UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2023

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

For the transition period from _______ to _______

Commission file number: 000-25927

MACATAWA BANK CORPORATION

(Exact name of registrant as specified in its charter)

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

10753 Macatawa Drive, Holland, Michigan 49424

(Address of principal executive offices) (Zip Code)

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

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

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

Indicate by ~~checkmark~~check mark 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):~~Act:

Large accelerated filer ☐

Accelerated filer ☒☐

Non-accelerated filer ☐☒

Smaller reporting company ☐☒

Emerging Growth Company ☐

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

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

The number of shares outstanding of each of the ~~issuer's~~issuer’s classes of common stock, as of the latest practicable date: ~~33,941,203~~34,292,294 shares of the ~~Company's~~Company’s Common Stock (no par value) were outstanding as of ~~October 26, 2017.~~April 27, 2023.

Forward-Looking Statements

This report contains forward-looking statements that are based on ~~management's~~management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “could”, “may”, “should”, “will”, “is likely”, or is “possible” or “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, those related to future levels of earning assets, ~~statements related to stabilization~~future composition of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, ~~including the impact of Basel III,~~ real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for loan losses and reserve recoveries, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future ~~FDIC assessment~~interest rate levels, future net interest margin levels, ~~building and improving our investment portfolio, diversifying our credit risk,~~ the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, ~~future balances of short-term investments, future~~ loan demand and loan growth, future ~~levels~~amounts of ~~mortgage banking revenue and~~unrecognized tax benefits, the future level of other revenue ~~sources. Management's~~sources and future amounts of unrealized gains or losses in our investment securities portfolio. Management’s determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Our ability to sell other real estate owned at its carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, maintain our current levels of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, respond to a changing interest rate environment, 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, interest rates 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.~~2022. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

~~Part I Financial Information~~

Part I

Financial Information

Item 1.

MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

As of ~~September 30, 2017~~March 31, 2023 (unaudited) and December 31, ~~2016~~2022

(Dollars in thousands, except per share data)

	March 31, 2023			December 31, 2022
ASSETS
Cash and due from banks	$	29,402		$	51,215
Federal funds sold and other short-term investments		391,336			703,955
Cash and cash equivalents		420,738			755,170
Debt securities available for sale, at fair value		525,959			499,257
Debt securities held to maturity (fair value 2023 - $335,559 and 2022 - $332,650)		348,387			348,765
Federal Home Loan Bank (FHLB) stock		10,211			10,211
Loans held for sale, at fair value		87			215
Total loans		1,220,939			1,177,748
Allowance for credit losses		(16,794	)		(15,285	)
Net loans		1,204,145			1,162,463
Premises and equipment – net		40,249			40,306
Accrued interest receivable		8,782			7,606
Bank-owned life insurance		53,557			53,345
Other real estate owned - net		—			2,343
Net deferred tax asset		8,471			9,712
Other assets		16,567			17,526
Total assets	$	2,637,153		$	2,906,919
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	690,444		$	834,879
Interest-bearing		1,640,451			1,780,263
Total deposits		2,330,895			2,615,142
Other borrowed funds		30,000			30,000
Accrued expenses and other liabilities		15,690			14,739
Total liabilities		2,376,585			2,659,881
Commitments and contingent liabilities		—			—
Shareholders’ equity
Common stock, no par value, 200,000,000 shares authorized; 34,292,294 and 34,298,640 shares issued and outstanding at March 31, 2023 and December 31, 2022		219,733			219,578
Retained earnings		67,092			59,036
Accumulated other comprehensive loss		(26,257	)		(31,576	)
Total shareholders’ equity		260,568			247,038
Total liabilities and shareholders’ equity	$	2,637,153		$	2,906,919

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-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three month periods ended March 31, 2023 and ~~Nine Month Periods Ended September 30, 2017 and 2016~~2022

(unaudited)

(Dollars in thousands, except per share data)

Three Months
Ended
September 30,

Three Months
Ended
September 30,

Nine Months
Ended
September 30,

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

	Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Interest income
Loans, including fees	$	15,660	$	10,397
Securities
Taxable		4,481		1,434
Tax-exempt		698		732
FHLB Stock		65		51
Federal funds sold and other short-term investments		6,362		529
Total interest income		27,266		13,143
Interest expense
Deposits		4,494		158
Other borrowings		156		320
Total interest expense		4,650		478
Net interest income		22,616		12,665
Provision for credit losses		—		(1,500	)
Net interest income after provision for credit losses		22,616		14,165
Noninterest income
Service charges and fees		994		1,211
Net gains on mortgage loans		11		308
Trust fees		1,033		1,088
ATM and debit card fees		1,662		1,599
Bank owned life insurance (“BOLI”) income		199		240
Other		629		519
Total noninterest income		4,528		4,965
Noninterest expense
Salaries and benefits		6,698		6,289
Occupancy of premises		1,137		1,172
Furniture and equipment		1,031		1,016
Legal and professional		348		194
Marketing and promotion		219		195
Data processing		955		884
FDIC assessment		330		180
Interchange and other card expense		384		373
Bond and D&O Insurance		122		130
Other		941		1,306
Total noninterest expenses		12,165		11,739
Income before income tax		14,979		7,391
Income tax expense		2,975		1,391
Net income	$	12,004	$	6,000
Basic earnings per common share	$	0.35	$	0.18
Diluted earnings per common share	$	0.35	$	0.18
Cash dividends per common share	$	0.08	$	0.08

See accompanying notes to consolidated financial statements.

-5-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three month periods ended March 31, 2023 and ~~Nine Month Periods Ended September 30, 2017 and 2016~~2022

(unaudited)

(Dollars in thousands)

	Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
Net income	$	12,004		$	6,000
Other comprehensive income (loss):
Unrealized gains (losses):
Net change in unrealized gains (losses) on debt securities available for sale		6,738			(15,119	)
Net unrealized gain at time of transfer on securities transferred to held-to-maturity		—			113
Amortization of net unrealized gains on securities transferred to held-to-maturity		(5	)		(6	)
Tax effect		(1,414	)		3,153
Net change in unrealized gains (losses) on debt securities available for sale, net of tax		5,319			(11,859	)
Less: reclassification adjustments:
Reclassification for gains included in net income		—			—
Tax effect		—			—
Reclassification for gains included in net income, net of tax		—			—
Other comprehensive income (loss), net of tax		5,319			(11,859	)
Comprehensive income (loss)	$	17,323		$	(5,859	)

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-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN ~~SHAREHOLDERS'~~SHAREHOLDERS’ EQUITY

~~Nine Month Periods Ended September 30, 2017~~Three month periods ended March 31, 2023 and ~~2016~~2022

(unaudited)

(Dollars in thousands, except per share data)

Common
Stock

Retained
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

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

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

	Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, January 1, 2022	$	219,082		$	35,220		$	(297	)	$	254,005
Net income for the three months ended March 31, 2022		—			6,000			—			6,000
Cash dividends at $0.08 per share		—			(2,728	)		—			(2,728	)
Repurchase of 1,338 shares for taxes withheld on vested restricted stock		(13	)		—			—			(13	)
Other comprehensive loss, net of tax		—			—			(11,859	)		(11,859	)
Stock compensation expense		197			—			—			197
Balance, March 31, 2022	$	219,266		$	38,492		$	(12,156	)	$	245,602

Balance, January 1, 2023	$	219,578		$	59,036		$	(31,576	)	$	247,038
Adoption of ASU 2016-13, net of tax		—			(1,215	)		—			(1,215	)
Net income for the three months ended March 31, 2023		—			12,004			—			12,004
Cash dividends at $0.08 per share		—			(2,733	)		—			(2,733	)
Repurchase of 1,338 shares for taxes withheld on vested restricted stock		(15	)		—			—			(15	)
Other comprehensive income, net of tax		—			—			5,319			5,319
Stock compensation expense		170			—			—			170
Balance, March 31, 2023	$	219,733		$	67,092		$	(26,257	)	$	260,568

See accompanying notes to consolidated financial statements.

-7-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~Nine Month Periods Ended September 30, 2017~~Three month periods ended March 31, 2023 and ~~2016~~2022

(unaudited)

(Dollars in thousands)

Nine Months
Ended
September 30,
2017

Nine Months
Ended
September 30,
2016

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

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

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

	Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
Cash flows from operating activities
Net income	$	12,004		$	6,000
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		160			737
Stock compensation expense		170			197
Provision for credit losses		—			(1,500	)
Origination of loans for sale		(179	)		(10,148	)
Proceeds from sales of loans originated for sale		318			11,008
Net gains on mortgage loans		(11	)		(308	)
Net gain on sales of other real estate		(356	)		—
Deferred income tax expense		150			456
Earnings in bank-owned life insurance		(199	)		(240	)
Change in accrued interest receivable and other assets		(217	)		504
Change in accrued expenses and other liabilities		889			(551	)
Net cash from operating activities		12,729			6,155
Cash flows from investing activities
Loan originations and payments, net		(43,158	)		7,318
Purchases of securities available for sale		(24,072	)		(72,557	)
Purchases of securities held to maturity		(3,966	)		(28,120	)
Proceeds from:
Maturities and calls of securities available for sale		1,626			5,187
Maturities and calls of securities held to maturity		1,126			31,238
Principal paydowns on securities available for sale		2,878			4,554
Principal paydowns on securities held to maturity		3,197			2,667
Sales of other real estate		2,699			—
Redemption of FHLB stock		—			1,347
Additions to premises and equipment		(496	)		(235	)
Net cash from investing activities		(60,166	)		(48,601	)
Cash flows from financing activities
Change in deposits		(284,247	)		4,339
Repayments and maturities of other borrowed funds		—			(25,000	)
Proceeds from other borrowed funds		—			25,000
Repurchase of shares for taxes withheld on vested restricted stock		(15	)		(13	)
Cash dividends paid		(2,733	)		(2,728	)
Net cash from financing activities		(286,995	)		1,598
Net change in cash and cash equivalents		(334,432	)		(40,848	)
Cash and cash equivalents at beginning of period		755,170			1,151,788
Cash and cash equivalents at end of period	$	420,738		$	1,110,940

See accompanying notes to consolidated financial statements.

