair
Value
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
 Value  (Level 1)  (Level 2)  (Level 3) 
September 30, 2017
            
June 30, 2021
            
U.S. Treasury and federal agency securities $97,735  $---  $97,735  $---  $67,392  $0  $67,392  $0 
U.S. Agency MBS and CMOs  20,133   ---   20,133   ---   64,247   0   64,247   0 
Tax-exempt state and municipal bonds  41,799   ---   41,799   ---   40,725   0   40,725   0 
Taxable state and municipal bonds  42,874   ---   42,874   ---   63,132   0   63,132   0 
Corporate bonds and other debt securities  10,161   ---   10,161   ---   4,459   0   4,459   0 
Other equity securities  1,480   ---   1,480   ---   1,491   0   1,491   0 
Loans held for sale  2,199   ---   2,199   ---   4,752   0   4,752   0 
Interest rate swaps  351   ---   ---   351   3,586   0   0   3,586 
Interest rate swaps  (351)  ---   ---   (351)  (3,586)  0   0   (3,586)
                                
December 31, 2016
                
December 31, 2020
                
Available for sale securities                
U.S. Treasury and federal agency securities $84,350  $---  $84,350  $---  $64,110  $0  $64,110  $0 
U.S. Agency MBS and CMOs  11,817   ---   11,817   ---   64,983   0   64,983   0 
Tax-exempt state and municipal bonds  39,187   ---   39,187   ---   45,642   0   45,642   0 
Taxable state and municipal bonds  33,883   ---   33,883   ---   57,177   0   57,177   0 
Corporate bonds and other debt securities  13,726   ---   13,726   ---   4,920   0   4,920   0 
Other equity securities  1,470   ---   1,470   ---   1,513   0   1,513   0 
Loans held for sale  2,181   ---   2,181   ---   5,422   0   5,422   0 
Interest rate swaps  494   ---   ---   494   4,217   0   0   4,217 
Interest rate swaps  (494)  ---   ---   (494)  (4,217)  0   0   (4,217)


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


 Fair  
Quoted Prices in
Active Markets
for Identical
Assets
  
Significant Other
Observable
Inputs
  
Significant
Unobservable
Inputs
  
Fair
Value
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
 Value  (Level 1)  (Level 2)  (Level 3) 
September 30, 2017
            
June 30, 2021
            
Impaired loans $2,775  $---  $---  $2,775  $1,665  $0  $0  $1,665 
Other real estate owned  4,631   ---   ---   4,631   0   0   0   0 
                                
December 31, 2016
                
December 31, 2020
                
Impaired loans $3,436  $---  $---  $3,436  $4,686  $0  $0  $4,686 
Other real estate owned  9,542   ---   ---   9,542   194   0   0   194 

-30--29-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 54 – FAIR VALUE (Continued)


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

  
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range (%)
September 30, 2017
           
Impaired Loans $2,775 Sales comparison approach Adjustment for differences between comparable sales  4.0 to 15.0
     Income approach Capitalization rate  9.5 to 11.0
                 
Other real estate owned  4,631 Sales comparison approach Adjustment for differences between comparable sales  3.0 to 22.0
     Income approach Capitalization rate  9.5 to 11.0
                 


  
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range (%)
December 31, 2016
             
Impaired Loans $3,436 Sales comparison approach Adjustment for differences between comparable sales  1.0 to 35.0
     Income approach Capitalization rate  9.5 to 11.5
                 
Other real estate owned  9,542 Sales comparison approach Adjustment for differences between comparable sales  2.0 to 32.5
     Income approach Capitalization rate  9.5 to 11.5
  
Asset Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range (%)
June 30, 2021               
Impaired Loans $1,665 Sales comparison approach Adjustment for differences between comparable sales 1.0 to 30.0
     Income approach Capitalization rate 9.5 to 11.0

  
Asset Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 Range (%)
December 31, 2020               
Impaired Loans $4,686 Sales comparison approach Adjustment for differences between comparable sales 1.5 to 20.0
     Income approach Capitalization rate 9.5 to 11.0
Other real estate owned  194 Sales comparison approach Adjustment for differences between comparable sales 3.0 to 20.0
     Income approach Capitalization rate 9.5 to 11.0


-31--30-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 54 – FAIR VALUE (Continued)


The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at SeptemberJune 30, 20172021 and December 31, 20162020 (dollars in thousands):



Level in June 30, 2021  December 31, 2020 

Fair Value
Hierarchy
 
Carrying
Amount
  
Fair
Value
  
Carrying
Amount
  
Fair
Value
 
Financial assets             
Cash and due from banksLevel 1 $31,051  $31,051  $31,480  $31,480 
Cash equivalentsLevel 2  1,189,266   1,189,266   752,256   752,256 
Securities held to maturityLevel 3  121,867   124,972   79,468   83,246 
FHLB stock   11,558  NA   11,558  NA 
Loans, netLevel 2  1,219,857   1,251,865   1,407,236   1,448,874 
Bank owned life insuranceLevel 3  52,507   52,507   42,516   42,516 
Accrued interest receivableLevel 2  4,539   4,539   5,625   5,625 
Financial liabilities                 
DepositsLevel 2  (2,600,076)  (2,600,122)  (2,298,587)  (2,298,867)
Other borrowed fundsLevel 2  (60,000)  (62,198)  (70,000)  (73,010)
Long-term debtLevel 2  (20,619)  (18,126)  (20,619)  (18,011)
Accrued interest payableLevel 2  (217)  (217)  (242)  (242)
Off-balance sheet credit-related items                 
Loan commitments   0   0   0   0 

 
Level in
Fair Value
Hierarchy 
  September 30, 2017  December 31, 2016 
Carrying
Amount
  
Fair
Value
  
Carrying
Amount
  
Fair
Value
 
Financial assets             
Cash and due from banksLevel 1 $28,318  $28,318  $27,690  $27,690 
Cash equivalentsLevel 2  131,571   131,571   62,129   62,129 
Securities held to maturityLevel 3  61,927   62,854   69,378   69,849 
FHLB stock   11,558  NA   11,558  NA 
Loans, netLevel 2  1,240,828   1,237,274   1,260,414   1,247,842 
Bank owned life insuranceLevel 3  40,042   40,042   39,274   39,274 
Accrued interest receivableLevel 2  4,532   4,532   4,092   4,092 
                  
Financial liabilities                 
DepositsLevel 2  (1,506,178)  (1,506,115)  (1,448,724)  (1,448,692)
Other borrowed fundsLevel 2  (72,118)  (71,946)  (84,173)  (84,051)
Long-term debtLevel 2  (41,238)  (36,562)  (41,238)  (36,112)
Accrued interest payableLevel 2  (545)  (545)  (282)  (282)
                  
Off-balance sheet credit-related items                 
Loan commitments   ---   ---   ---   --- 


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


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

-32-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.

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – PREMISES AND EQUIPMENT – NET

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

During the nine months ended September 30, 2017, the Company sold land parcels that had been held for several years as sites for future branch expansion.  One location was in northwest Grand Rapids (Walker) and was sold for $590,000, resulting in a net loss on sale of $70,000.  The other location was in southwest Grand Rapids (Metro Village) and was sold for $1.2 million, resulting in a net loss on sale of $176,000.  These losses are included in other noninterest income in the Consolidated Statements of Income for the three and nine month periods ended September 30, 2017.
NOTE 75 – DEPOSITS


Deposits are summarized as follows (dollars in thousands):
  
September 30,
2017
  
December 31,
2016
 
Noninterest-bearing demand $497,310  $501,478 
Interest bearing demand  351,742   340,715 
Savings and money market accounts  564,883   532,853 
Certificates of deposit  92,243   73,678 
  $1,506,178  $1,448,724 


  
June 30,
2021
  
December 31,
2020
 
Noninterest-bearing demand $956,961  $809,437 
Interest bearing demand  741,268   642,918 
Savings and money market accounts  805,297   742,685 
Certificates of deposit  96,550   103,547 
  $2,600,076  $2,298,587 

Time deposits that exceed the FDIC insurance limit of $250,000 were approximately $28.1$29.4 million at SeptemberJune 30, 20172021 and $17.4$28.8 million at December 31, 2016.2020.

-33--31-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 86 - OTHER BORROWED FUNDS


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


Federal Home Loan Bank Advances


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


Principal Terms
   
Advance
Amount
 
 
Range of Maturities
   
Weighted
Average
Interest Rate
  
Advance
Amount
 Range of Maturities 
Weighted
Average
Interest Rate
 
September 30, 2017     
June 30, 2021       
Single maturity fixed rate advances $70,000 February 2018 to April 2021  1.59% $30,000 
May 2023 to July 2024
  2.87%
Amortizable mortgage advances  2,118 March 2018 to July 2018  3.78%
Putable advances  30,000 
November 2024 to February 2030
  1.36%
 $72,118       $60,000      

Principal Terms
   
Advance
Amount
 
 
Range of Maturities
   
Weighted
Average
Interest Rate
  
Advance
Amount
 Range of Maturities 
Weighted
Average
Interest Rate
 
December 31, 2016     
December 31, 2020       
Single maturity fixed rate advances $80,000 February 2018 to April 2021  1.60% $40,000 
April 2021 to July 2024
  2.50%
Amortizable mortgage advances  4,173 March 2018 to July 2018  3.78%
Putable advances  30,000 
November 2024 to February 2030
  1.36%
 $84,173       $70,000      

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 $443.5$406.0 million and $425.0$427.9 million under a blanket lien arrangement at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.
-34-
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 8 - OTHER BORROWED FUNDS

Scheduled repayments of FHLB advances as of SeptemberJune 30, 20172021 were as follows (in thousands):


2017 $--- 
2018  52,118 
2019  10,000 
2020  --- 
2021  10,000 
Thereafter  --- 
  $72,118 
2021
 $0 
2022
  0 
2023
  10,000 
2024
  40,000 
2025
  0 
Thereafter  10,000 
  $60,000 


Federal Reserve Bank borrowings


The Company has a financing arrangement with the Federal Reserve Bank.  There were no0 borrowings outstanding at SeptemberJune 30, 20172021 and December 31, 2016,2020, and the Company had approximately $12.6$3.2 million and $18.1$12.9 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $15.1$3.6 million and $20.7$13.8 million at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.


-32-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 97 - EARNINGS PER COMMON SHARE




A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three and ninesix month periods ended SeptemberJune 30, 20172021 and 20162020 are as follows (dollars in thousands, except per share data):
  
Three Months
Ended
September 30,
2017
  
Three Months
Ended
September 30,
2016
  
Nine Months
Ended
September 30,
2017
  
Nine Months
Ended
September 30,
2016
 
Net income available to common shares $4,875  $4,604  $14,098  $11,844 
                 
Weighted average shares outstanding, including participating stock awards - Basic
  33,942,248   33,921,599   33,942,318   33,923,067 
                 
Dilutive potential common shares:                
Stock options  5,021   ---   6,101   --- 
Stock warrants  ---   ---   ---   --- 
Weighted average shares outstanding - Diluted
  33,947,269   33,921,599   33,948,419   33,923,067 
Basic earnings per common share $0.14  $0.14  $0.42  $0.35 
Diluted earnings per common share $0.14  $0.14  $0.42  $0.35 


Stock options for 100,896 shares of common stock for both the three and nine month periods ended September 30, 2016, were not considered in computing diluted earnings per share because they were antidilutive.
  
Three Months
Ended
June 30, 2021
  
Three Months
Ended
June 30, 2020
  
Six Months
Ended
June 30, 2021
  
Six Months
Ended
June 30, 2020
 
Net income available to common shares $7,818  $7,638  $15,596  $14,049 
Weighted average shares outstanding, including participating stock
   awards - Basic
  34,193,016   34,108,982   34,194,264   34,108,057 
Dilutive potential common shares:                
Stock options  0   0   0   0 
Weighted average shares outstanding - Diluted  34,193,016   34,108,982   34,194,264   34,108,057 
Basic earnings per common share $0.23  $0.22  $0.46  $0.41 
Diluted earnings per common share $0.23  $0.22  $0.46  $0.41 



There were no0 antidilutive shares of common stock in the three and ninesix month periods ended SeptemberJune 30, 2017.2021 and 2020.