-8-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

~~Nine Month Periods Ended September 30, 2017~~Three month periods ended March 31, 2023 and ~~2016~~2022

(unaudited)

(Dollars in thousands)

Nine Months
Ended
September 30,

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

	Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Supplemental cash flow information
Interest paid	$	4,307	$	481
Supplemental noncash disclosures:
Security settlement		—		5,747
Transfer of securities from available for sale to held to maturity		—		123,469

See accompanying notes to consolidated financial statements.

-9-

Index

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

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.~~Corporation (“FDIC”). 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~~

Recent Events: In early March 2023, over the course of the common stock of Macatawa Statutory Trust I and Macatawa Statutory Trust II. These are grantor trusts that issued trust preferred securities and are not consolidated with the Company under accounting principles generally acceptedfive days, three large financial institutions in the United States failed. Silvergate Bank self liquidated and Silicon Valley Bank and Signature Bank were both closed by the FDIC. These bank failures were driven by rapid withdrawals by depositors with large uninsured balances held at these institutions and losses incurred by these banks in liquidating their bond portfolios to provide liquidity to fund these deposit outflows. Silvergate Bank’s failure was also caused by its exposure to FTX and Alameda cryptocurrency firm failures. The FDIC determined that Silicon Valley Bank and Signature Bank were systemically important and fully guaranteed their depositor balances above the $250,000 FDIC insurance limit. Given the sharp increase in market interest rates during 2022 and into 2023, most financial institutions’ bond portfolios have significant unrealized loss positions. In response to this, the Federal Reserve Bank (“FRB”) created a new borrowing facility called the Bank Term Funding Program. This program allows a bank to borrow against its investment portfolio, at par value, with no reduction for unrealized losses. The term is for one year and interest rate is fixed at the time the advance is taken and there is no prepayment penalty. Allowable investments for pledge are those the FRB can own. This would include all of ~~America.~~the Company’s investment securities except municipal securities and corporate bonds. At March 31, 2023, the Company had no advances under this program and had $642.2 million in unused borrowing capacity under this program. The program expires on March 11, 2024.

At March 31, 2023, the Company had $391.3 million in federal funds sold and overnight balances and had borrowing capacity of $951 million, including $242.3 million in unused availability with the Federal Home Loan Bank (“FHLB”), $65.0 million in available fed funds facilities with correspondent banks, $1.5 million in availability at the FRB Discount Window and the $642.2 million in the FRB Bank Term Funding Program discussed above. At March 31, 2023, these liquidity sources exceeded the amount of the Company’s uninsured deposit balances.

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

Operating results for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2023. For further information, refer to the consolidated financial statements and related notes included in the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2022.

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

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

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

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

-10-

Index

~~Index~~

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)

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

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

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

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

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

~~Derivatives~~: Certain of our commercial loan customers have entered into interest rate swap agreements directly with the Bank. At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer. This is known as a back-to-back swap agreement. Under this arrangement the Bank has two freestanding interest rate swaps, both of which are carried at fair value. As the terms mirror each other, there is no income statement impact to the Bank. At September 30, 2017 and December 31, 2016, the total notional amount of such agreements was $42.7 million and $48.1 million and resulted in a derivative asset with a fair value of $351,000 and $494,000, respectively, which were included in other assets and a derivative liability of $351,000 and $494,000, respectively, which were included in other liabilities.

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

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

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

~~-11-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

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

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

FASB issued ASU No. 2016-13, as amended, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU, commonly referred to as Current Expected Credit Loss (“CECL”), 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,~~FASB also issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.

The Company adopted these standards as required on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for loans of $1.5 million and an increase of $62,000 to establish a reserve for unfunded commitments, with a $1.2 million decrease to retained earnings, with the $323,000 income tax portion being recorded as part of the deferred tax asset in the Company’s Consolidated Balance Sheet.

Allowance for Credit Losses (“ACL”) - Loans: The allowance for credit losses (allowance) is a valuation account that is deducted from the loan portfolios’ amortized cost basis to present the net amount expected to be collected on loans. The allowance is increased by the provision for credit losses and recoveries, and decreased by charge-offs of loans. Management believes the allowance 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, current and forecasted 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 uncollectability 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 is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogeneous segments, or pools, for allowance calculation. Commercial loans are divided into eight segments based primarily on property type and risk characteristics. They are further segmented based on commercial loan risk grade. Retail loans are segmented into categories including residential mortgage, home equity, unsecured and other secured and then further segmented based on delinquency status.

The Company’s loan portfolio classes as of March 31, 2023 were as follows:

Commercial Loans:

Commercial and Industrial - Risks to this category include industry concentration and limitations associated with monitoring the adequacy and condition of collateral which can include inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

Residential developed - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area, inadequate long-term financing arrangements and velocity of sales. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates as well as market demand and supply of similar property. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

-11-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Unsecured to residential developers - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

Vacant and unimproved - Risks to this category include industry concentration, valuation of farm land, agricultural properties and residential properties as well as velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Commercial development - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Residential improved - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Commercial improved - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates, cost overruns, changes in market demand for property or services and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Manufacturing and industrial - Risks to this category include industry concentration, valuation of commercial properties, changes in market demand for products produced and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Consumer Loans:

Residential mortgage - Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

Unsecured - Unsecured loans are susceptible to weakening general economic conditions and increases in unemployment rates.

Home equity - Home equity loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

Other secured - Other secured loans are susceptible to weakening general economic conditions and increases in unemployment rates, regulatory risks as well as the inability to monitor collateral consisting of personal property.

The remaining life methodology is used for all loan pools. This nondiscounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Given the bank’s limited loss history over the past twelve years, a loss rate computed for a comparable sized peer group (banks with assets between $1-3 billion) is then applied to future loan balances at the instrument level based on the remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast period and reversion periods.

-12-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reasonable and supportable economic forecasts have to be incorporated in determining expected losses. The forecast period represents the time frame from the current period end through the point in time that the Company can reasonably forecast. Ideally, the economic forecast period would cover the contractual terms of all loans; however, the ability to produce a forecast that is both reasonable and supportable becomes more difficult the longer the period is projected.

For periods beyond the forecast period, the loss rate reverts back to the long term historical loss average. As of January 1, 2023 and March 31, 2023, the Company used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion period for all loan segments. In determining the reasonable and supportable economic forecast period, the Company used a consensus economic forecast from a third-party provider that provided forecasts from twenty five leading economists. The Company considered the March 2023 report’s consensus/mean estimates for gross domestic product and unemployment rates and selected a loss period for the reasonable and supportable forecast period that most closely matched that consensus (December 2006 to September 2007). At adoption of CECL on January 1, 2023, the Company considered the December 2022 report for these same metrics and used a loss period from September 2007 to December 2007. The effect of changing the loss period from that used at January 1, 2023 to March 31, 2023 was a reduction in the historical loss rate used at March 31, 2023.

A number of qualitative factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising interest rates, external factors and other considerations. During each reporting period, management also considers the need to adjust the baseline lifetime loss rates for factors that may cause expected losses to differ from those experienced in the historical loss periods.

The Company is also required to consider expected credit losses associated with loan commitments over the contractual period in which it is exposed to credit risk on the underlying commitments. Any allowance for off-balance sheet credit exposures is reported as an other liability on the Company’s Consolidated Balance Sheet and is increased or decreased via other noninterest expense on the Company’s Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on ~~available-for-sale~~commitments expected to be funded over their estimated lives. The allowance is calculated using the same methodology, inputs and assumptions as the funded portion of loans at the segment level applied to the amount of commitments expected to be funded.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan using the level-yield method without anticipating prepayments. Accrued interest on loans totaled $3.8 million at March 31, 2023 and $4.0 million at December 31, 2022.

Accrued interest receivable for loans is included as a separate line item on the Company’s Consolidated Balance Sheet. The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse accrued interest income on loans that are placed on nonaccrual status. The Company believes this policy results in the timely reversal of uncollectible interest.

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Securities: Securities are classified as held to maturity (“HTM”) and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities available for sale (“AFS”) consist of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as AFS are reported at their fair value and the related unrealized gain or loss is reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level yield method without anticipating prepayments. Gains and losses on sales are based on the amortized cost of the security sold. Accrued interest receivable on securities totaled $4.5 million at March 31, 2023 and $3.4 million at December 31, 2022.

-13-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ACL - Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At March 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities ~~will now have~~AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses.

ACL - Securities Held to Maturity - Since the adoption of CECL, the Company measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be ~~presented as~~collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in the Company’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At March 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to securities HTM.

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

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

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

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

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

-14-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

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

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

Derivatives: Certain of the Bank’s commercial loan customers have entered into interest rate swap agreements directly with the Bank. At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer. This is known as a back-to-back swap agreement. Under this arrangement the Bank has two freestanding interest rate swaps, each of which is carried at fair value. As the terms mirror each other, there is no income statement impact to the Bank. At March 31,2023 and December 31, 2022, the total notional amount of such agreements was $115.1 million and $125.3 million, respectively, and resulted in a derivative asset with a fair value of $5.3 million and $6.5 million, respectively, which were included in other assets and a derivative liability of $5.3 million and $6.5 million, respectively, which were included in other liabilities.

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 fair value of interest rate lock commitments was $4,000 at March 31, 2023 and $0 at December 31, 2022. The net fair value of mortgage backed security derivatives was ($3,000) at March 31, 2023 and $0 at December 31, 2022.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. As of March 31, 2023 and December 31, 2022, these loans had net unrealized gains of $5,000 and $4,000, respectively, which are reflected in their carrying value. Changes in fair value of loans held for sale are included in net gains on mortgage loans. Loans are sold with servicing released; therefore no mortgage servicing right assets are established.

Newly Issued Not Yet Effective Standards: FASB issued ASU 2023-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This standard allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This election allows the entity to record writedown of investment to federal income tax expense where income tax credits are recorded. This also aligns the treatment of other tax equity investments with that allowed for low income housing tax credit investments. The standard is effective for the Company for fiscal years beginning after December 15, ~~2019, and for~~2023, including interim periods within ~~those~~these fiscal years. The Company ~~is currently evaluating~~already utilizes the ~~impact~~proportional amortization method for its investments in low income housing tax credit investments and as it has no other types of investments in tax credit structures, adoption of this ~~new ASU on its consolidated financial statements.~~standard will not have any immediate impact.

FASB issued ASU ~~No. 2016-15,~~ ~~Statement of Cash Flows~~2023-01, Leases (Topic ~~230)~~842): ~~Classification of Certain Cash Receipts and Cash Payments (a consensus of~~Common Control Arrangements. This standard requires entities to amortize leasehold improvements associated with common control leases over the ~~FASB Emerging Issues Task Force).~~ ~~This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in~~useful life to the statement of cash flows. In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds 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.common control group. The ~~amendments are~~standard is effective for ~~annual periods beginning after December 15, 2017, and for interim periods within those annual periods. The impact of adoption of this ASU by~~ the Company ~~is not expected to be material.~~

~~-12-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

~~FASB issued ASU 2017-12,~~ ~~Targeted Improvements to Accounting~~ for ~~Hedging Activities~~. This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Topic 815, ~~Derivatives and Hedging~~, through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. The ASU is effective forfiscal years beginning after December 15, ~~2018, and~~2023, including interim periods within ~~those~~these fiscal years. ~~The~~As the Company does not ~~expect the impact of~~have any such common control leases, adoption of this ~~ASU to be material.~~standard will not have any immediate impact.

~~-13-~~-15-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 2 – SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2017
Available for Sale:
March 31, 2023
Available for Sale
U.S. Treasury and federal agency securities	$	98,386	$	58	$	(709)	$	97,735	$	255,211	$	175	$	(13,528	)	$	241,858
U.S. Agency MBS and CMOs		20,281		13		(161)		20,133		134,956		81		(12,793	)		122,244
Tax-exempt state and municipal bonds		41,255		677		(133)		41,799		37,142		77		(270	)		36,949
Taxable state and municipal bonds		43,100		89		(315)		42,874		119,862		149		(6,874	)		113,137
Corporate bonds and other debt securities		10,165		16		(20)		10,161		12,112		4		(345	)		11,771
Other equity securities		1,500		---		(20)		1,480
									$	559,283	$	486	$	(33,810	)	$	525,959
	$	214,687	$	853	$	(1,358)	$	214,182
Held to Maturity
U.S. Treasury									$	251,286	$	—	$	(11,274	)	$	240,012
Tax-exempt state and municipal bonds	$	61,927	$	927	$	---	$	62,854		97,101		552		(2,106	)		95,547
									$	348,387	$	552	$	(13,380	)	$	335,559

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2016
December 31, 2022
Available for Sale:
U.S. Treasury and federal agency securities	$	85,582	$	49	$	(1,281)	$	84,350	$	240,921	$	23	$	(16,310	)	$	224,634
U. S. Agency MBS and CMOs		12,037		11		(231)		11,817
U.S. Agency MBS and CMOs										128,165		—		(14,347	)		113,818
Tax-exempt state and municipal bonds		39,578		212		(603)		39,187		37,198		10		(498	)		36,710
Taxable state and municipal bonds		34,255		65		(437)		33,883		120,647		49		(8,525	)		112,171
Corporate bonds and other debt securities		13,765		16		(55)		13,726		12,387		—		(463	)		11,924
Other equity securities		1,500		---		(30)		1,470
	$	186,717	$	353	$	(2,637)	$	184,433	$	539,318	$	82	$	(40,143	)	$	499,257
Held to Maturity:
Held to Maturity
U.S. Treasury									$	251,307	$	—	$	(13,677	)	$	237,630
Tax-exempt state and municipal bonds	$	69,378	$	573	$	(102)	$	69,849		97,458		415		(2,853	)		95,020
									$	348,765	$	415	$	(16,530	)	$	332,650

There were no ~~sale~~sales of securities ~~available for sale~~ in the three month periods ended ~~September 30, 2017~~March 31, 2023 and ~~2016. Proceeds~~2022.

-16-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (Continued)

On January 1, 2022, the Company reclassified ten U.S. Treasury securities with an amortized cost of $123.5 million from available for sale to held to maturity, as it has the ~~sale of~~intent and ability to hold these securities ~~were $5.8 million in the nine month period ended September 30, 2017 resulting in~~to maturity. These securities had net unrealized gains of ~~$3,000, as~~$113,000 at the date of transfer, which will continue to be 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~~and will be amortized over the remaining life of the securities as an adjustment of yield. The effect on ~~sale~~interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities in the Consolidated Statements of Income in the nine month period ended September 30, 2017. Proceeds from the sale of securities available for sale were $9.6 million in the nine month period ended September 30, 2016 resulting in net gains on sale of $99,000 as reported in the Consolidated Statements of Income. This resulted in reclassifications of $99,000 ($64,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the nine month period ended September 30, 2016.transferred.

~~-14-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

Contractual maturities of debt securities at ~~September 30, 2017~~March 31, 2023 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	$	58,157	$	57,487	$	22,431	$	22,106
Due from one to five years		13,622		14,055		115,857		115,387		272,386		260,375		369,226		352,338
Due from five to ten years		10,687		11,019		55,693		55,805		17,844		17,697		34,295		30,814
Due after ten years		23,606		23,761		23,151		23,017		—		—		133,331		120,701
	$	61,927	$	62,854	$	213,187	$	212,702	$	348,387	$	335,559	$	559,283	$	525,959

Securities with unrealized losses at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (dollars in thousands):

	Less than 12 Months				12 Months or More				Total				Less than 12 Months					12 Months or More					Total
September 30, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2023													Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available for Sale
U.S. Treasury and federal agency securities	$	60,225	$	(472)	$	15,497	$	(237)	$	75,722	$	(709)	$	90,278	$	(2,249	)	$	125,775	$	(11,279	)	$	216,053	$	(13,528	)
U.S. Agency MBS and CMOs		16,883		(129)		1,087		(32)		17,970		(161)		31,574		(1,021	)		64,296		(11,772	)		95,870		(12,793	)
Tax-exempt state and municipal bonds		7,428		(79)		2,124		(54)		9,552		(133)		17,744		(103	)		5,541		(167	)		23,285		(270	)
Taxable state and municipal bonds		20,469		(239)		3,199		(76)		23,668		(315)		41,608		(989	)		58,236		(5,885	)		99,844		(6,874	)
Corporate bonds and other debt securities		4,269		(9)		1,507		(11)		5,776		(20)		7,462		(148	)		3,839		(197	)		11,301		(345	)
Other equity securities		1,480		(20)		---		---		1,480		(20)
Total temporarily impaired	$	110,754	$	(948)	$	23,414	$	(410)	$	134,168	$	(1,358)
Total													$	188,666	$	(4,510	)	$	257,687	$	(29,300	)	$	446,353	$	(33,810	)

Held to Maturity
U.S. Treasury													$	114,386	$	(5,063	)	$	125,626	$	(6,211	)	$	240,012	$	(11,274	)
Tax-exempt state and municipal bonds														26,395		(384	)		49,855		(1,722	)		76,250		(2,106	)
													$	140,781	$	(5,447	)	$	175,481	$	(7,933	)	$	316,262	$	(13,380	)

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

Unrealized
Loss
Fair
Value

Unrealized
Loss
Fair
Value

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

~~-15-~~-17-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 2 – SECURITIES(Continued)

	Less than 12 Months					12 Months or More					Total
December 31, 2022	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available for Sale:
U.S. Treasury and federal agency securities	$	144,796	$	(6,230	)	$	66,008	$	(10,080	)	$	210,804	$	(16,310	)
U.S. Agency MBS and CMOs		64,427		(4,789	)		41,340		(9,558	)		105,767		(14,347	)
Tax-exempt state and municipal bonds		31,337		(498	)		—		—			31,337		(498	)
Taxable state and municipal bonds		71,165		(3,337	)		33,452		(5,188	)		104,617		(8,525	)
Corporate bonds and other debt securities		10,668		(357	)		1,256		(106	)		11,924		(463	)
	$	322,393	$	(15,211	)	$	142,056	$	(24,932	)	$	464,449	$	(40,143	)

Held to Maturity:
U.S. Treasury	$	237,630	$	(13,677	)	$	—	$	—		$	237,630	$	(13,677	)
Tax-exempt state and municipal bonds		57,671		(2,314	)		21,721		(539	)		79,392		(2,853	)
	$	295,301	$	(15,991	)	$	21,721	$	(539	)	$	317,022	$	(16,530	)

~~Other-Than-Temporary-Impairment~~

Management evaluates securities ~~for other-than-temporary impairment ("OTTI")~~in an unrealized loss position at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In analyzing an issuer’s financial condition, Management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.

At March 31, 2023, 413 securities available for sale with fair values totaling $446.4 million had unrealized losses totaling $33.8 million. For securities available for sale with unrealized losses, management considered the financial condition of the issuer and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. At March 31, 2023, 66 securities held to maturity with fair values totaling $316.3 million had unrealized losses totaling $13.4 million. Management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Management determined that the unrealized losses for each period and each investment were attributable to changes in interest rates and not due to credit quality. As such, no ~~OTTI charges were necessary during the three and nine month periods ended September 30, 2017 and 2016.~~allowance for credit losses on securities available for sale or held to maturity have been established as of March 31, 2023.

Securities with a carrying value of approximately ~~$2.0~~$3.6 million and $3.5 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022, respectively.