-35--33-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 108 - FEDERAL INCOME TAXES




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


 
Three Months
Ended
September 30,
2017
  
Three Months
Ended
September 30,
2016
  
Nine Months
Ended
September 30,
2017
  
Nine Months
Ended
September 30,
2016
 
Current $2,261  $1,370  $4,004  $4,596 
Deferred  (104)  (20)  2,249   (167)
  $2,157  $1,350  $6,253  $4,429 


  
Three Months
Ended
June 30, 2021
  
Three Months
Ended
June 30, 2020
  
Six Months
Ended
June 30, 2021
  
Six Months
Ended
June 30, 2020
 
Current $1,456  $2,970  $3,749  $4,671 
Deferred  384   (1,211)  (144)  (1,483)
  $1,840  $1,759  $3,605  $3,188 



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


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


  
Three Months
Ended
June 30, 2021
  
Three Months
Ended
June 30, 2020
  
Six Months
Ended
June 30, 2021
  
Six Months
Ended
June 30, 2020
 
Statutory rate  21%  21%  21%  21%
Statutory rate applied to income before taxes $2,028  $1,974  $4,032  $3,620 
Deduct                
Tax-exempt interest income  (156)  (177)  (315)  (355)
Bank-owned life insurance  (53)  (48)  (111)  (99)
Other, net  21   10   (1)  22 
  $1,840  $1,759  $3,605  $3,188 



The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies.  No valuation allowance was necessary at September 30, 2017 or December 31, 2016.Management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income.
-36-

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

NOTE 10 - FEDERAL INCOME TAXES (Continued)


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

  
September 30,
2017
  
December 31,
2016
 
Deferred tax assets      
Allowance for loan losses $5,752  $5,937 
Nonaccrual loan interest  598   718 
Valuation allowance on other real estate owned  1,292   3,714 
Unrealized loss on securities available for sale  177   799 
Other  539   176 
Gross deferred tax assets  8,358   11,344 
Valuation allowance  ---   --- 
Total net deferred tax assets  8,358   11,344 
         
Deferred tax liabilities        
Depreciation  (1,608)  (1,705)
Prepaid expenses  (349)  (399)
Other  (409)  (377)
Gross deferred tax liabilities  (2,366)  (2,481)
Net deferred tax asset $5,992  $8,863 


  
June 30,
2021
  
December 31,
2020
 
Deferred tax assets      
Allowance for loan losses $3,529  $3,656 
Net deferred loan fees  1,033  $822 
Nonaccrual loan interest  83   120 
Valuation allowance on other real estate owned  5   41 
Other  501   499 
Gross deferred tax assets  5,151   5,138 
Valuation allowance  0   0 
Total net deferred tax assets  5,151   5,138 
Deferred tax liabilities        
Depreciation  (1,225)  (1,285)
Prepaid expenses  (170)  (170)
Unrealized gain on securities available for sale  (564)  (1,120)
Other  (433)  (504)
Gross deferred tax liabilities  (2,392)  (3,079)
Net deferred tax asset $2,759  $2,059 



There were no0 unrecognized tax benefits at SeptemberJune 30, 20172021 or December 31, 20162020 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2013.2016.


-34-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 119 – COMMITMENTS AND OFF BALANCE-SHEET RISK


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


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


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


 
September 30,
2017
  
December 31,
2016
  
June 30,
2021
  
December 31,
2020
 
Commitments to make loans $121,797  $90,293  $136,096  $88,022 
Letters of credit  12,117   13,823   12,295   11,751 
Unused lines of credit  495,151   437,435   677,472   596,298 


The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $14.2$3.3 million and $19.8 million$0 at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.

-37-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 $17.3 million and $21.0 million at June 30, 2021 and December 31, 2020, respectively.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

At SeptemberJune 30, 2017,2021, approximately 32.7%50.0% of the Bank’s commitments to make loans were at fixed rates, offered at current market rates.  The remainder of the commitments to make loans were at variable rates tied to prime or one month LIBOR and generally expire within 30 days.  The majority of the unused lines of credit were at variable rates tied to prime.


NOTE 1210 – CONTINGENCIES


The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. As of SeptemberJune 30, 2017,2021, there were no material pending legal proceedings to which the Company or any of its subsidiaries are a party or which any of its properties are the subject.

NOTE 1311 – SHAREHOLDERS'SHAREHOLDERS’ EQUITY


Regulatory Capital


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


The prompt corrective action regulations provide five5 categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.


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

-38--35-
 MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1311 – SHAREHOLDERS' EQUITY (Continued)


At SeptemberJune 30, 20172021 and December 31, 2016,2020, actual capital levels and minimum required levels were (dollars in thousands):


 Actual  
Minimum
Capital
Adequacy
  
Minimum Capital
Adequacy With
Capital Buffer
  
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
        
Minimum
Capital
  
Minimum Capital
Adequacy With
  
To Be Well
Capitalized Under
Prompt Corrective
 
 Amount Ratio  Amount Ratio  Amount Ratio  Amount Ratio  Actual  Adequacy  Capital Buffer  Action Regulations 
September 30, 2017
                    
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
June 30, 2021
                        
CET1 capital (to risk weighted assets)                                            
Consolidated $173,779 11.7% $66,837 4.5% $85,403 5.8%  N/A N/A  $246,097   17.1% $64,763   4.5% $100,743   7.0%  N/A   N/A 
Bank  207,805 14.0   66,831 4.5   85,395 5.8  $96,533 6.5%  238,363
   16.6   64,752   4.5   100,725   7.0  $93,531   6.5%
Tier 1 capital (to risk weighted assets)                                                        
Consolidated  213,779 14.4   89,116 6.0   107,682 7.3   N/A N/A   266,097
   18.5   86,351   6.0   122,331   8.5   N/A   N/A 
Bank  207,805 14.0   89,108 6.0   107,672 7.3   118,810 8.0   238,363
   16.6   86,336   6.0   122,310   8.5   115,115   8.0 
Total capital (to risk weighted assets)                                                        
Consolidated  230,213 15.5   118,821 8.0   137,387 9.3   N/A N/A   282,903   19.7   115,135   8.0   151,115   10.5   N/A   N/A 
Bank  224,239 15.1   118,810 8.0   137,374 9.3   148,513 10.0   255,169   17.7   115,115   8.0   151,088   10.5   143,894   10.0 
Tier 1 capital (to average assets)                                                        
Consolidated  213,779 12.0   71,008 4.0   N/A N/A   N/A N/A   266,097   9.5   112,276   4.0   N/A   N/A   N/A   N/A 
Bank  207,805 11.7   70,945 4.0   N/A N/A   88,682 5.0   238,363   8.5   112,244   4.0   N/A   N/A   140,305   5.0 
                                                        
December 31, 2016
                        
December 31, 2020
                                
CET1 capital (to risk weighted assets)                                                        
Consolidated $163,663 11.0% $66,743 4.5% $76,013 5.1%  N/A N/A  $235,629   15.8% $67,170   4.5% $104,487   7.0%  N/A   N/A 
Bank  197,972 13.4   66,737 4.5   76,006 5.1  $96,398 6.5%  248,829   16.7   67,161   4.5   104,473   7.0  $97,010   6.5%
Tier 1 capital (to risk weighted assets)                                                        
Consolidated  203,663 13.7   88,991 6.0   98,261 6.6   N/A N/A   255,629   17.1   89,561   6.0   126,877   8.5   N/A   N/A 
Bank  197,972 13.4   88,983 6.0   98,252 6.6   118,644 8.0   248,829   16.7   89,548   6.0   126,860   8.5   119,397   8.0 
Total capital (to risk weighted assets)                                                        
Consolidated  220,625 14.9   118,655 8.0   127,925 8.6   N/A N/A   273,037   18.3   119,414   8.0   156,731   10.5   N/A   N/A 
Bank  214,934 14.5   118,644 8.0   127,913 8.6   148,305 10.0   266,237   17.8   119,397   8.0   156,709   10.5   149,247   10.0 
Tier 1 capital (to average assets)                                                        
Consolidated  203,663 12.0   67,810 4.0   N/A N/A   N/A N/A   255,629   9.9   103,420   4.0   N/A   N/A   N/A   N/A 
Bank  197,972 11.7   67,742 4.0   N/A N/A   84,677 5.0   248,829   9.6   103,391   4.0   N/A   N/A   129,238
   5.0 


Approximately $40.0All $20.0 million of trust preferred securities outstanding at SeptemberJune 30, 20172021 and December 31, 2016, respectively,2020 qualified as Tier 1 capital. On July 7, 2021, the Company redeemed all of the outstanding trust preferred securities.  Refer to our 20162020 Form 10-K for more information on the trust preferred securities.


The Bank was categorized as "well capitalized"“well capitalized” at SeptemberJune 30, 20172021 and December 31, 2016.2020.

-39-
-36-
Index
Item2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

At SeptemberJune 30, 2017,2021, we had total assets of $1.80$2.94 billion, total loans of $1.26$1.24 billion, total deposits of $1.51$2.60 billion and shareholders' equity of $173.5$248.2 million.  DuringFor the third quarter of 2017,three months ended June 30, 2021, we recognized net income of $4.9$7.8 million compared to net income of $4.6 million in the third quarter of 2016.  For the nine months ended September 30, 2017, we recognized net income of $14.1 million compared to $11.8$7.6 million for the same period in 2016.2020.  For the six months ended June 30, 2021, we recognized net income of $15.6 million compared to $14.0 million for the same period in 2020.  The Bank was categorized as “well capitalized” under regulatory capital standards at SeptemberJune 30, 2017.2021.

We paid a dividend of $0.03$0.08 per share in each quarter of 2016.  We increased the dividend to $0.04 per sharein 2020 and in the first and second quarters of 20172021. 

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and $0.05 per shareReporting for Financial Institutions Working with Customers Affected by the Coronavirus.”  The guidance explained that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”).  The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs.  On December 27, 2020, another COVID-19 relief bill was signed that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated.  Through June 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  As of June 30, 2021, all of these modifications had expired and the loans returned to their contractual payment terms.

The CARES Act, as amended, included an allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”).  PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP.  These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part.  Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through December 31, 2020, the Bank had originated 1,738 PPP loans totaling $346.7 million in principal, with an average loan size of $200,000.  Fees totaling $10.0 million were generated from the SBA for these loans in the third quarteryear ended December 31, 2020.  These fees are deferred and amortized into interest income over the contractual period of 2017.24 months or 60 months, as applicable.  Upon SBA forgiveness, unamortized fees are then recognized into interest income.  Participation in the PPP had a significant impact on the Bank’s asset mix and net interest income in 2020 and will continue to impact both asset mix and net interest income until these loans are forgiven or paid off.  The initial PPP expired on August 8, 2020.  Through December 31, 2020, 765 PPP loans totaling $113.5 million had been forgiven by the SBA and a total of $5.4 million in PPP fees had been recognized by the Bank.


On December 27, 2020, another COVID-19 relief bill was signed that extended and modified several provisions of the PPP.  This included an additional allocation of $284 billion.  The SBA reactivated the PPP on January 11, 2021.  The Bank originated additional loans through the PPP, which expired on May 31, 2021.  In the six months ended June 30, 2021, the Bank had generated and received SBA approval on 1,000 PPP loans totaling $128.4 million and generated $5.6 million in related deferred PPP fees.  In the six months ended June 30, 2021, 833 PPP loans totaling $187.5 million had been forgiven by the SBA and a total of $4.4 million in PPP fees had been recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP originations.
RESULTS OF OPERATIONS

Summary: Net income for the three months ended SeptemberJune 30, 20172021 was $4.9$7.8 million, compared to net income of $4.6 million in the same period in 2016. Net income per common share on a diluted basis was $0.14 for the three months ended September 30, 2017 and $0.14 for the same period in 2016.  For the nine months ended September 30, 2017, net income was $14.1 million, compared to $11.8$7.6 million for the same period in 2016.2020.  Net income per share on a diluted basis for the ninethree months ended SeptemberJune 30, 20172021 was $0.42$0.23 compared to $0.35$0.22 for the same period in 2016.2020.  Net income for the six months ended June 30, 2021 was $15.6 million, compared to $14.0 million for the same period in 2020.  Net income per share on a diluted basis for the six months ended June 30, 2021 was $0.46 compared to $0.41 for the same period in 2020.