-18-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 –LOANS

Portfolio loans were as follows (dollars in thousands):

	September 30, 2017			December 31, 2016			March 31, 2023			December 31, 2022
Commercial and industrial	$	418,838		$	449,342		$	473,354		$	441,716

Commercial real estate:
Residential developed		9,077			11,970			7,001			7,234
Unsecured to residential developers		2,410			4,734			—			—
Vacant and unimproved		38,677			40,286			38,700			36,270
Commercial development		486			378			99			103
Residential improved		83,441			75,348			116,177			112,791
Commercial improved		295,924			289,478			255,894			259,281
Manufacturing and industrial		100,347			95,787			125,477			121,924
Total commercial real estate		530,362			517,981			543,348			537,603

Consumer
Consumer:
Residential mortgage		221,829			217,614			148,676			139,148
Unsecured		254			396			106			121
Home equity		82,296			88,113			52,647			56,321
Other secured		6,458			7,366			2,808			2,839
Total consumer		310,837			313,489			204,237			198,429
Total loans								1,220,939			1,177,748
Allowance for credit losses								(16,794	)		(15,285	)
							$	1,204,145		$	1,162,463
Total loans		1,260,037			1,280,812
Allowance for loan losses		(16,434	)		(16,962	)
	$	1,243,603		$	1,263,850

The totals above are shown net of deferred fees and costs. Deferred fees on loans totaled $1.3 million and $1.3 million at March 31, 2023 and December 31, 2022, respectively. Deferred costs on loans totaled $1.4 million and $1.4 million at March 31, 2023 and December 31, 2022, respectively.

~~-16-~~-19-

Index

~~Index~~

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~~credit 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
Three months ended March 31, 2023											Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance, prior to adoption of ASU 2016-03											$	5,596	$	7,180		$	2,458		$	51	$	15,285
Impact of adoption of ASU 2016-03												1,299		(212	)		389			—		1,476
Charge-offs		---		---		(55)		---		(55)		—		—			(21	)		—		(21	)
Recoveries		32		199		38		---		269		9		3			42			—		54
Provision for loan losses		(212)		(94)		(43)		(1)		(350)
Provision for credit losses (1)												220		(201	)		(50	)		31		—
Ending Balance	$	6,156	$	6,688	$	3,561	$	29	$	16,434	$	7,124	$	6,770		$	2,818		$	82	$	16,794

Three months ended September 30, 2016	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Three months ended March 31, 2022											Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance	$	4,960	$	8,065	$	3,894	$	40	$	16,959	$	5,176	$	8,051		$	2,633		$	29	$	15,889
Charge-offs		---		---		(46)		---		(46)		—		—			(35	)		—		(35	)
Recoveries		50		95		39		---		184		5		233			24			—		262
Provision for loan losses		515		(548)		(190)		(27)		(250)
Provision for credit losses (1)												148		(1,213	)		(469	)		34		(1,500	)
Ending Balance	$	5,525	$	7,612	$	3,697	$	13	$	16,847	$	5,329	$	7,071		$	2,153		$	63	$	14,616

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

~~-17-~~

(1)

Beginning January 1, 2023, calculation is based on CECL methodology. Prior to January 1, 2023, calculation was based on probable incurred loss methodology.

The following table presents gross chargeoffs for the three months ended March 31, 2023 by portfolio class and origination year (dollars in thousands):

	Term Loans By Origination Year
March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total


Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial development		—		—		—		—		—		—		—		—
Commercial improved		—		—		—		—		—		—		—		—
Manufacturing and industrial		—		—		—		—		—		—		—		—
Residential development		—		—		—		—		—		—		—		—
Residential improved		—		—		—		—		—		—		—		—
Vacant and unimproved		—		—		—		—		—		—		—		—
Total commercial		—		—		—		—		—		—		—		—

Residential mortgage		—		—		—		—		—		—		—		—
Consumer unsecured		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		21		21
Total consumer		—		—		—		—		—		—		21		21

Total loans		—		—		—		—		—		—		21		21

-20-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 3 –LOANS(Continued)

Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Under CECL for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance on the fair value of collateral.

The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and the loan’s amortized cost. If the fair value of the collateral exceeds the loan’s amortized cost, no allowance is necessary. The Company’s policy is to obtain appraisals on any significant pieces of collateral. For real estate collateral that is in industries that are undergoing significant stress, or properties that are specialized use or have limited marketability, higher discounts are applied in determining fair value.

There have been no significant changes to the types of collateral securing our collateral dependent loans.

The amortized cost of collateral-dependent loans by class as of March 31, 2023 was as follows (dollars in thousands):

	Collateral Type
March 31, 2023	Real Estate		Other		Allowance Allocated

Commercial and industrial	$	—	$	—	$	—
Commercial real estate:
Residential developed		—		—		—
Unsecured to residential developers		—		—		—
Vacant and unimproved		—		—		—
Commercial development		—		—		—
Residential improved		30		—		—
Commercial improved		303		—		6
Manufacturing and industrial		—		—		—
		333		—		6
Consumer
Residential mortgage		—		—		—
Unsecured		—		—		—
Home equity		—		—		—
Other secured		—		—		—
Consumer		—		—		—
Total	$	333	$	—	$	6

The following table presents the balance in the allowance for ~~loan~~credit 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:
December 31, 2022											Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for credit losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	605	$	368	$	723	$	---	$	1,696	$	55	$	20	$	220	$	—	$	295
Collectively evaluated for impairment		5,740		6,335		3,148		43		15,266		5,541		7,160		2,238		51		14,990
Total ending allowance balance	$	6,345	$	6,703	$	3,871	$	43	$	16,962	$	5,596	$	7,180	$	2,458	$	51	$	15,285

Loans:
Individually reviewed for impairment	$	5,994	$	11,934	$	11,726	$	---	$	29,654	$	3,603	$	518	$	2,886	$	—	$	7,007
Collectively evaluated for impairment		443,348		506,047		301,763		---		1,251,158		438,113		537,085		195,543		—		1,170,741
Total ending loans balance	$	449,342	$	517,981	$	313,489	$	---	$	1,280,812	$	441,716	$	537,603	$	198,429	$	—	$	1,177,748

~~-18-~~-21-

Index

~~Index~~

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 September 30, 2017 (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

~~-19-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 3 – LOANS~~ ~~(Continued)~~

The following table presents loans individually evaluated for impairment by class of loans as of December 31, ~~2016~~2022 (dollars in thousands):

December 31, 2016	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
December 31, 2022							Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Year-To-Date Average Recorded Investment
With no related allowance recorded:
Commercial and industrial	$	2,298	$	2,298	$	---	$	3,278	$	3,278	$	—	$	2,338
Commercial real estate:
Residential improved								31		31		—		33
								31		31		—		33
Consumer								—		—		—		—
Total with no related allowance recorded							$	3,309	$	3,309	$	—	$	2,371

With an allowance recorded:
Commercial and industrial							$	325	$	325	$	55	$	365
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		27		27		---
Commercial improved		350		350		---		307		307		9		313
Manufacturing and industrial		---		---		---		180		180		11		185
		377		377		---		487		487		20		498
Consumer:
Residential mortgage		---		---		---		2,653		2,653		202		2,619
Unsecured		---		---		---		29		29		2		29
Home equity		---		---		---		204		204		16		234
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		2,886		2,886		220		2,882
Total with an allowance recorded	$	26,979	$	26,979	$	1,696	$	3,698	$	3,698	$	295	$	3,745
Total	$	29,654	$	29,654	$	1,696	$	7,007	$	7,007	$	295	$	6,116

~~-20-~~-22-

Index

~~Index~~

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 nine month periods ended September 30, 2017 and 2016 (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

~~-21-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 3 – LOANS~~ ~~(Continued)~~

~~Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.~~ The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016 (dollars in thousands):~~2022:

March 31, 2023	Nonaccrual with No Allowance		Nonaccrual with Allowance		Total Nonaccrual		Over 90 days Accruing		Total Nonperforming Loans
Commercial and industrial	$	—	$	—	$	—	$	—	$	—

Commercial real estate:
Residential developed		—		—		—		—		—
Unsecured to residential developers		—		—		—		—		—
Vacant and unimproved		—		—		—		—		—
Commercial development		—		—		—		—		—
Residential Improved		—		—		—		—		—
Commercial improved		—		—		—		—		—
Manufacturing and industrial		—		—		—		—		—
		—		—		—		—		—
Consumer:
Residential mortgage		—		75		75		—		75
Unsecured		—		—		—		—		—
Home equity		—		—		—		—		—
Other secured		—		—		—		—		—
		—		75		75		—		75
Total	$	—	$	75	$	75	$	—	$	75

December 31, 2022	Nonaccrual with No Allowance		Nonaccrual with Allowance		Total Nonaccrual		Over 90 days Accruing		Total Nonperforming Loans
Commercial and industrial	$	—	$	—	$	—	$	—	$	—

Commercial real estate:
Residential developed		—		—		—		—		—
Unsecured to residential developers		—		—		—		—		—
Vacant and unimproved		—		—		—		—		—
Commercial development		—		—		—		—		—
Residential improved		—		—		—		—		—
Commercial improved		—		—		—		—		—
Manufacturing and industrial		—		—		—		—		—
		—		—		—		—		—
Consumer:
Residential mortgage		—		78		78		—		78
Unsecured		—		—		—		—		—
Home equity		—		—		—		—		—
Other secured		—		—		—		—		—
		—		78		78		—		78
Total	$	—	$	78	$	78	$	—	$	78

No interest income was recognized on nonaccrual loans during the three months ended March 31, 2023.