The increase in earnings in both the three and six months ended SeptemberJune 30, 20172021 compared to the same periodperiods in 20162020 was due primarily to increasedlower provision for loan losses more than offsetting the impact of lower levels of net interest income and reduced nonperforming asset expenses.income.  Net interest income increaseddecreased to $13.1$14.5 million in the three months ended SeptemberJune 30, 20172021 compared to $11.9$15.0 million in the same period in 2016.  Nonperforming asset expenses (including administration costs and losses) were a negative $77,000 for three2020.  Net interest income decreased to $28.9 million in the six months ended SeptemberJune 30, 20172021 compared to $325,000 for$30.4 million in the same periodsix months ended June 30, 2020.  These decreases in 2016,net interest income were primarily as a result of a decrease of $220,000attributable to the decreases in writedowns of other real estate owned.  short-term interest rates instituted by the Federal Reserve in March 2020.

-37-
The provision for loan losses was a negative $350,000$750,000 for the three months ended SeptemberJune 30, 2017,2021, compared to a negative $250,000$1.0 million for the same period in 2016.2020.  We again were in a net loan recovery position for the three months ended SeptemberJune 30, 2017,2021, with $214,000$104,000 in net loan recoveries, compared to $138,000$4.0 million in net loan recoveriescharge-offs in the same period in 2016.  Also, income tax expense was reduced by $512,000 in September 2016 due to tax credits and other adjustments that did not recur in 2017.

The increase in earnings for the nine month period ended September 30, 2017 compared to the same period of 2016, was due primarily to increased net interest income and reduced nonperforming asset expenses.  Net interest income increased to $38.4 million in the first nine months of 2017 compared to $35.2 million in the same period in 2016.  Nonperforming asset expenses (including administration costs and losses)2020.  We were a negative $140,000 for the first nine months of 2017 compared to $1.2 million for the first nine months of 2016, primarily as a result of a net gains on other real estate owned of $575,000 for the first nine months of 2017 compared to net losses of $409,000 for the same period in 2016.  The provision for loan losses was a negative $1.35 million for the first nine months of 2017, compared to a negative $1.1 million for the first nine months of 2016.  We again werealso in a net loan recovery position for the first ninesix months of 2017,ended June 30, 2021, with $822,000$148,000 in net loan recoveries compared to $866,000$3.0 million in net loan recoveriescharge-offs in the same period in 2016.  Each2020.  Both the three and six month periods ended June 30, 2020 were impacted by a $4.1 million charge-off taken in June 2020 related to a single loan relationship with a movie theater business where the underlying assets were sold through bankruptcy proceedings.  The provision for loan losses in the 2020 periods was also impacted by increases to qualitative environmental factors to address increased risk of these items is discussed more fully below.loss attributable to the COVID-19 pandemic.
 
-40-
Index
Net Interest Income:Net interest income totaled $13.1$14.5 million for the three months ended SeptemberJune 30, 2017 and $11.92021 compared to $15.0 million for the same period in 2016.  For the first nine months of 2017, net2020.  Net interest income was $38.4decreased to $28.9 million in the six months ended June 30, 2021 compared to $35.2$30.4 million in the six months ended June 30, 2020.

Net interest income for the second quarter of 2021 decreased $590,000 compared to the same period in 2016.2020.  Of this decrease, $2.0 million was from changes in the volume of average interest earning assets and interest bearing liabilities, partially offset by a $1.4 million increase from changes in rates earned or paid.  The largest changes occurred in interest income on commercial loans (excluding PPP loans) and in PPP loans which fluctuated significantly in the second quarter of 2021 compared to the same period in 2020.  The net change for commercial loans (excluding PPP loans) was $1.8 million with a decrease in interest income due to rate of $313,000 and a decrease in interest income of $1.5 million due to portfolio contraction.  PPP loans contributed an additional $1.4 million in net interest income in the second quarter of 2021 primarily due to higher PPP fee recognition.  Additionally, residential mortgage loan interest income decreased by $599,000 in the second quarter of 2021 compared to the same period in 2020.  Of the $599,000 decrease in interest income on residential mortgage loans, $484,000 was due to a decrease in average balances resulting from a high volume of originations of refinanced loans which are sold versus retained in portfolio. Rate reductions in the deposit portfolio served to partially offset the net negative effects of the changes noted above in interest income.


Net interest income was positively impacted infor the threesix months ended SeptemberJune 30, 2017 by an increase in average earning assets of $96.52021 decreased $1.4 million compared to the same period in 2016.  Our2020.  Of this decrease, $1.0 million was from changes in the volume of average yield oninterest earning assets forand interest bearing liabilities and $357,000 was from changes in rates earned or paid.  The largest changes occurred in interest income on commercial loans (excluding PPP loans) and in PPP loans which fluctuated significantly in the threefirst six months ended September 30, 2017 increased 18 basis pointsof 2021 compared to the same period in 20162020.  The net change for commercial loans (excluding PPP loans) was a $4.9 million decrease with a decrease in interest income due to rate of $1.8 million and a decrease in interest income of $3.1 million due to portfolio contraction.  PPP loans contributed an additional $4.0 million in net interest income in the first six months of 2021 due to higher average balances and higher levels of PPP fee recognition upon forgiveness.  Interest income from 3.39%federal funds sold and other short-term investments decreased by $188,000 in the first six months of 2021 compared to 3.57%.  Averagethe same period in 2020 due to the 150 basis points decrease in the federal funds rate in March 2020.  This caused a $1.7 million decrease in interest income; however, increases in average balances of federal funds sold and other short-term investments in the first six months of 2021 offset most of this by adding $1.5 million in interest income.  Of the $1.2 million decrease in interest income on residential mortgage loans, $1.0 million was due to a decrease in average balances resulting from a high volume of originations of refinanced loans which are sold versus retained in portfolio and $212,000 was due to lower loan rates. Rate reductions in the deposit portfolio served to partially offset the net negative effects of the changes noted above in interest income.
As the Company is in an asset-sensitive position, reductions in market interest rates have a negative impact on margin as the Company’s interest earning assets totaled $1.65 billion for three months ended September 30, 2017reprice faster than its interest-bearing liabilities. Much of our asset-sensitivity is due to commercial and consumer loans that have variable interest rates.  For both loan types we established floor rates several years ago.  These floors provide protection to net interest income when short-term interest rates decline.

The cost of funds decreased to 0.17% in the second quarter of 2021 compared to $1.56 billion0.40% in the second quarter of 2020. For the first six months of 2021, the cost of funds decreased to 0.18% compared to 0.53% for the same period in 2016. The net interest margin was 3.21% for the three months ended September 30, 2017 compared to 3.04% for the same period in 2016.  An increase of $42.4 million in average securities between periods and an increase of $36.4 million in average loans were the primary drivers of the increase.  Yield on commercial loans increased from 3.88% for three months ended September 30, 2016 to 4.11% for the same period in 2017.  Yield on residential mortgage loans decreased from 3.51% for the three months ended September 30, 2016 to 3.47% for the same period in 2017, while yields on consumer loans increased from 3.93% for the third quarter of 2016 to 4.32% for the third quarter of 2017.  The December 2016, March 2017 and June 2017 increases in the federal funds rate had a net positive impact on our net interest margin position as more loans repriced at the higher rate than our funding sources.

Average interest earning assets increased to $1.61 billion for the first nine months of 2017, compared to $1.54 billion for the first nine months of 2016.  Our average yield on earning assets increased 17 basis points for the first nine months of 2017 in comparison to the same period in 2016.  Our net interest margin was 3.24% for the first nine months of 2017 compared to 3.04% for the same period in 2016.  Net interest margin for the first nine months of 2017 benefitted from the December 2016, March 2017 and June 2017 increases in the federal funds rate.  The commercial loan yield in the first nine months of 2017 was also positively impacted by the complete payoff of a loan in the first quarter of 2017 that had been on nonaccrual, resulting in the realization of $267,000 in interest income that had been deferred.

The cost of funds increased to 0.53% and 0.50% in the three and nine month periods of 2017 from 0.45% and 0.47% in the same periods of 2016. Increases2020.  Decreases in the rates paid on our interest-bearing checking, savings and money market accounts in response to the December 2016, March 2017 and June 2017 federal funds rate increasesdecreases over the past year caused the slight increasedecrease in our cost of funds.

-41--38-
The following table shows an analysis of net interest margin for the three month periods ended SeptemberJune 30, 20172021 and 20162020 (dollars in thousands):


 For the three months ended September 30,  For the three months ended June 30, 
 2017  2016  2021  2020 
 
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
  
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
  
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
  
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
 
Assets
                               
Taxable securities $162,729  $741   1.83% $136,807  $584   1.71% $196,479 $792 1.61% $183,062 $954 2.06%
Tax-exempt securities (1)  104,387   574   3.51   87,918   451   3.31  139,771 760 2.80 132,037 864 3.37 
Commercial loans (2)  946,105   9,930   4.11   903,484   8,965   3.88  890,750 8,541 3.79 1,047,600 10,366 3.91 
PPP loans (3) 248,042 3,034 4.84 263,992 1,615 2.42 
Residential mortgage loans  219,532   1,905   3.47   219,170   1,928   3.51  135,329 1,164 3.43 190,750 1,763 3.70 
Consumer loans  88,933   969   4.32   95,551   945   3.93  55,449 564 4.08 71,498 744 4.18 
Federal Home Loan Bank stock  11,558   122   4.15   11,558   122   4.13  11,558 56 1.93 11,558 115 3.93 
Federal funds sold and other short-term investments  118,784   385   1.27   101,062   127   0.49   992,484  273  0.11  315,696  86  0.11 
Total interest earning assets (1)  1,652,028   14,626   3.57   1,555,550   13,122   3.39  2,669,862 15,184 2.29 2,216,193 16,507 3.00 
                        
Noninterest earning assets:                                     
Cash and due from banks  29,940           28,482          34,276     26,779     
Other  93,334           96,065           105,349      95,916     
Total assets $1,775,302          $1,680,097          $2,809,487     $2,338,888     
                        
Liabilities
                                     
Deposits:                                     
Interest bearing demand $352,661  $98   0.11% $313,624  $65   0.08% $658,842 $39 0.02% $507,431 $89 0.07%
Savings and money market accounts  551,917   454   0.33   522,697   239   0.19  819,030 62 0.03 699,143 215 0.12 
Time deposits  88,933   180   0.81   81,769   126   0.62  102,967 143 0.56 143,318 591 1.66 
Borrowings:                                     
Other borrowed funds  74,190   314   1.66   94,384   419   1.74  62,198 328 2.09 70,000 356 2.01 
Long-term debt  41,238   442   4.20   41,238   371   3.52   20,619  155  2.97  20,619  209  4.02 
Total interest bearing liabilities  1,108,939   1,488   0.53   1,053,712   1,220   0.45  1,663,656 727 0.17 1,440,511 1,460 0.40 
                        
Noninterest bearing liabilities:                                     
Noninterest bearing demand accounts  488,028           459,372          887,559     657,367     
Other noninterest bearing liabilities  6,348           6,817          13,756     14,723     
Shareholders' equity  171,987           160,196           244,516      226,287     
Total liabilities and shareholders' equity $1,775,302          $1,680,097          $2,809,487      $2,338,888      
                        
Net interest income     $13,138          $11,902        $14,457     $15,047   
Net interest spread (1)          3.04%          2.94%     2.12%     2.60%
Net interest margin (1)          3.21%          3.04%     2.19%     2.74%
Ratio of average interest earning assets to average interest bearing liabilities  148.97%          147.63%         160.48%     153.85%     

(1)Yields are presented on a tax equivalent basis using a 35%an assumed tax rate.rate of 21% at June 30, 2021 and 2020.
(2)Includes loan fees of $117,000$356,000 and $200,000$282,000 for the three months ended SeptemberJune 30, 20172021 and 2016.2020, respectively.  Includes average nonaccrual loans of approximately $558,000$463,000 and $270,000$5.7 million for the three months ended SeptemberJune 30, 20172021 and 2016.2020, respectively.  Excludes PPP loans.
(3)Includes loan fees of $2.4 million and $983,000 for the three months ended June 30, 2021 and 2020, respectively.

-42--39-
The following table shows an analysis of net interest margin for the ninesix month periods ended SeptemberJune 30, 20172021 and 20162020 (dollars in thousands):

 For the nine months ended September 30,  For the six months ended June 30, 
 2017  2016  2021  2020 
 
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
  
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
  
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
  
Average
Balance
  
Interest
Earned
or Paid
  
Average
Yield
or Cost
 
Assets
                               
Taxable securities $152,043  $2,025   1.78% $132,941  $1,700   1.70% $193,267 $1,579 1.63% $187,297 $2,015 2.15%
Tax-exempt securities (1)  106,481   1,658   3.29   85,682   1,324   3.29  131,949 1,518 2.97 130,004 1,746 3.46 
Commercial loans (2)  952,987   29,317   4.06   898,039   26,625   3.90  923,392 17,537 3.78 1,075,460 22,402 4.12 
PPP loans (3) 244,314 5,586 4.55 131,996 1,615 2.42 
Residential mortgage loans  217,223   5,649   3.47   217,185   5,730   3.51  142,972 2,486 3.48 198,266 3,671 3.71 
Consumer loans  91,141   2,834   4.16   96,975   2,873   3.96  57,279 1,161 4.09 73,846 1,651 4.49 
Federal Home Loan Bank stock  11,558   367   4.19   11,558   368   4.18  11,558 117 2.01 11,558 239 4.09 
Federal funds sold and other short-term investments  77,710   666   1.13   99,753   383   0.51   899,217  474  0.11  248,287  662  0.53 
Total interest earning assets (1)  1,609,143   42,516   3.58   1,542,133   39,003   3.41  2,603,948 30,458 2.37 2,056,714 34,001 3.33 
                        
Noninterest earning assets:                                     
Cash and due from banks  28,911           26,690          32,725     27,960     
Other  97,371           97,232           101,866      93,681     
Total assets $1,735,425          $1,666,055          $2,738,539     $2,178,355     
                        
Liabilities
                                     
Deposits:                                     
Interest bearing demand $333,148  $237   0.09% $324,554  $227   0.09% $642,842 $73 0.02% $471,170 $279 0.12%
Savings and money market accounts  552,903   1,094   0.27   515,041   708   0.19  808,370 123 0.03 675,089 928 0.27 
Time deposits  82,035   440   0.71   85,862   398   0.62  105,283 327 0.63 148,439 1,290 1.75 
Borrowings:                                     
Other borrowed funds  86,945   1,053   1.60   97,637   1,318   1.77  66,077 681 2.05 66,869 705 2.09 
Long-term debt  41,238   1,266   4.05   41,238   1,104   3.52   20,619  307  2.96  20,619  449  4.30 
Total interest bearing liabilities  1,096,269   4,090   0.50   1,064,332   3,755   0.47  1,643,191 1,511 0.18 1,382,186 3,651 0.53 
                        
Noninterest bearing liabilities:                                     
Noninterest bearing demand accounts  465,191           437,943          838,618     559,928     
Other noninterest bearing liabilities  5,756           6,734          13,951     12,828     
Shareholders' equity  168,209           157,046           242,779      223,413     
Total liabilities and shareholders' equity $1,735,425          $1,666,055          $2,738,539      $2,178,355      
                        
                        
Net interest income     $38,426          $35,248        $28,947     $30,350   
Net interest spread (1)          3.08%          2.94%     2.19%     2.80%
Net interest margin          3.24%          3.04%
Net interest margin (1)     2.25%     2.98%
Ratio of average interest earning assets to average interest bearing liabilities  146.78%          144.89%         158.47%     148.80%     

(1)Yields are presented on a tax equivalent basis using a 35%an assumed tax rate.rate of 21% at June 30, 2021 and 2020.
(2)Includes loan fees of $484,000$525,000 and $559,000$461,000 for the ninesix months ended SeptemberJune 30, 20172021 and 2016.2020, respectively. Includes average nonaccrual loans of approximately $511,000$496,000 and $407,000$4.1 million for the ninesix months ended SeptemberJune 30, 20172021 and 2016.2020, respectively. Excludes PPP loans.
(3)Includes loan fees of $4.4 million and $983,000 for the six months ended June 30, 2021 and 2020, respectively.

-43--40-
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 June 30,
2021 vs 2020
Increase (Decrease) Due to
  
For the six months ended June 30,
2021 vs 2020
Increase (Decrease) Due to
 
  Volume  Rate  Total  Volume  Rate  Total 
                   
Interest income                  
Taxable securities $383  $(545) $(162) $176  $(612) $(436)
Tax-exempt securities  359   (463)  (104)  100   (328)  (228)
Commercial loans, excluding PPP loans  (1,512)  (313)  (1,825)  (3,063)  (1,802)  (4,865)
Paycheck protection program loans  (647)  2,066   1,419   1,953   2,018   3,971 
Residential mortgage loans  (484)  (115)  (599)  (973)  (212)  (1,185)
Consumer loans  (164)  (16)  (180)  (352)  (138)  (490)
Federal Home Loan Bank stock  —   (59)  (59)  —   (122)  (122)
Federal funds sold and other short-term investments  185   2   187   1,472   (1,660)  (188)
Total interest income  (1,880)  557   (1,323)  (687)  (2,856)  (3,543)
Interest expense                        
Interest bearing demand $131  $(181) $(50) $216  $(422)  (206)
Savings and money market accounts  212   (365)  (153)  453   (1,258)  (805)
Time deposits  (134)  (314)  (448)  (300)  (663)  (963)
Other borrowed funds  (99)  71   (28)  (10)  (14)  (24)
Long-term debt  —   (54)  (54)  —   (142)  (142)
Total interest expense  110   (843)  (733)  359   (2,499)  (2,140)
Net interest income $(1,990) $1,400  $(590) $(1,046) $(357) $(1,403)
Provision for Loan Losses: The provision for loan losses for the three months ended SeptemberJune 30, 20172021 was a negative $350,000$750,000 compared to a negative $250,000$1.0 million for the same period in 2016.  The negative provisions for loan losses for each period were the result of continued stabilization of real estate values on problem credits, continued improvement in asset quality metrics and net loan recoveries of $214,000 in the three months ended September 30, 2017 and $138,000 in the same period in 2016.  At September 30, 2017, we had experienced net loan recoveries in each of the past eleven quarters.2020.  The provision for loan losses for the first nine monthshalf of 20172021 was a negative $1.35 million$750,000 compared to a negative $1.1$1.7 million for the same period in 2016.2020.  The provisions for loan losses for the 2020 periods were impacted by additional qualitative adjustments made to provide for estimated losses associated with the COVID-19 pandemic as well as a $4.1 million charge-off was taken in June 2020 related to a single loan relationship with a movie theater business for which the underlying assets were sold through bankruptcy proceedings, some of which was specifically reserved for previously.  No other loans of this industry type remain in our portfolio.  This was partially offset by continued strong asset quality metrics and loan portfolio contraction.  When excluding PPP loans, which are 100% guaranteed by the SBA, total loans decreased by $60.5 million in the three months ended June 30, 2021.  This was a significant factor in determining the provision for loan losses in the second quarter of 2021.  Net loan recoveries were $104,000 in the three months ended June 30, 2021 compared to net loan charge-offs of $4.0 million in the same period in 2020. 

Gross loan recoveries were $269,000$134,000 for the three months ended SeptemberJune 30, 20172021 and $184,000$149,000 for the same period in 2016.2020.  In the three months ended SeptemberJune 30, 2017,2021, we had $55,000$30,000 in gross loan charge-offs, compared to $46,000$4.2 million in the same period in 2016.2020.  For the ninesix months ended SeptemberJune 30, 2017,2021, we experienced gross loan recoveries of $1,043,000$228,000 compared to $1,024,000$1.2 million for the same period in 2016.  Loan2020.  Gross charge-offs were $221,000 for the ninesix months ended SeptemberJune 30, 20172021 were $80,000 compared to $158,000$4.2 million for the same period in 2016.  We continue to experience positive results from our collection efforts as evidenced by our net loan recoveries.  While we expect our collection efforts to produce further recoveries, they may not continue at the same level we have experienced the past several quarters.2020.

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

Noninterest Income: Noninterest income for the three and ninesix month periods ended SeptemberJune 30, 20172021 was $4.3$6.2 million and $13.0$12.7 million compared to $5.1$5.9 million and $14.2$10.8 million for the same periods in 2016.2020, respectively.   The components of noninterest income are shown in the table below (in thousands):


 
Three Months
Ended
September 30,
2017
  
Three Months
Ended
September 30,
2016
  
Nine Months
Ended
September 30,
2017
  
Nine Months
Ended
September 30,
2016
  
Three Months
Ended
June 30,
2021
  
Three Months
Ended
June 30,
2020
  
Six Months
Ended
June 30,
2021
  
Six Months
Ended
June 30,
2020
 
Service charges and fees on deposit accounts $1,172  $1,152  $3,342  $3,312  $1,065 $860 $2,057 $1,970 
Net gains on mortgage loans  369   1,175   1,273   2,235  1,311 1,849 3,326 2,499 
Trust fees  801   790   2,412   2,286  1,133 945 2,138 1,880 
Gain as sales of securities  ---   ---   3   99 
ATM and debit card fees  1,324   1,272   3,863   3,715  1,683 1,321 3,168 2,658 
Bank owned life insurance (“BOLI”) income  249   146   730   748  250 231 526 472 
Investment services fees  239   181   705   755  339 228 816 652 
Other income  146   359   681   1,069   388  420  676  682 
Total noninterest income $4,300  $5,075  $13,009  $14,219  $6,169 $5,854 $12,707 $10,813 


-41-
Net gains on mortgage loans were down $806,000$538,000 in the three months ended SeptemberJune 30, 20172021 and were up $827,000 in the six months ended June 30, 2021 compared to the same periodperiods in 20162020 as a result of an overallchanges in the volume of loans originated for sale.  In the past two years volumes have been high due to a lower levelinterest rate environment, spurring more refinancing of volume.fixed rate loans which we sell into the secondary market.  Mortgage loans originated for sale in the three months ended SeptemberJune 30, 20172021 were $11.4$39.2 million, compared to $38.2$50.1 million in the same period in 2016.  Mortgage loans2020.  For the first six months of 2021, mortgages originated for portfolio in three months ended September 30, 2017sale were $16.2$86.5 million, compared to $25.4$79.4 million infor the same period in 2016.  Mortgage loans originated for sale2020.
Investment services fees were up $111,000 in the three months ended June 30, 2021 and were up $164,000 in the six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, respectively. The increase for the first nine monthsthree and six month periods ended June 30, 2021 was largely due to the 2020 periods being significantly impacted by the COVID-19 shutdown of 2017 were $45.0 million, down from $76.1 million in the first nine months of 2016.economy.  ATM and debit card fees were also up in the three and ninesix months ended SeptemberJune 30, 20172021 as compared to the three and six months ended June 30, 2020, respectively, due to higherreduced volume of usage by our customers.  BOLI income in the first nine months of 2016 included $290,000 in net benefits from the distribution of a death claim on a covered former employee.  Trust fees were up in the first nine months of 2017 due to investment market value changes and growth in trust assets.  Other noninterest income for the three month period ended September 30, 2017 was reduced by a net loss of $176,000 on the sale of property in southwest Grand Rapids (Metro Village)customers during the quarter. This also impactedCOVID-19 shutdown of the nine month period ended September 30, 2017, along with a net loss of $70,000 on sale of property in northwest Grand Rapids (Walker)economy in the second quarter of 2017.2020.  These volumes and resulting income have returned to more normal levels in the 2021 periods.  Service charges on deposit accounts increased in the three and six months ended June 30, 2021 as compared to the same periods in 2020 as customers returned to more normal behaviors in 2021 after having curtailed spending in 2020 due to uncertainty related to the COVID-19 pandemic.  Additionally, customers’ account balances in 2020 were bolstered by economic impact payments, thereby resulting in fewer overdrafts.
 