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 $ ---

~~-22-~~-23-

Index

~~Index~~

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 ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022 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
March 31, 2023											30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	22	$	---	$	22	$	418,816	$	418,838	$	—	$	—	$	—	$	473,354	$	473,354

Commercial real estate:
Residential developed		---		---		---		9,077		9,077		—		—		—		7,001		7,001
Unsecured to residential developers		---		---		---		2,410		2,410		—		—		—		—		—
Vacant and unimproved		308		---		308		38,369		38,677		—		—		—		38,700		38,700
Commercial development		---		239		239		247		486		—		—		—		99		99
Residential improved		---		91		91		83,350		83,441		—		—		—		116,177		116,177
Commercial improved		107		---		107		295,817		295,924		83		—		83		255,811		255,894
Manufacturing and industrial		---		---		---		100,347		100,347		—		—		—		125,477		125,477
		415		330		745		529,617		530,362		83		—		83		543,265		543,348
Consumer:
Residential mortgage		---		56		56		221,773		221,829		120		74		194		148,482		148,676
Unsecured		---		---		---		254		254		—		—		—		106		106
Home equity		33		---		33		82,263		82,296		—		—		—		52,647		52,647
Other secured		5		11		16		6,442		6,458		—		—		—		2,808		2,808
		38		67		105		310,732		310,837		120		74		194		204,043		204,237
Total	$	475	$	397	$	872	$	1,259,165	$	1,260,037	$	203	$	74	$	277	$	1,220,662	$	1,220,939

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

December 31, 2022	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	—	$	—	$	—	$	441,716	$	441,716
Commercial real estate:
Residential developed		—		—		—		7,234		7,234
Unsecured to residential developers		—		—		—		—		—
Vacant and unimproved		—		—		—		36,270		36,270
Commercial development		—		—		—		103		103
Residential improved		—		—		—		112,791		112,791
Commercial improved		71		—		71		259,210		259,281
Manufacturing and industrial		—		—		—		121,924		121,924
		71		—		71		537,532		537,603
Consumer:
Residential mortgage		—		77		77		139,071		139,148
Unsecured		—		—		—		121		121
Home equity		24		—		24		56,297		56,321
Other secured		—		—		—		2,839		2,839
		24		77		101		198,328		198,429
Total	$	95	$	77	$	172	$	1,177,576	$	1,177,748

~~-23-~~-24-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 3 –LOANS (Continued)

~~The~~

At times, the Company ~~had allocated $1,346,000 and $1,696,000~~will modify terms of ~~specific reserves to customers whose~~a loan ~~terms have been modified in troubled debt restructurings (“TDRs”) as of September 30, 2017 and December 31, 2016, respectively. These loans may have involved the restructuring of terms~~ to allow ~~customers~~the customer to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. ~~The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure.~~ For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan. In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt. The second note is charged off immediately and collected only after the first note is paid in full. This modification type is commonly referred to as an A-B note structure. For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief. For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

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

As with other ~~impaired~~individually reviewed loans, an allowance for loan loss is estimated for each ~~TDR~~such modification made to borrowers experiencing financial difficulty 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~~individually reviewed 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 loans, 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~~modifications to borrowers experiencing financial difficulty 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~~modifications to borrowers experiencing financial difficulty as of ~~September 30, 2017 and December~~March 31, ~~2016~~2023 (dollars in thousands):

	September 30, 2017				December 31, 2016				March 31, 2023
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance		Percentage to Total Loans
Commercial and industrial		20	$	4,555		25	$	5,994		3	$	309		0.07	%
Commercial real estate		38		8,742		49		11,933		3		509		0.09	%
Consumer		103		8,663		116		12,059		32		2,847		1.39	%
		161	$	21,960		190	$	29,986		38	$	3,665		0.30	%

~~-24-~~-25-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 3 –LOANS (Continued)

~~The~~The following table presents information related to ~~accruing troubled debt restructurings~~modifications to borrowers experiencing financial difficulty as of ~~September 30, 2017 and December~~March 31, ~~2016.~~2023. The table presents the amount of accruing ~~troubled debt restructurings~~modifications that were on nonaccrual status prior to the ~~restructuring,~~modification, accruing at the time of ~~restructuring~~modification and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the ~~restructured~~modified terms as of ~~each~~the 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

	March 31, 2023
Accruing - nonaccrual at modification	$	—
Accruing - accruing at modification		3,665
Accruing - upgraded to accruing after six consecutive payments		—
	$	3,665

~~The following tables present information regarding troubled debt restructurings executed~~There were no modifications made to borrowers experiencing financial difficulty during the three month period ended March 31, 2023.

There were no defaults on loans with modifications to borrowers experiencing financial difficulty during the three month periods ended ~~September 30, 2017~~March 31, 2023 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 restructurings executed during the nine month periods ended September 30, 2017 and 2016 (dollars in thousands):~~

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 nine month periods ended September 30, 2017 and 2016,~~ 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~~modification were not ~~material.~~material.

~~-25-~~-26-

Index

~~Index~~

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 eight point grading system, with grades 5 through 8 being considered classified, or watch, credits. The higher the risk grade, the stronger likelihood of loss. At grade 7, a loan is placed on nonaccrual status. 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:~~grades in ascending order of likelihood of loss:

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-~~-27-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 3 –LOANS (Continued)

As of ~~September 30, 2017 and~~ December 31, ~~2016,~~2022, 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
December 31, 2022																				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	$	15,040	$	21,451	$	175,762	$	220,987	$	8,309	$	167	$	—	$	—	$	441,716

Commercial real estate:
Residential developed		---		---		1,173		7,119		785		---		---		---		9,077		—		—		—		7,234		—		—		—		—		7,234
Unsecured to residential developers		---		---		---		2,410		---		---		---		---		2,410		—		—		—		—		—		—		—		—		—
Vacant and unimproved		---		---		16,252		18,975		3,450		---		---		---		38,677		—		1,231		18,406		16,633		—		—		—		—		36,270
Commercial development		---		---		110		137		---		---		239		---		486		—		—		103		—		—		—		—		—		103
Residential improved		---		---		5,218		75,297		1,579		1,256		91		---		83,441		—		—		25,585		87,176		30		—		—		—		112,791
Commercial improved		---		1,287		63,600		226,190		3,798		939		110		---		295,924		—		17,802		83,769		151,641		5,762		307		—		—		259,281
Manufacturing & industrial		---		961		44,416		52,150		2,301		519		---		---		100,347		—		11,422		32,977		73,566		1,646		2,313		—		—		121,924
	$	---	$	17,352	$	233,989	$	663,360	$	27,516	$	6,539	$	444	$	---	$	949,200	$	15,040	$	51,906	$	336,602	$	557,237	$	15,747	$	2,787	$	—	$	—	$	979,319

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

-28-

~~Commercial~~

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 –LOANS (Continued)

The following table summarizes loan ratings by grade for 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

	Term Loans Amortized Cost Basis By Origination Year and Risk Grades
March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial
Commercial and industrial
Grades 1-3	$	14,305	$	60,752	$	18,955	$	7,346	$	14,878	$	47,073	$	70,542	$	233,851
Grade 4		12,017		46,095		24,990		26,313		10,486		30,408		77,814		228,123
Grade 5		—		342		43		407		99		115		10,246		11,252
Grade 6		—		41		49		—		—		38		—		128
Grade 7-8		—		—		—		—		—		—		—		—
	$	26,322	$	107,230	$	44,037	$	34,066	$	25,463	$	77,634	$	158,602	$	473,354
Commercial development
Grades 1-3	$	—	$	99	$	—	$	—	$	—	$	—	$	—	$	99
Grade 4		—		—		—		—		—		—		—		—
Grade 5		—		—		—		—		—		—		—		—
Grade 6		—		—		—		—		—		—		—		—
Grade 7-8		—		—		—		—		—		—		—		—
	$	—	$	99	$	—	$	—	$	—	$	—	$	—	$	99
Commercial improved
Grades 1-3	$	6,992	$	18,654	$	33,327	$	10,894	$	14,484	$	17,925	$	2,915	$	105,191
Grade 4		1,778		37,516		37,376		43,647		17,937		3,321		3,200		144,775
Grade 5		—		148		—		29		2,227		3,171		50		5,625
Grade 6		—		—		303		—		—		—		—		303
Grade 7-8		—		—		—		—		—		—		—		—
	$	8,770	$	56,318	$	71,006	$	54,570	$	34,648	$	24,417	$	6,165	$	255,894
Manufacturing and industrial
Grades 1-3	$	786	$	17,839	$	4,829	$	8,562	$	4,370	$	7,459	$	430	$	44,275
Grade 4		6,709		27,464		15,090		7,933		5,805		14,188		145		77,334
Grade 5		—		177		94		—		—		810		495		1,576
Grade 6		—		—		—		—		—		2,292		—		2,292
Grade 7-8		—		—		—		—		—		—		—		—
	$	7,495	$	45,480	$	20,013	$	16,495	$	10,175	$	24,749	$	1,070	$	125,477
Residential development
Grades 1-3	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 4		322		3,837		1,455		—		—		—		1,387		7,001
Grade 5		—		—		—		—		—		—		—		—
Grade 6		—		—		—		—		—		—		—		—
Grade 7-8		—		—		—		—		—		—		—		—
	$	322	$	3,837	$	1,455	$	—	$	—	$	—	$	1,387	$	7,001
Residential improved
Grades 1-3	$	4,587	$	7,574	$	1,442	$	9,544	$	258	$	5,442	$	401	$	29,248
Grade 4		4,037		568		30,241		1,988		7,233		15,710		27,122		86,899
Grade 5		—		—		30		—		—		—		—		30
Grade 6		—		—		—		—		—		—		—		—
Grade 7-8		—		—		—		—		—		—		—		—
	$	8,624	$	8,142	$	31,713	$	11,532	$	7,491	$	21,152	$	27,523	$	116,177
Vacant and unimproved
Grades 1-3	$	—	$	4,503	$	7,725	$	7,210	$	—	$	110	$	646	$	20,194
Grade 4		952		2,897		3,721		8,332		163		117		982		17,164
Grade 5		1,342		—		—		—		—		—		—		1,342
Grade 6		—		—		—		—		—		—		—		—
Grade 7-8		—		—		—		—		—		—		—		—
	$	2,294	$	7,400	$	11,446	$	15,542	$	163	$	227	$	1,628	$	38,700