-44-
Index
Noninterest Expense: Noninterest expense decreasedincreased by $1.2 million to $10.8$11.7 million for the three month period ended SeptemberJune 30, 2017, from $11.32021 as compared to the same period in 2020.  Noninterest expense increased by $977,000 to $23.2 million for the six months ended June 30, 2021 compared to $22.2 million for the same period in 2016.  Noninterest expense decreased to $32.4 million for the nine month period ended September 30, 2017 compared to $34.3 million for the same period in 2016.2020.  The components of noninterest expense are shown in the table below (in thousands):

 
Three Months
Ended
September 30,
2017
  
Three Months
Ended
September 30,
2016
  
Nine Months
Ended
September 30,
2017
  
Nine Months
Ended
September 30,
2016
  
Three Months
Ended
June 30,
2021
  
Three Months
Ended
June 30,
2020
  
Six Months
Ended
June 30,
2021
  
Six Months
Ended
June 30,
2020
 
Salaries and benefits $6,211  $6,166  $18,363  $18,521  $6,502 $5,766 $12,914 $12,457 
Occupancy of premises  922   901   2,939   2,784  994 949 2,031 1,958 
Furniture and equipment  797   772   2,278   2,476  978 882 1,915 1,737 
Legal and professional  199   153   621   500  274 247 496 538 
Marketing and promotion  226   275   678   825  175 239 350 477 
Data processing  655   741   2,068   2,089  855 787 1,762 1,547 
FDIC assessment  134   166   404   638  159 76 329 76 
Interchange and other card expense  333   334   970   927  388 327 746 674 
Bond and D&O insurance  119   132   353   395  111 104 222 209 
Net (gains) losses on repossessed and foreclosed properties  (190)  115   (575)  409 
Administration and disposition of problem assets  113   210   435   787 
Outside services  423   412   1,280   1,171  491 378 925 831 
Other noninterest expense  814   896   2,620   2,772   791  749  1,513  1,722 
Total noninterest expense $10,756  $11,273  $32,434  $34,294  $11,718 $10,504 $23,203 $22,226 


Most categories of noninterest expense were relatively flat or had reductionsunchanged compared to the three months ended SeptemberJune 30, 20162020 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased by $736,000 in the three months ended June 30, 2021 from same period in 2020. This increase is due partially to reversing actions taken to mitigate the effects of the COVID-19 pandemic in the second quarter of 2020 including personnel hiring and pay freezes, salary reductions for senior management, and halting of 401k matching contributions and bonus accruals.  In addition, we experienced lower cost deferrals from commercial loan production due to fewer PPP loans originated in 2021.  Also contributing to the increase was an increase in variable-based compensation due to higher mortgage origination volume. Salaries and benefits increased by $457,000 for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to the same combination of factors. The table below identifies the primary components of salaries and benefits (in thousands):
  
Three Months
Ended
June 30,
2021
  
Three Months
Ended
June 30,
2020
  
Six Months
Ended
June 30,
2021
  
Six Months
Ended
June 30,
2020
 
Salaries and other compensation  5,683   5,561   11,467   11,241 
Salary deferral from commercial loan originations  (269)  (529)  (621)  (670)
Bonus accrual  217   54   399   323 
Mortgage production - variable comp  381   334   715   518 
401k matching contributions  127   58   229   270 
Medical insurance costs  363   288   725   775 
Total salaries and benefits $6,502  $5,766  $12,914  $12,457 
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Occupancy expenses were up $45,000 in the three months ended SeptemberJune 30, 2017 from same period in 2016. This increase is largely due to a higher level of costs associated with employee benefits, particularly medical insurance, which was up $25,000 compared to the three months ended September 30, 2016.  Variable based compensation was down $83,000 compared to the three months ended September 30, 2016 and was down $210,000 for the first nine months of 2017 compared to the same period in 2016 due to lower mortgage production and brokerage volume.  We had 343 full-time equivalent employees at September 30, 2017 compared to 343 at September 30, 2016.

Occupancy expenses were up $21,000 in the third quarter of 20172021 and were up $155,000 for$73,000 in the first ninesix months of 2017ended June 30, 2021 compared to the same periods in 20162020 due to higher property taxes and maintenance costs incurred associated with certain branch facilities.  Furniture and equipment expenses were up $96,000 in the three months ended June 30, 2021 and were up $178,000 in the six months ended June 30, 2021 compared to the same periods in 2020 due to costs associated with equipment and service contracts primarily to improve information security.

Our FDIC assessment costs decreasedincreased by $32,000$83,000 in the third quarter of 2017three months ended June 30, 2021 compared to the same period in 2016 and by $234,000 for2020 due to utilization of assessment credits in the first ninethree months ended June 30, 2020. In January 2019, the FDIC notified us that the Bank would receive an assessment credit of 2017 due primarilyapproximately $438,000 to positive changes in ouroffset future assessment rates.   These costs have been trending down foras the past few years and we believe the rate has stabilized and future expense fluctuations will likely be dependent on changes in our asset size.

Costs associated with administration and dispositionFDIC Deposit Insurance Fund had exceeded its target ratio of problem assets have decreased significantly over the past several years.  These expenses include legal costs, repossessed and foreclosed property administration expense and losses on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. Losses on repossessed and foreclosed properties include both net gains and losses on the sale of properties and unrealized losses from value declines for outstanding properties.  We experienced decreases in almost every category1.35%.  Assessment credits totaling $266,000 were applied in the third quarterand fourth quarters of 20172019 and the remaining $172,000 credits were applied in the six months ended June 30, 2020.  As a result, FDIC assessment costs were up $253,000 in the first ninesix months of 20172021 compared to the same period in 2020.
Data processing costs were up $68,000 and $215,000 in the three and six month periods ended June 30, 2021, respectively, compared to the same periods in the prior year.2020 due to higher usage of electronic banking services and debit cards by our customers.

These costs are itemizedOutside services were up $113,000 and $94,000 in the following table (in thousands):three and six month periods ended June 30, 2021, respectively, compared to the same periods in 2020 due certain increased vendor costs including a business process review of our customer onboarding process.
 
  
Three Months
Ended
September 30,
2017
  
Three Months
Ended
September 30,
2016
  
Nine Months
Ended
September 30,
2017
  
Nine Months
Ended
September 30,
2016
 
Legal and professional – nonperforming assets $39  $28  $74  $127 
Repossessed and foreclosed property administration  74   182   361   660 
Net (gains) losses on repossessed and foreclosed properties  (190)  115   (575)  409 
Total $(77) $325  $(140) $1,196 
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As the level of problem loans and assets have declined, the costs associated with these nonperforming assets have decreased significantly over the past several years.  Other real estate owned decreased from $13.1 million at September 30, 2016 to $6.7 million at September 30, 2017.  During the second quarter of 2017, we sold our largest individual other real estate owned property (carry value of $3.4 million) for a net gain of $68,000.   This property was responsible for a significant portion of our nonperforming asset expense, including maintenance, property taxes and utility costs.

Net gains/losses on repossessed assets and foreclosed properties for the three month period ended September 30, 2017 decreased $305,000 from the same period in 2016.  For the first nine months of 2017, these expenses decreased $984,000 from the same period in 2016.  These decreases were primarily due to net gains on sales of other real estate properties in these periods.  In the three month period ended September 30, 2017, net gains totaled $190,000, compared to $105,000 for the same period in 2016.  In the first nine months of 2017, we recognized net gains totaling $660,000 on such sales, compared to $365,000 for the same period in 2016.

Federal Income Tax Expense:We recorded $2.2$1.8 million and $6.3$3.6 million in federal income tax expense for the three and ninesix month periods ended SeptemberJune 30, 20172021 compared to $1.4$1.8 million and $4.4$3.2 million respectively, in the same periods in 2016.  Our effective tax rate for the three and nine month periods ended September 30, 2017 was 30.67% and 30.73%, compared to 22.67% and 27.22%, respectively, for the same periods in 2016.  Federal income tax expense and related2020.  Our effective tax rates for the three and six month periods ended June 30, 2021 were lower19.05% and 18.78%, respectively, compared to 18.72% and 18.50% for the same periods in the 2016 periods due to tax credits and other adjustments recognized in our 2015 federal tax return which was filed in the third quarter of 2016.2020. 

FINANCIAL CONDITION

Total assets were $1.80$2.94 billion at SeptemberJune 30, 2017,2021, an increase of $62.0$299.1 million from $1.74 billion at December 31, 2016.2020. This change reflected increases of $70.1$436.6 million in cash and cash equivalents, and $29.7$3.1 million in securities available for sale, offset by decreases of $20.8 million in our loan portfolio, $7.5$42.4 million in securities held to maturity, and $6.0$10.0 in bank-owned life insurance, partially offset by a decrease of $191.0 million in other real estate owned.our loan portfolio including PPP loans. Total deposits increased by $57.5 million and other borrowed funds decreased by $12.1$301.5 million at SeptemberJune 30, 20172021 compared to December 31, 2016.2020.

Cash and Cash Equivalents:Our cash and cash equivalents, which include federal funds sold and short-term investments, were $159.9 million$1.22 billion at SeptemberJune 30, 20172021 compared to $89.8$783.7 million at December 31, 2016.2020.  The increase in these balances primarily related primarily to thean increase in our total deposits combined with a decrease in our total loans and increase in total deposits in the same period.loan portfolio.

Securities:Securities Debt securities available for sale were $214.2$240.0 million at SeptemberJune 30, 20172021 compared to $184.4$236.8 million at December 31, 2016.2020. The balance at SeptemberJune 30, 20172021 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio decreased from $69.4was $121.9 million at June 30, 2021 compared to $79.5 million at December 31, 2016 to $61.9 million at September 30, 2017.2020.  Our held to maturity portfolio is comprised of state, municipal and municipalprivately placed commercial bonds.

Portfolio Loans and Asset Quality: Total portfolio loans decreased by $20.8$191.0 million in the first ninesix months of 20172021 and were $1.26$1.24 billion at SeptemberJune 30, 20172021 compared to $1.28$1.43 billion at December 31, 2016.2020. During the first ninesix months of 2017,2021, our commercial portfolio decreased by $18.1$158.2 million.  We originated a total of 1,000 PPP loans totaling $128.4 million whilein the six months ended June 30, 2021 and received forgiveness proceeds in the amount of $187.8 million from the SBA in the same time period.  As a result, PPP loans decreased by $59.4 million during the first six months of 2021.  We expect a substantial portion of our remaining PPP borrowers will apply for and receive approval for loan forgiveness in the second half of 2021.  Excluding the PPP loans, our commercial loans decreased by $98.8 million in the first six months of 2021 as customers substituted PPP loans for drawing on their lines of credit.  Our consumer portfolio decreased by $6.9$7.4 million and our residential mortgage portfolio increaseddecreased by $4.2 million.

The volume of residential mortgage loans originated for sale in the first nine months of 2017 decreased $31.1 million compared to the same period in 2016 due to a higher interest rate environment. Residential mortgage loans originated for sale were $45.0$25.4 million in the first ninesix months of 2017 compared to $76.1 million in the first nine months of 2016.  Mortgage loans originated for portfolio in the first nine months of 2017 were $37.4 million, compared to $62.6 million in the first nine months of 2016.  2021.
Mortgage loans originated for portfolio are typically adjustable rate loans as well as fixed rate loans that conform to secondary market requirements and have a term of fifteen years or less.  Mortgage loans originated for portfolio in the first six months of 2021 increased $5.7 million compared to the same period in 2020, from $18.1 million in the first six months of 2020 to $23.8 million in the same period in 2021.
 
The volume of residential mortgage loans originated for sale in the first six months of 2021 increased $7.1 million compared to the same period in 2020. Residential mortgage loans originated for sale were $86.5 million in the first six months of 2021 compared to $79.4 million in the first six months of 2020.
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The following table shows our loan origination activity for loans to be held in portfolio loans during the first ninesix months of 20172021 and 2016,2020, broken out by loan type and also shows average originated loan size (dollars in thousands):

 Nine months ended September 30, 2017  Nine months ended September 30, 2016  Six months ended June 30, 2021  Six months ended June 30, 2020 
 
Portfolio
Originations
  
Percent of
Total
Originations
  
Average
Loan Size
  
Portfolio
Originations
  
Percent of
Total
Originations
  
Average
Loan Size
  
Portfolio
Originations
  
Percent of
Total
Originations
  
Average
Loan Size
  
Portfolio
Originations
  
Percent of
Total
Originations
  
Average
Loan Size
 
Commercial real estate:                               
Residential developed $7,227   3.1% $903  $5,227   2.1% $871  $6,187 2.0% 562 $2,561 0.5% 366 
Unsecured to residential developers  ---   ---   ---   ---   ---   ---  — — — 170 — 170 
Vacant and unimproved  2,149   0.9   269   552   ---   184  6,301 2.0 788 12,311 2.3 1,759 
Commercial development  125   ---   125   2,342   1.0   1,171  — — — — — — 
Residential improved  38,828   16.5   254   48,718   19.4   350  51,854 16.6 535 34,264 6.4 519 
Commercial improved  41,436   17.6   1,480   29,632   11.8   988  25,792 8.3 955 22,289 4.2 1,013 
Manufacturing and industrial  12,039   5.1   926   11,457   4.6   955   11,565  3.7 964  5,515  1.0 306 
Total commercial real estate  101,804   43.2   482   97,928   38.9   510  101,699 32.5 656 77,110 14.4 637 
Commercial and industrial  60,269   25.6   685   58,432   23.2   526 
Total commercial  162,073   68.8   542   156,360   62.1   516 
                        
Commercial and industrial, excluding PPP 30,203 9.7 408 79,218 14.8 825 
PPP loans  128,420  41.1 128  343,711  64.1 209 
Total commercial and commercial real estate 260,322 83.3 211 500,039 93.3 269 
Consumer                                     
Residential mortgage  37,439   15.9   234   62,616   24.9   204  23,844 7.6 346 18,097 3.4 355 
Unsecured  ---   ---   ---   20   ---   10  — — — — — — 
Home equity  34,070   14.5   85   31,006   12.3   84  27,353 8.8 120 17,274 3.2 101 
Other secured  1,850   0.8   16   1,808   0.7   17   1,024  0.3 26  544  0.1 15 
Total consumer  73,359   31.2   108   95,450   37.9   121   52,221  16.7 155  35,915  6.7 139 
Total loans $235,432   100.0%  240  $251,810   100.0%  231  $312,543  100.0% 199 $535,954  100.0% 253 


The following table shows a breakout of our commercial loan activity during the first ninesix months of 20172021 and 20162020 (dollars in thousands):

  Nine Months
Ended
September 30,
2017
   Nine Months
Ended
September 30,
2016
  
Six Months
Ended
June 30,
2021
  
Six Months
Ended
June 30,
2020
 
Commercial loans originated $162,073  $156,360  $260,322 $500,039 
Repayments of commercial loans  (125,828)  (115,858) (345,088) (206,256)
Change in undistributed - available credit  (54,368)  (3,302)  (73,418)  (81,096)
Net increase/(decrease) in total commercial loans $(18,123) $37,200 
Net increase (decrease) in total commercial loans $(158,184) $212,687 

Overall, the commercial loan portfolio decreased $18.1$158.2 million in the first ninesix months of 2017.2021.  Our commercial and industrial portfolio decreased by $30.5$135.9 million andwhile our commercial real estate loans increaseddecreased by $12.4$22.3 million.  However, ourAs discussed above, included in the commercial production for the first six months of 2021 is $128.4 million in PPP loans.  Our overall production of commercial loans increaseddecreased by $5.7$239.7 million from $156.4$500.0 million in the first ninesix months of 2016 compared2020 to $162.1$260.2 million in the same period of 2017.2021 mostly due to the significantly lower production of PPP loans (down $215.3 million).  Beyond the effect of the PPP loan production, our commercial and industrial portfolio is subject to seasonal fluctuations and we typically experience large paydowns in certain commercial loan categories in the second quarter each year, particularly nursery and floriculture production, and loans to automobile, recreational vehicle and boat dealers. Excluding the PPP loan activity, the commercial loan categories with the largest balance fluctuations in the first six months of 2021 were: agricultural products (down $29.1 million), finance and insurance (down $11.1 million), manufacturing (down $20.0 million), retail trade (down $24.4 million) and real estate and rental/leasing (down $10.2 million).  Retail trade includes floor plan loan lines to vehicle dealers.  The decreasedecline in ending portfolio balanceborrowings in this sector was primarily the result of our dealers selling through their inventory but not being able to receive new inventory due to supply shortages from December 31, 2016 to September 30, 2017 was due primarily to changes in undistributed balances/available credit.  Considering our pipelinethe COVID-19 shutdown of commercial credits at September 30, 2017, we expect to achieve measured, high quality loan portfolio growth throughout the remainder of 2017.economy.

Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 75.3%85.6% and 75.5%85.2% of the total loan portfolio at SeptemberJune 30, 20172021 and December 31, 2016.2020, respectively. Residential mortgage and consumer loans comprised approximately 24.7%14.4% and 24.5%14.8% of total loans at SeptemberJune 30, 20172021 and December 31, 2016.2020, respectively.

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

  September 30, 2017  December 31, 2016  June 30, 2021  December 31, 2020 
Balance  
Percent of
Total Loans
  Balance  
Percent of
Total Loans
  Balance  
Percent of
Total Loans
  Balance  
Percent of
Total Loans
 
Commercial real estate: (1)                     
Residential developed $9,077   0.7% $11,970   0.9% $7,279 0.6% $8,549 0.6%
Unsecured to residential developers  2,410   0.2   4,734   0.4  60 — — — 
Vacant and unimproved  38,677   3.1   40,286   3.1  36,797 3.0 47,122 3.3 
Commercial development  486   ---   378   ---  673 — 857 — 
Residential improved  83,441   6.6   75,348   5.9  98,217 7.9 114,392 8.0 
Commercial improved  295,924   23.5   289,478   22.6  273,229 22.1 266,006 18.6 
Manufacturing and industrial  100,347   8.0   95,787   7.5   113,644  9.2  115,247  8.1 
Total commercial real estate  530,362   42.1   517,981   40.4  529,899 42.8 552,173 38.6 
Commercial and industrial  418,838   33.2   449,342   35.1 
Total commercial  949,200   75.3   967,323   75.5 
                
Commercial and industrial, excluding PPP 359,821 29.1 436,331 30.6 
PPP loans  169,679  13.7  229,079  16.0 
Total commercial and commercial real estate 1,059,399 85.6 1,217,583 85.2 
Consumer                         
Residential mortgage  221,829   17.6   217,614   17.0  124,156 10.0 149,556 10.5 
Unsecured  254   ---   396   ---  129 — 161 — 
Home equity  82,296   6.6   88,113   6.9  50,826 4.1 57,975 4.0 
Other secured  6,458   0.5   7,366   0.6   3,817  0.3  4,056  0.3 
Total consumer  310,837   24.7   313,489   24.5   178,928  14.4  211,748  14.8 
Total loans $1,260,037   100.0% $1,280,812   100.0% $1,238,327  100.0% $1,429,331  100.0%


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

Commercial real estate loans accounted for 42.1%42.8% and 40.4%38.6% of the total loan portfolio at SeptemberJune 30, 20172021 and December 31, 20162020, respectively, and consisted primarily of loans to business owners and developers of owner and non-owner occupied commercial properties and loans to developers of single and multi-family residential properties. In the table above, we show our commercial real estate portfolio by loans secured by residential and commercial real estate, and by stage of development. Improved loans are generally secured by properties that are under construction or completed and placed in use. Development loans are secured by properties that are in the process of development or fully developed. Vacant and unimproved loans are secured by raw land for which development has not yet begun and agricultural land.

Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised 17.6%10.0% of portfolio loans at SeptemberJune 30, 20172021 and 17.0%10.5% at December 31, 2016.2020.  We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan-to-value loans) in an effort to continue to diversify our credit risk and deploy our excess liquidity. A large portion of our residential mortgage loan production continues to be sold on the secondary market with servicing released.

The volume of residential mortgage loans originated for sale during the first ninesix months of 2017 decreased2021 increased from the first ninesix months of 20162020 as a result of interest rate conditions.  We are also experiencing a shiftThe continued low market interest rates that began in production to financing new home purchases versus refinancings.early 2020 has caused an increase in refinancing of fixed rate mortgages which we sell into the secondary market.

Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. Consumer loansThis portfolio decreased by $6.9$7.4 million to $89.0$54.8 million at SeptemberJune 30, 20172021 from $95.9$62.2 million at December 31, 2016,2020, due primarily to a decrease in home equity loans.  ConsumerThese other consumer loans comprised 7.1%4.4% of our portfolio loans at SeptemberJune 30, 20172021 and 7.5%4.3% at December 31, 2016.2020.
 
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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 SeptemberJune 30, 2017,2021, nonperforming assets totaled $7.2$2.8 million compared to $12.6$3.1 million at December 31, 2016. Additions2020. There were no additions to other real estate owned in the first ninesix months of 2017 were $60,000, compared to $102,0002021 or in the first ninesix months of 2016.2020.  At SeptemberJune 30, 2017,2021, there was just one loanwere no loans in redemption,foreclosure, so we expect there to be few additions to other real estate owned in 2017.the remainder of 2021.  Proceeds from sales of foreclosed properties were $6.2 million$170,000 in the first ninesix months of 2017,2021, resulting in net realized gainsgain on sales of $660,000.  We sold our largest individual foreclosed property in the second quarter of 2017.$20,000.  Proceeds from sales of foreclosed properties were $4.2 million$92,000 in the first ninesix months of 20162020 resulting in net realized gainsgain on sales of $365,000.    Based upon purchase agreements in place at September 30, 2017 and the sale of our largest individual property in the second quarter of 2017, we expect the level of sales of foreclosed properties to be lower in the final quarter of 2017 than experienced in the first nine months of 2017.$0.   

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing.  Nonperforming loans at June 30, 2021 consisted of $341,000 of commercial real estate loans and $92,000 of consumer and residential mortgage loans.  As of SeptemberJune 30, 2017,2021, nonperforming loans were negligible and totaled $521,000,$433,000, or 0.04%0.03% of total portfolio loans, compared to $300,000,$533,000, or 0.02%0.04% of total portfolio loans, at December 31, 2016.2020.


Nonperforming loans at September 30, 2017 consisted of $440,000 of commercial real estate loans, $4,000 of commercial and industrial loans, and $77,000 of consumer and residential mortgage loans.
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Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $6.7$2.3 million at SeptemberJune 30, 20172021 and $12.3$2.5 million at December 31, 2016. Of this2020. The entire balance at SeptemberJune 30, 2017, there were 212021 was comprised of one commercial real estate properties totaling approximately $6.6 million. The remaining balance was comprised of 4 residential properties totaling approximately $109,000.property. All properties acquired through or in lieu of foreclosure are initially transferred at their fair value less estimated costs to sell and then evaluated monthly for impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least annually on all foreclosed assets.