Total Commercial
Grades 1-3	$	26,670	$	109,421	$	66,278	$	43,556	$	33,990	$	78,009	$	74,934	$	432,858
Grade 4		25,815		118,377		112,873		88,213		41,624		63,744		110,650		561,296
Grade 5		1,342		667		167		436		2,326		4,096		10,791		19,825
Grade 6		—		41		352		—		—		2,330		—		2,723
Grade 7-8		—		—		—		—		—		—		—		—
	$	53,827	$	228,506	$	179,670	$	132,205	$	77,940	$	148,179	$	196,375	$	1,016,702

~~-27-~~-29-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~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~~credit 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 by year of origination and based on ~~payment activity~~delinquency status at March 31, 2023 (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
									Term Loans Amortized Cost Basis By Origination Year
March 31, 2023									2023		2022		2021		2020		2019		Prior		Revolving		Total
Retail
Residential mortgage
Performing	$	217,558	$	396	$	88,113	$	7,366	$	17,336	$	42,826	$	27,298	$	10,419	$	5,322	$	33,520	$	11,880	$	148,601
Nonperforming		56		---		---		---		—		—		—		—		—		75		—		75
Total	$	217,614	$	396	$	88,113	$	7,366
									$	17,336	$	42,826	$	27,298	$	10,419	$	5,322	$	33,595	$	11,880	$	148,676
Consumer unsecured
Performing									$	—	$	—	$	—	$	13	$	15	$	26	$	52	$	106
Nonperforming										—		—		—		—		—		—		—		—
									$	—	$	—	$	—	$	13	$	15	$	26	$	52	$	106
Home equity
Performing									$	71	$	901	$	233	$	489	$	249	$	2,324	$	48,380	$	52,647
Nonperforming										—		—		—		—		—		—		—		—
									$	71	$	901	$	233	$	489	$	249	$	2,324	$	48,380	$	52,647
Other
Performing									$	304	$	1,133	$	687	$	360	$	100	$	224	$	—	$	2,808
Nonperforming										—		—		—		—		—		—		—		—
									$	304	$	1,133	$	687	$	360	$	100	$	224	$	—	$	2,808

Total Retail									$	17,711	$	44,860	$	28,218	$	11,281	$	5,686	$	36,169	$	60,312	$	204,237

The following table presents the recorded investment in consumer loans based on payment status at December 31, 2022 (dollars in thousands):

December 31, 2022	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	139,071	$	121	$	56,321	$	2,839
Nonperforming		77		—		—		—
Total	$	139,148	$	121	$	56,321	$	2,839

-30-

Index

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-~~

~~Index~~

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

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

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

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

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

Interest Rate ~~Swaps:~~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-~~-31-

Index

~~Index~~

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			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
	Value			(Level 1)		(Level 2)		(Level 3)			Value			(Level 1)		(Level 2)			(Level 3)
September 30, 2017
March 31, 2023
Available for sale securities
U.S. Treasury and federal agency securities	$	97,735		$	---	$	97,735	$	---		$	241,858		$	—	$	241,858		$	—
U.S. Agency MBS and CMOs		20,133			---		20,133		---			122,244			—		122,244			—
Tax-exempt state and municipal bonds		41,799			---		41,799		---			36,949			—		36,949			—
Taxable state and municipal bonds		42,874			---		42,874		---			113,137			—		113,137			—
Corporate bonds and other debt securities		10,161			---		10,161		---			11,771			—		11,771			—
Other equity securities		1,480			---		1,480		---			1,321			—		1,321			—
Loans held for sale		2,199			---		2,199		---			87			—		87			—
Interest rate swaps		351			---		---		351			5,294			—		5,294			—
Total assets measured at fair value on recurring basis											$	532,661		$	—	$	532,661		$	—

Interest rate swaps		(351	)		---		---		(351	)		(5,294	)		—		(5,294	)		—
Total liabilities measured at fair value on recurring basis											$	(5,294	)	$	—	$	(5,294	)	$	—

December 31, 2016
December 31, 2022
Available for sale securities
U.S. Treasury and federal agency securities	$	84,350		$	---	$	84,350	$	---		$	224,634		$	—	$	224,634		$	—
U.S. Agency MBS and CMOs		11,817			---		11,817		---			113,818			—		113,818			—
Tax-exempt state and municipal bonds		39,187			---		39,187		---			36,710			—		36,710			—
Taxable state and municipal bonds		33,883			---		33,883		---			112,171			—		112,171			—
Corporate bonds and other debt securities		13,726			---		13,726		---			11,924			—		11,924			—
Other equity securities		1,470			---		1,470		---			1,304			—		1,304			—
Loans held for sale		2,181			---		2,181		---			215			—		215			—
Interest rate swaps		494			---		---		494			6,463			—		6,463			—
Total assets measured at fair value on recurring basis											$	507,239		$	—	$	507,239		$	—

Interest rate swaps		(494	)		---		---		(494	)		(6,463	)		—		(6,463	)		—
Total liabilities measured at fair value on recurring basis											$	(6,463	)	$	—	$	(6,463	)	$	—

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

Value (Level 1) (Level 2) (Level 3)
September 30, 2017

Impaired loans $ 2,775 $ --- $ --- $ 2,775
Other real estate owned 4,631 --- --- 4,631

December 31, 2016

Impaired loans $ 3,436 $ --- $ --- $ 3,436
Other real estate owned 9,542 --- --- 9,542

	Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2023
Collateral dependent loans	$	327	$	—	$	—	$	327

December 31, 2022
Impaired loans	$	328	$	—	$	—	$	328

~~-30-~~-32-

Index

~~Index~~

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 (%)
March 31, 2023
Collateral dependent loans	$	327	Sales comparison approach	Adjustment for differences between comparable sales	1.5 to 20.0
			Income approach	Capitalization rate	9.5 to 11.0

Asset
Fair
Value

Valuation
Technique

Unobservable
Inputs
Range (%)
December 31, 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 (%)
December 31, 2022
Impaired Loans	$	328	Sales comparison approach	Adjustment for differences between comparable sales	1.5 to 20.0
			Income approach	Capitalization rate	9.5 to 11.0

~~-31-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022 (dollars in thousands):

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 banks Level 1 $ 28,318 $ 28,318 $ 27,690 $ 27,690
Cash equivalents Level 2 131,571 131,571 62,129 62,129
Securities held to maturity Level 3 61,927 62,854 69,378 69,849
FHLB stock 11,558 NA 11,558 NA
Loans, net Level 2 1,240,828 1,237,274 1,260,414 1,247,842
Bank owned life insurance Level 3 40,042 40,042 39,274 39,274
Accrued interest receivable Level 2 4,532 4,532 4,092 4,092

Financial liabilities
Deposits Level 2 (1,506,178 ) (1,506,115 ) (1,448,724 ) (1,448,692 )
Other borrowed funds Level 2 (72,118 ) (71,946 ) (84,173 ) (84,051 )
Long-term debt Level 2 (41,238 ) (36,562 ) (41,238 ) (36,112 )
Accrued interest payable Level 2 (545 ) (545 ) (282 ) (282 )

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

	Level in	March 31, 2023						December 31, 2022
	Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and due from banks	Level 1	$	29,402		$	29,402		$	51,215		$	51,215
Federal funds sold and other short-term investments	Level 1		391,336			391,336			703,955			703,955
Securities held to maturity - U.S. Treasury	Level 2		251,286			240,012			251,307			237,630
Securities held to maturity - tax-exempt and muni	Level 3		97,101			95,547			97,458			95,020
FHLB stock	Level 3		10,211			10,211			10,211			10,211
Loans, net	Level 2		1,203,818			1,185,925			1,162,135			1,131,387
Bank owned life insurance	Level 3		53,557			53,557			53,345			53,345
Accrued interest receivable	Level 2		8,782			8,782			7,606			7,606
Financial liabilities
Deposits	Level 2		(2,330,895	)		(2,331,330	)		(2,615,142	)		(2,615,860	)
Other borrowed funds	Level 2		(30,000	)		(28,824	)		(30,000	)		(28,666	)
Accrued interest payable	Level 2		(228	)		(228	)		(114	)		(114	)
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.~~transferability, so fair value approximates its cost. The fair value of off-balance sheet credit-related items is not significant.

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

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

-34-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 76 – 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

	March 31, 2023		December 31, 2022
Noninterest-bearing demand	$	690,444	$	834,879
Interest bearing demand		608,967		760,889
Savings and money market accounts		858,895		922,418
Certificates of deposit		172,589		96,956
	$	2,330,895	$	2,615,142

Time deposits that ~~exceed~~exceeded the FDIC insurance limit of $250,000 were approximately ~~$28.1~~$56.1 million at ~~September 30, 2017~~March 31, 2023 and ~~$17.4~~$29.7 million at December 31, ~~2016.~~2022.

~~-33-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 87 - OTHER BORROWED FUNDS

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

Federal Home Loan Bank Advances

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

Principal Terms		Advance Amount	Range of Maturities	Weighted Average Interest Rate		Advance Amount		Range of Maturities	Weighted Average Interest Rate
September 30, 2017
March 31, 2023
Single maturity fixed rate advances	$	70,000	February 2018 to April 2021	1.59	%	$	10,000	February 2024		2.63	%
Amortizable mortgage advances		2,118	March 2018 to July 2018	3.78	%
Putable advances							20,000	November 2024		1.81	%
	$	72,118				$	30,000

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, 2022
Single maturity fixed rate advances	$	80,000	February 2018 to April 2021	1.60	%	$	10,000	February 2024		2.63	%
Amortizable mortgage advances		4,173	March 2018 to July 2018	3.78	%
Putable advances							20,000	November 2024		1.81	%
	$	84,173				$	30,000

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~~$453.2 million and ~~$425.0~~$446.1 million under a blanket lien arrangement at ~~September 30, 2017~~ March 31, 2023 and December 31, ~~2016,~~2022, respectively. The remaining $20.0 million putable advance at March 31, 2023 and December 31, 2022 had a one-time put option on November 13, 2020. The FHLB did not exercise this option.