At September 30, 2017, our foreclosed asset portfolio had a weighted average age held in portfolio of 5.84 years. Below is a breakout of our foreclosed asset portfolio at September 30, 2017 and December 31, 2016 by property type and the percentages the property has been written down since taken into our possession and the combined writedown percentage, including losses taken when the property was loan collateral (dollars in thousands):
  September 30, 2017  December 31, 2016 
Foreclosed Asset Property Type
 
Carrying
Value
  
Foreclosed
Asset
Writedown
  
Combined
Writedown
(Loan and
Foreclosed
Asset)
  
Carrying
Value at
Carrying
Value
  
Foreclosed
Asset
Writedown
  
Combined
Writedown
(Loan and
Foreclosed
Asset)
 
Single Family $---   ---%  ---% $136   ---%  20.3%
Residential Lot  109   46.9   73.1   438   30.1   48.0 
Multi-Family  ---   ---   ---   ---   ---   --- 
Vacant Land  2,246   46.8   53.6   3,096   47.2   58.3 
Residential Development  2,218   29.5   71.3   2,570   36.2   74.2 
Commercial Office  ---   ---   ---   240   49.3   51.1 
Commercial Industrial  ---   ---   ---   ---   ---   --- 
Commercial Improved  2,088   9.3   28.8   5,773   48.7   51.2 
  $6,661   32.5   58.1  $12,253   45.2   60.1 
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The following table shows the composition and amount of our nonperforming assets (dollars in thousands):

 
September 30,
2017
  
December 31,
2016
  
June 30,
2021
  
December 31,
2020
 
Nonaccrual loans $521  $300  $433 $533 
Loans 90 days or more delinquent and still accruing  ---   ---   —  — 
Total nonperforming loans (NPLs)  521   300  433 533 
Foreclosed assets  6,661   12,253  2,343 2,537 
Repossessed assets  ---   ---   —  — 
Total nonperforming assets (NPAs) $7,182  $12,553  $2,776 $3,070 
        
NPLs to total loans  0.04%  0.02% 0.03% 0.04%
NPAs to total assets  0.40%  0.72% 0.09% 0.12%


The following table shows the composition and amount of our troubled debt restructurings (TDRs) at SeptemberJune 30, 20172021 and December 31, 20162020 (dollars in thousands):

 September 30, 2017  December 31, 2016  June 30, 2021  December 31, 2020 
 Commercial  Consumer  Total  Commercial  Consumer  Total  Commercial  Consumer  Total  Commercial  Consumer  Total 
Performing TDRs $12,974  $8,609  $21,583  $17,786  $12,051  $29,837  $1,638 $3,544 $5,182 $4,959 $4,049 $9,008 
Nonperforming TDRs (1)  322   55   377   141   8   149   341  —  341  437  —  437 
Total TDRs $13,296  $8,664  $21,960  $17,927  $12,059  $29,986  $1,979 $3,544 $5,523 $5,396 $4,049 $9,445 

(1)Included in nonperforming asset table above

We had a total of $22.0$5.5 million and $30.0$9.4 million of loans whose terms have been modified in TDRs as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and thatwhether cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.  In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be removed.  Total TDRs decreased by $8.0$3.9 million from December 31, 20162020 to SeptemberJune 30, 2017.  Of this decrease, $2.4 million related to a consumer property that was sold during the period and the remainder of the decrease was primarily2021 due to payoffs and paydowns on commercial TDRs.existing TDRs exceeding new additions.  There were 62 loans identified as TDRs at June 30, 2021 compared to 76 loans at December 31, 2020.

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


On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”.  This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19.  The guidance goes on to explain that in consultation with the FASB staff that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not Troubled Debt Restructurings (“TDRs”).  The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs.  The Economic Aid Act passed by Congress on December 27, 2020 extended the date for such modifications to not be treated as TDRs to the earlier of 60 days after date on which the national emergency declared as a result of COVID-19 is terminated or January 1, 2022.  Through June 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  The majority of these modifications involved three-month extensions. By June 30, 2021, all of these modifications had expired and the loans returned to their contractual payment terms.

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Allowance for loan losses: The allowance for loan losses at SeptemberJune 30, 20172021 was $16.4$16.8 million, a decrease of $528,000$602,000 from $17.0 million at December 31, 2016.2020.  The balance of the allowance for loan losses represented 1.30%1.36% of total portfolio loans at SeptemberJune 30, 20172021 and 1.22% at December 31, 2020.  The ratios at June 30, 2021 and December 31, 2016.2020 are impacted by $169.7 million and $229.1 million of remaining PPP loans which are fully guaranteed and receive no allowance allocation.  The ratios excluding these loans were 1.57% and 1.45% at June 30, 2021 and December 31, 2020.  The allowance for loan losses to nonperforming loan coverage ratio decreasedincreased from 5654%3266.0% at December 31, 20162020 to 3154%3881.3% at SeptemberJune 30, 2017.2021.
 
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The table below shows the changes in thesecertain credit metrics over the past five quarters:quarters (dollars in thousands):

(Dollars in millions) 
Quarter Ended
September 30,
2017
  
Quarter Ended
June 30,
2017
  
Quarter Ended
March 31,
2017
  
Quarter Ended
December 31,
2016
  
Quarter Ended
September 30,
2016
 
Commercial loans $949.2  $949.8  $962.1  $967.3  $923.2 
 
Quarter Ended
June 30,
2021
  
Quarter Ended
March 31,
2021
  
Quarter Ended
December 31,
2020
  
Quarter Ended
September 30,
2020
  
Quarter Ended
June 30,
2020
 
Nonperforming loans  0.5   0.7   0.4   0.3   0.2  433 525 533 195 2,957 
Other real estate owned and repo assets  6.7   7.1   12.1   12.3   13.1  2,343 2,371 2,537 2,624 2,624 
Total nonperforming assets  7.2   7.8   12.5   12.6   13.3  2,776 2,896 3,070 2,819 5,881 
Net charge-offs (recoveries)  (0.2)  (0.4)  (0.2)  (1.2)  (0.1) (104) (44) (50) (203) 4,034 
Total delinquencies  0.8   0.8   0.9   1.4   0.3  126 217 581 524 3,330 


As discussed earlier,At June 30, 2021, we have had net loan recoveries in eachtwenty-four of the last elevenpast twenty-six quarters.  Our total delinquencies have continued to be negligiblewere $126,000 at June 30, 2021 and were $872,000 at September 30, 2017 and $1.4 million$581,000 at December 31, 2016.2020.  Our delinquency percentage at SeptemberJune 30, 20172021 was just 0.07%, well below the Bank’s peers.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 $528,000$602,000 in the first ninesix months of 2017.2021.  We recorded a negative provision for loan losses of $1.35 million($750,000) for the ninesix months ended SeptemberJune 30, 20172021 compared to a negative $1.1$1.7 million in provision expense for the same period of 2020.  Net loan recoveries were $148,000 for the six months ended June 30, 2021, compared to net loan charge-offs of $3.0 million for the same period of 2016.  Net loan recoveries were $822,000 for the nine months ended September 30, 2017, compared to net recoveries of $866,000 for the same period in 2016.2020. The ratio of net charge-offs (recoveries) to average loans was -0.09%-0.02% on an annualized basis for the first ninesix months of 2017, compared to -0.10%2021 and 0.41% for the first ninesix months of 2016.2020.

WeDespite the large charge-off taken in the second quarter of 2020, we are encouraged by the reduced level of gross charge-offs over recent quarters. We do, however, recognize that future charge-offs and resulting provisions for loan losses are expected to be impacted by the timing and extent of changes in the overall economy and the real estate markets. We believe we have seen some stabilization in economic conditions and real estate markets.  However, we expect it to take additional time for sustained improvement in the economy and real estate markets in order to further reduce our impaired loans.

Our allowance for loan losses is maintained at a level believed appropriate based upon our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance and related provision for loan losses relies on several key elements, which include specific allowances for loans considered impaired, general allowance for commercial loans not considered impaired based upon applying our loan rating system, and general allocations based on historical trends for homogeneous loan groups with similar risk characteristics.

Overall, impaired loans declined by $7.7$3.9 million to $22.0$6.7 million at SeptemberJune 30, 20172021 compared to $29.7$10.6 million at December 31, 2016.2020.  The specific allowance for impaired loans decreased $350,000$449,000 to $1.3 million$761,000 at SeptemberJune 30, 2017,2021, compared to $1.7$1.2 million at December 31, 2016.2020.  The specific allowance for impaired loans represented 6.1%11.4% of total impaired loans at SeptemberJune 30, 20172021 and 5.7%11.4% at December 31, 2016.  The overall balance of impaired loans remained elevated partially due to an accounting rule (ASU 2011-02) adopted in 2011 that requires us to identify classified loans that renew at existing contractual rates as TDRs if the contractual rate is less than market rates for similar loans at the time of renewal.2020. 

The general allowance allocated to commercial loans that were not considered to be impaired was based upon the internal risk grade of such loans.  We use a loan rating method based upon an eight point system.  Loans are stratified between real estate secured and non realnon-real estate secured.  The real estate secured portfolio is further stratified by the type of real estate.  Each stratified portfolio is assigned a loss allocation factor.  A higher numerical grade assigned to a loan category generally results in a greater allocation percentage.  Changes in risk grade of loans affect the amount of the allowance allocation.

The determination of our loss factors is based upon our actual loss history by loan grade and adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date.  We use a rolling 18 month actual net chargeoffcharge-off history as the base for our computation.  Over the past few years, the 18 month period computations have reflected sizeable decreases in net chargeoffcharge-off experience.  We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. Adjustments to the qualitative factors also involved consideration of different loss periods for the Bank, including 12, 24, 36, 48 and 60 month periods. We also considered the extended period of improvedstrong 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.  While significant stimulus and mitigation efforts were expected to soften the impact, we believed a downgrade to our economic qualitative factor was appropriate and we added 7 basis points to this qualitative factor at March 31, 2020. Additional allocations were provided in the second, third and fourth quarters of 2020.  In the first quarter of 2021, this factor was decreased by 2 basis points in recognition of improved economic conditions but additional allocations were made to other factors for a net increase of 8 basis points in the quarter.  In the second quarter 2021, we added 20 basis points to our consumer loan portfolio qualitative factors to address the risk that economic impact payments may be masking consumer delinquency and default.
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Certain industry sectors have been more negatively impacted by the economic effects of COVID-19 than others such as hospitality, restaurants and sporting events.  We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (27%), followed by Manufacturing (16%) and Retail Trade (10%).

The table below breaks down our commercial loan portfolio by industry type at June 30, 2021 and identifies the percentage of loans in each type that have a pass rating within our grading system (4 or better) and criticized rating (5 or worse) (dollars in thousands):
  June 30, 2021 
  Excluding PPP  PPP Loans  Total  
Percent of
Total Loans
  Percent Grade 4 or Better  Percent Grade 5 or Worse 
Industry:                  
Agricultural Products $36,700  $3,101  $39,801   3.76%  99.17%  0.83%
Mining and Oil Extraction  855   63   918   0.09%  100.00%  0.00%
Construction  72,304   22,483   94,787   8.95%  99.00%  1.00%
Manufacturing  127,524   39,103   166,627   15.73%  97.26%  2.74%
Wholesale Trade  47,116   2,324   49,440   4.67%  100.00%  0.00%
Retail Trade  94,706   6,414   101,120   9.55%  99.91%  0.09%
Transportation and Warehousing  45,250   9,793   55,043   5.20%  97.95%  2.05%
Information  748   779   1,527   0.14%  54.62%  45.38%
Finance and Insurance  34,765   576   35,341   3.34%  100.00%  0.00%
Real Estate and Rental and Leasing  280,502   2,094   282,596   26.68%  99.77%  0.23%
Professional, Scientific and Technical Services  7,238   9,874   17,112   1.62%  98.63%  1.37%
Management of Companies and Enterprises  2,600   —   2,600   0.25%  100.00%  0.00%
Administrative and Support Services  16,836   14,487   31,323   2.96%  99.66%  0.34%
Education Services  2,453   5,509   7,962   0.75%  98.88%  1.12%
Health Care and Social Assistance  51,072   25,859   76,931   7.26%  100.00%  0.00%
Arts, Entertainment and Recreation  7,130   3,121   10,251   0.97%  96.72%  3.28%
Accommodations and Food Services  37,060   14,985   52,045   4.91%  85.49%  14.51%
Other Services  24,861   9,114   33,975   3.21%  99.05%  0.95%
Total commercial loans $889,720  $169,679  $1,059,399   100.00%  98.39%  1.61%
Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was $12.0$13.5 million at SeptemberJune 30, 20172021 and $12.1$13.8 million at December 31, 2016.  This resulted in a general reserve percentage allocated at September 30, 2017 of 1.29% of commercial loans, an increase from 1.27% at December 31, 2016.2020.  The qualitative component of our allowance allocated to commercial loans was $12.0$13.4 million at SeptemberJune 30, 2017 (down2021, down $263,000 from $12.4$13.7 million at December 31, 2016).2020.
 
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Groups of homogeneous loans, such as residential real estate and open- and closed-end consumer loans, receive allowance allocations based on loan type.  A rolling 12 month (four quarter) historical loss experience period was applied to residential mortgage and consumer loan portfolios.  As with commercial loans that are not considered impaired, the determination of the allowance allocation percentage is based principally on our historical loss experience.  These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans.  The homogeneous loan allowance was $3.0$2.6 million at SeptemberJune 30, 20172021 and $3.1$2.4 million at December 31, 2016.2020.

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

Premises and Equipment:   Premises and equipment totaled $46.8$42.9 million at SeptemberJune 30, 2017,2021, down $3.2 million$348,000 from $50.0$43.3 million at December 31, 2016.  During the second quarter of 2017 we sold a property in northwest Grand Rapids that had been held for future branch expansion for $590,000, recognizing a net loss on sale of $70,000.   During the third quarter of 2017, we sold a property in southwest Grand Rapids (Metro Village) that had been held for future branch expansion for $1.2 million, recognizing a net loss on sale of $176,000.2020.

Deposits and Other Borrowings: Total deposits increased $57.5$301.5 million to $1.51$2.60 billion at SeptemberJune 30, 2017,2021, as compared to $1.45$2.30 billion at December 31, 2016.2020.  Non-interest checking account balances decreased $4.1increased $147.5 million during the ninefirst six months of 2017.2021.  Interest bearing demand account balances increased $11.0$98.4 million and savings and money market account balances increased $32.0$62.6 million in the first ninesix months of 2017.2021 as municipal and business customers have held higher balances during the COVID-19 pandemic.  Certificates of deposits increaseddecreased by $18.6$7.0 million in the first ninesix months of 2017.2021 reflecting the continued low market interest rates.  We believe our success in maintaining the balances of personal and business checking and savings accounts was primarily attributable to our focus on quality customer service, the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our sophisticated product line.

Noninterest bearing demand accounts comprised 33%37% of total deposits at SeptemberJune 30, 20172021 and 35% of total deposits at December 31, 2016.2020.  These balances typically increase at year end for many of our commercial customers, then decline in the first quarter.  Becausehalf of the next year.  This didn’t happen in the first half of 2021 due to customers of all types holding higher balances during the COVID-19 pandemic.  In addition, because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types.  Interest bearing demand, including money market and savings accounts, comprised 61%59% of total deposits at SeptemberJune 30, 20172021 and 60% at December 31, 2016.2020. Time accounts as a percentage of total deposits were 6%4% at SeptemberJune 30, 20172021 and 5% December 31, 2016.2020.


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Borrowed funds totaled $113.4$80.6 million at SeptemberJune 30, 2017,2021, including $72.1$60.0 million of Federal Home Loan Bank (“FHLB”) advances and $41.2$20.6 million in long-term debt associated with trust preferred securities.  Borrowed funds totaled $125.4$90.6 million at December 31, 2016,2020, including $84.2$70.0 million of FHLB advances and $41.2$20.6 million in long-term debt associated with trust preferred securities.  Borrowed funds decreased by $12.1 million inOn July 7, 2021, the first nine monthsCompany redeemed all of 2017 primarily due to an early payoff of $10.0 million of an FHLB advance in July 2017.the long-term debt associated with trust preferred securities.
 
CAPITAL RESOURCES

Total shareholders' equity of $173.5$248.2 million at SeptemberJune 30, 20172021 increased $11.2$8.4 million from $162.2$239.8 million at December 31, 2016.2020. The increase was primarily a result of net income of $14.1$15.6 million earned in the first ninesix months of 2017 and an increase2021, partially offset by a decrease of $1.2$2.1 million in accumulated other comprehensive income partially offset by theand a payment of $4.4$5.4 million in cash dividends to shareholders.  The Bank was categorized as “well capitalized” at SeptemberJune 30, 2017.2021.

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

Macatawa Bank Corporation
  Sept 30,
2017
    June 30,
2017
    March 31,
2017
    Dec 31,
2016
    Sept 30,
2016
  
June 30,
2021
  
March 31,
2021
  
Dec 31,
2020
  
Sept 30,
2020
  
June 30,
2020
 
Total capital to risk weighted assets  15.5%  15.5%  15.1%  14.9%  15.2% 19.7% 19.3% 18.3% 17.7% 17.3%
Common Equity Tier 1 to risk weighted assets  11.7   11.6   11.3   11.0   11.3  17.1 16.7 15.8 15.3 14.9 
Tier 1 capital to risk weighted assets  14.4   14.3   14.0   13.7   14.1  18.5 18.1 17.1 16.6 16.3 
Tier 1 capital to average assets  12.0   12.2   12.1   12.0   12.0  9.5 9.8 9.9 9.8 10.5 

Approximately $40.0All $20.0 million of trust preferred securities outstanding at SeptemberJune 30, 20172021 qualified as Tier 1 capital.  On July 7, 2021, the Company redeemed all of the outstanding trust preferred securities.

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

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

We have actively pursued initiatives to maintain a strong liquidity position.  The Bank has reduced its reliance on non-core funding sources, including brokered deposits, and focused on achieving a non-core funding dependency ratio below its peer group average.  We have had no brokered deposits on our balance sheet since December 2011.  We continue to maintain significant on-balance sheet liquidity.  At SeptemberJune 30, 2017,2021, the Bank held $131.6 million$1.19 billion of federal funds sold and other short-term investments.  In addition, the Bank had available borrowing capacity from correspondent banks of approximately $304.1$278.3 million as of SeptemberJune 30, 2017.2021.

In the normal course of business, we enter into certain contractual obligations, including obligations which are considered in our overall liquidity management.  The table below summarizes our significant contractual obligations at SeptemberJune 30, 20172021 (dollars in thousands):

 
Less than
1 year
  1-3 years  3-5 years  
More than
5 years
  
Less than
1 year
  1-3 years  3-5 years  
More than
5 years
 
Long term debt $---  $---  $---  $41,238  $— $— $— $20,619 
Time deposit maturities  59,436   30,505   2,262   40  80,439 14,826 1,228 57 
Other borrowed funds  42,118   20,000   10,000   ---  — 20,000 30,000 10,000 
Operating lease obligations  243   422   ---   ---   343  377  193  — 
Total $101,797  $50,927  $12,262  $41,278  $80,782 $35,203 $31,421 $30,676 


In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan commitments and standby letters of credit.  The level and fluctuation of these commitments is also considered in our overall liquidity management.  At SeptemberJune 30, 2017,2021, we had a total of $495.2$677.5 million in unused lines of credit, $121.8$136.1 million in unfunded loan commitments and $12.1$12.3 million in standby letters of credit.
 
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Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises.  Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year.  Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings.  In 2016,2020, the Bank paid dividends to the Company totaling $6.2$11.7 million.  In the same period, the Company paid $10.9 million in dividends to its shareholders totaling $4.0 million.shareholders.  On February 27, 2017,24, 2021, the Bank paid a dividend totaling $1.8$3.7 million to the Company in anticipation of the common share cash dividend of $0.04$0.08 per share paid on February 28, 201725, 2021 to shareholders of record on February 13, 2017.10, 2021.  The cash distributed for this cash dividend payment totaled $1.4$2.7 million.  On May 30, 2017,26, 2021, the Bank paid a dividend totaling $1.9$3.2 million to the Company in anticipation of the common share cash dividend of $0.04$0.08 per share paid on May 30, 201727, 2021 to shareholders of record on May 15, 2017.12, 2021.  The cash distributed for this cash dividend payment totaled $1.4$2.7 million.  On August 29, 2017,July 6, 2021, the Bank paid a dividend totaling $2.0$20.0 million to the Company in anticipation of the common share cash dividendredemption of $0.05 per share paid on August 30, 2017 to shareholdersits trust preferred securities.  On July 7, 2021, the Company redeemed all of record on August 15, 2017.  The cash distributed for this cash dividend payment totaled $1.7 million.the outstanding trust preferred securities.  The Company retained the remaining balance in each period for general corporate purposes.  At SeptemberJune 30, 2017,2021, the Bank had a retained earnings balance of $46.6$75.5 million.
 
During 2016, the Company received payments from the Bank totaling $7.1 million, representing the Bank’s intercompany tax liability for the 2016 tax year, in accordance with the Company’s tax allocation agreement.  During the first nine months of 2017, the Company received payments from the Bank totaling $4.1 million, representing the Bank’s intercompany tax liability for the first nine months of 2017.
The Company has the right to defer interest payments for 20 consecutive quarters on its trust preferred securities if necessary for liquidity purposes.  During the deferral period, the Company may not declare or pay any dividends on its common stock or make any payment on any outstanding debt obligations that rank equally with or junior to the trust preferred securities.

The Company’s cash balance at SeptemberJune 30, 20172021 was $6.0$7.6 million.  The Company believes that it has sufficient liquidity to meet its cash flow obligations.


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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 ninesix months of 2017.2021.

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

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

Noninterest revenue is recognized in accordance with contractual requirements and as we fulfill our obligations under contractual terms.  Most of our noninterest revenue comes from services that are transaction based and such revenue is recognized as the related service is provided.
Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes.  At SeptemberJune 30, 2017,2021, we had gross deferred tax assets of $8.4$5.2 million and gross deferred tax liabilities of $2.4 million resulting in a net deferred tax asset of $6.0$2.8 million.  Accounting standards require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard.  Each reporting period we consider all reasonably available positive and negative evidence and determine whether it is “more likely than not” that we would be able to realize our deferred tax assets.  With the positive results in the first nine months of 2017, weWe concluded at SeptemberJune 30, 20172021 that no other valuation allowance on our net deferred tax asset was required.  Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.
 
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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.


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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 SeptemberJune 30, 20172021 (dollars in thousands):

Interest Rate Scenario
 
Economic
Value of
Equity
    
Percent
Change
   
Net Interest
Income
    
Percent
Change
  
Economic
Value of
Equity
  
Percent
Change
  
Net Interest
Income
  
Percent
Change
 
Interest rates up 200 basis points $222,340   (3.71)% $55,481   3.59% $328,246 8.30% $55,706 18.86%
Interest rates up 100 basis points  227,555   (1.46)  54,498   1.75  314,737 3.84 51,152 9.14 
No change  230,918   ---   53,559   ---  303,087 — 46,868 — 
Interest rates down 100 basis points  214,540   (7.09)  51,752   (3.37) 287,185 (5.25) 46,095 (1.65)
Interest rates down 200 basis points  206,841   (10.43)  50,249   (6.18) 287,228 (5.23) 46,076 (1.69)

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.

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

In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; and client preferences.
 
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Item 4:
CONTROLS AND PROCEDURES

(a)
Evaluation of Disclosure Controls and Procedures.Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) as of SeptemberJune 30, 2017,2021, the end of the period covered by this report.

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

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

(b)
Changes in Internal Controls. During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
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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 second quarter of 2021.  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      
April 1 - April 30, 2021      
Employee Transactions  —  $— 
May 1 - May 31, 2021        
Employee Transactions  —   — 
June 1 - June 30, 2021        
Employee Transactions  815  $8.92 
Total for Second Quarter ended June 30, 2021        
Employee Transactions  815  $8.92 

Item 6.
EXHIBITS.


3.1
Restated Articles of Incorporation. Previously filed with the Commission on April 28, 2011October 27, 2016 in Macatawa Bank Corporation’s Quarterly Report on Form 10-Q, Exhibit 3.1. Here incorporated by reference.
3.2
Bylaws. Previously filed with the Commission on February 19, 2015 in Macatawa Bank Corporation's Annual Report on Form 10-K for the year ended December 31, 2014, Exhibit 3.1.3.2. Here incorporated by reference.
4.1
Restated Articles of Incorporation. Exhibit 3.1 is here incorporated by reference.
4.2
Bylaws. Exhibit 3.2 is here incorporated by reference.
4.3Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the SEC upon request.
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.INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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SIGNATSIGNATURESURES

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


 MACATAWA BANK CORPORATION
  
 /s/ Ronald L. Haan
 Ronald L. Haan
 Chief Executive Officer
 (Principal Executive Officer)
  
 /s/ Jon W. Swets
 Jon W. Swets
 Senior Vice President and
 Chief Financial Officer
 (Principal Financial and Accounting Officer)
  
Dated: October 26, 2017July 22, 2021


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