~~-34-~~-35-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 87 - OTHER BORROWED FUNDS (Continued)

Scheduled repayments of FHLB advances as of ~~September 30, 2017~~March 31, 2023 were as follows (in thousands):

2017 $ ---
2018 52,118
2019 10,000
2020 ---
2021 10,000
Thereafter ---
$ 72,118

2023	$	—
2024		30,000
2025		—
2026		—
2027		—
Thereafter		—
	$	30,000

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank. There were no borrowings outstanding at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, and the Company had approximately ~~$12.6~~$1.5 million and ~~$18.1~~$5.5 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling ~~$15.1~~$1.6 million and ~~$20.7~~$5.8 million at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, respectively. In March 2023, the Federal Reserve Bank implemented a new lending facility called the Bank Term Funding Program. This program allows a bank to borrow against its investment portfolio, at par value, with no reduction for unrealized losses. The term is for one year and interest rate is fixed at the time the advance is taken and there is no prepayment penalty. Allowable investments for pledge are those the Federal Reserve Bank can own. This would include all of the Company’s investments except municipal securities and corporate bonds. At March 31, 2023, the Company had no advances under this program and had $642.2 million in unused borrowing capacity under this program. The program expires on March 11, 2024.

NOTE 98 - EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 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 March 31, 2023		Three Months Ended March 31, 2022
Net income available to common shares	$	12,004	$	6,000
Weighted average shares outstanding, including participating stock awards - Basic		34,297,221		34,254,772
Dilutive potential common shares:
Stock options		—		—
Weighted average shares outstanding - Diluted		34,297,221		34,254,772
Basic earnings per common share	$	0.35	$	0.18
Diluted earnings per common share	$	0.35	$	0.18

There were no antidilutive shares of common stock in the three ~~and nine~~ month periods ended ~~September 30, 2017.~~March 31, 2023 and 2022.

~~-35-~~-36-

Index

~~Index~~

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~MACATAWA BANK CORPORATION~~

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

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):

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~~Management believes it is more likely than not that all of the deferred tax assets at ~~September 30, 2017 or December~~March 31, ~~2016.~~

~~-36-~~

~~Index~~

2023 will be realized against deferred tax liabilities and projected future taxable income.

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

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

	September 30, 2017			December 31, 2016			March 31, 2023			December 31, 2022
Deferred tax assets
Allowance for loan losses	$	5,752		$	5,937		$	3,527		$	3,210
Net deferred loan fees								—			—
Nonaccrual loan interest		598			718			12			12
Valuation allowance on other real estate owned		1,292			3,714			—			—
Unrealized loss on securities available for sale		177			799
Unrealized loss on securities available for sale and transferred to held to maturity								6,980			8,394
Other		539			176			297			257
Gross deferred tax assets		8,358			11,344			10,816			11,873
Valuation allowance		---			---			—			—
Total net deferred tax assets		8,358			11,344			10,816			11,873

Deferred tax liabilities
Depreciation		(1,608	)		(1,705	)		(1,104	)		(1,098	)
Net deferred loan fees								(20	)		(309	)
Prepaid expenses		(349	)		(399	)		(309	)		(21	)
Other		(409	)		(377	)		(912	)		(733	)
Gross deferred tax liabilities		(2,366	)		(2,481	)		(2,345	)		(2,161	)
Net deferred tax asset	$	5,992		$	8,863		$	8,471		$	9,712

There were no unrecognized tax benefits at ~~September 30, 2017~~March 31, 2023 or December 31, ~~2016~~2022 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.~~2020.

-37-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1110 – COMMITMENTS AND OFF BALANCE-SHEET RISK

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates. Collateral or other security is normally not obtained for these financial instruments prior to their use and many of the commitments are expected to expire without being used. Standby letters of credit are conditional commitments to guarantee a customer’s performance to a third party. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. At March 31, 2023, the reserve for unfunded commitments was $61,000 and was included in other liabilities in the Company’s consolidated balance sheet.

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

	September 30, 2017		December 31, 2016		March 31, 2023		December 31, 2022
Commitments to make loans	$	121,797	$	90,293
Commitments to extend credit					$	115,100	$	77,384
Letters of credit		12,117		13,823		11,937		13,455
Unused lines of credit		495,151		437,435		719,013		745,674

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately ~~$14.2 million~~$82,000 and ~~$19.8 million~~$0 at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, 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 $1.1 million and $0 at March 31, 2023 and December 31, 2022, respectively.

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

At ~~September 30, 2017,~~March 31, 2023, approximately ~~32.7%~~67.2% 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~~term SOFR and generally expire within 30 days. The majority of the unused lines of credit were at variable rates tied to ~~prime.~~prime or SOFR.

NOTE 1211 – CONTINGENCIES

The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. As of ~~September 30, 2017,~~March 31, 2023, there were no material pending legal proceedings to which the Company or any of its subsidiaries are a party or which any of its properties are the subject.

NOTE 1312 – ~~SHAREHOLDERS'~~SHAREHOLDERS’ EQUITY

Regulatory Capital

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

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

~~In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's~~

-38-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – SHAREHOLDERS’ EQUITY(Continued)

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

At March 31, 2023 and ~~off-balance-sheet exposures.~~

~~-38-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 13 – SHAREHOLDERS' EQUITY~~ ~~(Continued)~~

~~At September 30, 2017 and~~ December 31, ~~2016,~~2022, actual capital levels and minimum required levels were (dollars in thousands):

	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy With Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Regulations									Minimum Capital					Minimum Capital Adequacy With					To Be Well Capitalized Under Prompt Corrective
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Actual					Adequacy					Capital Buffer					Action Regulations
September 30, 2017
																	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2023
CET1 capital (to risk weighted assets)
Consolidated	$	173,779	11.7	%	$	66,837	4.5	%	$	85,403	5.8	%		N/A	N/A		$	286,826		17.1	%	$	75,561		4.5	%	$	117,539		7.0	%		N/A		N/A
Bank		207,805	14.0			66,831	4.5			85,395	5.8		$	96,533	6.5	%		278,347		16.6			75,558		4.5			117,535		7.0		$	109,139		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			286,826		17.1			100,748		6.0			142,726		8.5			N/A		N/A
Bank		207,805	14.0			89,108	6.0			107,672	7.3			118,810	8.0			278,347		16.6			100,744		6.0			142,720		8.5			134,325		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			303,620		18.1			134,331		8.0			176,309		10.5			N/A		N/A
Bank		224,239	15.1			118,810	8.0			137,374	9.3			148,513	10.0			295,141		17.6			134,325		8.0			176,302		10.5			167,906		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			286,826		10.3			111,845		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			278,347		10.0			111,839		4.0			N/A		N/A			139,799		5.0

December 31, 2016
December 31, 2022
CET1 capital (to risk weighted assets)
Consolidated	$	163,663	11.0	%	$	66,743	4.5	%	$	76,013	5.1	%		N/A	N/A		$	278,615		16.9	%	$	74,003		4.5	%	$	115,116		7.0	%		N/A		N/A
Bank		197,972	13.4			66,737	4.5			76,006	5.1		$	96,398	6.5	%		270,274		16.4			73,992		4.5			115,098		7.0		$	106,877		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			278,615		16.9			98,670		6.0			139,783		8.5			N/A		N/A
Bank		197,972	13.4			88,983	6.0			98,252	6.6			118,644	8.0			270,274		16.4			98,655		6.0			139,762		8.5			131,540		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			293,900		17.9			131,561		8.0			172,673		10.5			N/A		N/A
Bank		214,934	14.5			118,644	8.0			127,913	8.6			148,305	10.0			285,559		17.4			131,540		8.0			172,647		10.5			164,426		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			278,615		9.7			114,589		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			270,274		9.4			114,582		4.0			N/A		N/A			143,227		5.0

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

The Bank was categorized as ~~"well capitalized"~~“well capitalized” at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~

2022.

-39-

Index

Item2.

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

At ~~September 30, 2017,~~March 31, 2023, we had total assets of ~~$1.80~~$2.64 billion, total loans of ~~$1.26~~$1.22 billion, total deposits of ~~$1.51~~$2.33 billion and ~~shareholders'~~shareholders’ equity of ~~$173.5~~$260.6 million. ~~During~~For the ~~third quarter of 2017,~~three months ended March 31, 2023, we recognized net income of ~~$4.9~~$12.0 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~~$6.0 million for the same period in ~~2016.~~2022. The Bank was categorized as “well capitalized” under regulatory capital standards at ~~September 30, 2017.~~March 31, 2023.

We paid a dividend of ~~$0.03~~$0.08 per share in each quarter ~~of 2016. We increased the dividend to $0.04 per share~~in 2022 and in the first ~~and second quarters~~quarter of ~~2017 and $0.05 per share~~2023.

In early March 2023, over the course of five days, three large financial institutions in the ~~third quarter~~United States failed. Silvergate Bank self liquidated and Silicon Valley Bank and Signature Bank were both closed by the FDIC. These bank failures were driven by rapid withdrawals by depositors with large uninsured balances held at these institutions and losses incurred by these banks in liquidating their bond portfolios to provide liquidity to fund these deposit outflows. Silvergate Bank’s failure was also caused by its exposure to FTX and Alameda cryptocurrency firm failures. The FDIC determined that Silicon Valley Bank and Signature Bank were systematically important and fully guaranteed their depositor balances above the $250,000 FDIC insurance limit. Given the sharp increase in market interest rates during 2022 and into 2023, most financial institutions’ bond portfolios have significant unrealized loss positions. In response to this, the FRB created a new borrowing facility called the Bank Term Funding Program. This program allows a bank to borrow against its investment portfolio, at par value, with no reduction for unrealized losses. The term is for one year and interest rate is fixed at the time the advance is taken and there is no prepayment penalty. Allowable investments for pledge are those the FRB can own. This would include all of ~~2017.~~the Company’s investments except municipal securities and corporate bonds. At March 31, 2023, the Company had no advances under this program and had $642.2 million in unused borrowing capacity under this program. The program expires on March 11, 2024.

At March 31, 2023, the Company had $391.3 million in federal funds sold and overnight balances and had total additional borrowing capacity of $951 million, including $242.3 million in unused availability with the FHLB, $65.0 million in available fed funds facilities with correspondent banks, $1.5 million in availability at the FRB’s Discount Window and the $642.2 million availability in the FRB Bank Term Funding Program discussed above. Given the flexibility of borrowing structure options with the FHLB, if the Company needed to borrow, we would likely utilize our FHLB capacity first. At March 31, 2023, our uninsured deposits totaled approximately $962.7 million, or 41% of total deposits, and our liquidity sources exceeded the amount of uninsured deposit balances by over $300 million.

While the Bank experienced a decline in deposit balances during the three months ended March 31, 2023, most of the decline took place prior to the early March 2023 bank failures noted. Our deposit base is primarily made up of many small accounts, and balances at March 31, 2023 were comprised of 48% personal customers and 52% business customers. Our core deposits - which we define as deposits we have sourced within our local markets - represented 100% of our total deposits at March 31, 2023. Our total deposit balances of $2.33 billion at March 31, 2023 remain elevated, reflecting a $625.5 million increase, or 37%, over pre-pandemic totals of $1.71 billion as of March 31, 2020.

-40-

Index

RESULTS OF OPERATIONS

Summary: Net income for the three months ended ~~September 30, 2017~~March 31, 2023 was ~~$4.9~~$12.0 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$6.0 million for the same period in ~~2016.~~2022. Net income per share on a diluted basis for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 was ~~$0.42~~$0.35 compared to ~~$0.35~~$0.18 for the same period in ~~2016.~~2022.

The increase in earnings in the three months ended ~~September 30, 2017~~March 31, 2023 compared to the same period in ~~2016~~2022 was due primarily to ~~increased~~higher levels of net interest income partially offset by lower mortgage banking income and ~~reduced nonperforming~~a provision for credit losses benefit recorded in the first quarter of 2022. Throughout 2022, beginning in March, the Federal Reserve Bank increased the federal funds rate several times, bringing the high end of their rate range rate from 0.25% at the beginning of 2022 to 4.50% at the end of 2022. The Federal Reserve Bank raised this rate an additional 50 basis points to 5.00% during the three months ended March 31, 2023. Given our asset ~~expenses.~~sensitive balance sheet posture, this had a significant positive impact on our net interest income. Net interest income increased to ~~$13.1~~$22.6 million in the three months ended ~~September 30, 2017~~March 31, 2023 compared to ~~$11.9~~$12.7 million in the same period in ~~2016. Nonperforming asset expenses (including administration costs and losses) were a negative $77,000 for~~2022. Gains on sales of mortgage loans decreased to $11,000 in the three months ended ~~September 30, 2017~~March 31, 2023 compared to ~~$325,000~~$308,000 in the same period in 2022.

The provision for credit losses was $0 for the three months ended March 31, 2023, compared to a benefit (income) of $1.5 million for the same period in 2016, primarily as a result of a decrease of $220,000 in writedowns of other real estate owned. The provision for loan losses was a negative $350,000 for the three months ended September 30, 2017, compared to a negative $250,000 for the same period in 2016.2022. We ~~again~~ were in a net loan recovery position for the three months ended ~~September 30, 2017,~~March 31, 2023, with ~~$214,000~~$33,000 in net loan recoveries, compared to ~~$138,000~~$227,000 in net loan recoveries in the same period in ~~2016. Also, income tax expense was reduced by $512,000 in September 2016 due to tax credits and other adjustments that did not recur in 2017.~~

~~The increase in earnings for~~2022. Several of the ~~nine month period ended September 30, 2017 compared~~previous qualitative environmental factors related to the ~~same period of 2016, was due primarily to increased net interest income and~~COVID-19 pandemic were reduced ~~nonperforming asset expenses. Net interest income increased to $38.4 million~~ in the first ~~nine months~~quarter of ~~2017 compared to $35.2 million~~2022, reflecting improvement in economic conditions and success at mitigating the effects of the COVID-19 pandemic, resulting in the ~~same period~~net provision benefit recorded in ~~2016. Nonperforming asset expenses (including administration costs and losses) were a negative $140,000~~the first quarter of 2022. Also impacting comparability between periods is our adoption of ASU 2016-13, commonly referred to as CECL, effective January 1, 2023. At adoption, we increased the allowance for credit losses by $1.5 million. Provision for the first ~~nine months of 2017 compared to $1.2 million for~~quarter 2023 was determined under CECL while the first ~~nine months of 2016, primarily as a result of a net gains on other real estate owned of $575,000 for~~quarter 2022 was determined under the first nine months of 2017 compared to net losses of $409,000 for the same period in 2016. The provision for loan losses was a negative $1.35 million for the first nine months of 2017, compared to a negative $1.1 million for the first nine months of 2016. We again were in a net loan recovery position for the first nine months of 2017, with $822,000 in net loan recoveries, compared to $866,000 in net loan recoveries in the same period in 2016. Each of these items is discussed more fully below.probable incurred loss model.

~~-40-~~

~~Index~~

Net Interest Income:Net interest income totaled ~~$13.1~~$22.6 million for the three months ended ~~September 30, 2017 and $11.9~~March 31, 2023 compared to $12.7 million for the same period in ~~2016. For the first nine months of 2017, net interest income was $38.4 million compared to $35.2 million for the same period in 2016.~~2022.

Net interest income ~~was positively impacted in~~for the ~~three months ended September 30, 2017 by an increase in average earning assets~~first quarter of ~~$96.5~~2023 increased $10.0 million compared to the same period in ~~2016. Our~~2022. Of this increase, $1.4 million was from changes in the volume of average ~~yield on earning assets for the three months ended September 30, 2017 increased 18 basis points compared to the same period in 2016 from 3.39% to 3.57%. Average~~ interest earning assets ~~totaled $1.65 billion for three months ended September 30, 2017 compared to $1.56 billion for the same period~~and interest bearing liabilities and $8.6 million was from increases from changes in ~~2016.~~rates earned or paid. The largest changes occurred in interest income on commercial loans and in overnight funds. The net change in interest ~~margin~~income for commercial loans was ~~3.21% for the three months ended September 30, 2017 compared to 3.04% for the same period in 2016. An~~an increase of ~~$42.4~~$5.4 million ~~in average securities between periods~~with an increase of $4.6 million due to rate and an increase of ~~$36.4~~$782,000 due to portfolio growth. Overnight funds contributed an increase of $6.2 million due to changes in rate, partially offset by a reduction of $394,000 due to lower average ~~loans were~~balances compared to 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 thirdfirst quarter of ~~2016 to 4.32% for the third quarter~~2022 as excess funds were deployed into loans and investment securities. The average balance 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 benefittedinvestment portfolio grew by $326.0 million 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$572.7 million in the first quarter of ~~2017 that had been on nonaccrual, resulting~~2022 to $898.7 million in the ~~realization~~first quarter of ~~$267,000~~2023. This growth resulted in an additional $1.6 million of interest income ~~that had been deferred.~~in the first quarter of 2023.

The cost of funds increased to ~~0.53% and 0.50%~~1.07% in the ~~three and nine month periods~~first quarter of ~~2017 from 0.45% and 0.47%~~2023 compared to 0.11% in the ~~same periods~~first quarter of ~~2016.~~2022. Increases in the rates paid on our interest-bearing checking, savings, ~~and~~ money market and certificate of deposit accounts in response to the ~~December 2016, March 2017 and June 2017~~ federal funds rate increases over the past year and market conditions caused the ~~slight~~ increase in our cost of funds.

The asset yield improvement to 4.15% in the first quarter of 2023 from 1.92% in the first quarter of 2022, far outweighed the increase in cost of funds. As a result, net interest margin improved to 3.44% for the first quarter 2023 compared to 1.85% for the first quarter of 2022.

-41-

Index

The following table shows an analysis of net interest margin for the three month periods ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (dollars in thousands):

	For the three months ended September 30,																For the three months ended March 31,
	2017								2016								2023								2022
	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	%	$	765,999		$	4,481		2.35	%	$	402,863		$	1,434		1.43	%
Tax-exempt securities (1)		104,387			574		3.51			87,918			451		3.31			132,692			698		2.71			169,845			731		2.22
Commercial loans (2)		946,105			9,930		4.11			903,484			8,965		3.88			985,258			13,300		5.40			902,347			7,888		3.50
PPP loans (3)																		—			—		—			20,364			1,052		20.66
Residential mortgage loans		219,532			1,905		3.47			219,170			1,928		3.51			143,839			1,343		3.73			116,504			939		3.22
Consumer loans		88,933			969		4.32			95,551			945		3.93			57,303			1,017		7.20			54,096			519		3.89
Federal Home Loan Bank stock		11,558			122		4.15			11,558			122		4.13			10,211			65		2.55			11,019			51		1.84
Federal funds sold and other short-term investments		118,784			385		1.27			101,062			127		0.49			555,670			6,362		4.58			1,111,216			529		0.19
Total interest earning assets (1)		1,652,028			14,626		3.57			1,555,550			13,122		3.39			2,650,972			27,266		4.15			2,788,254			13,143		1.92

Noninterest earning assets:
Cash and due from banks		29,940								28,482								34,615								32,505
Other		93,334								96,065								72,007								96,703
Total assets	$	1,775,302							$	1,680,097							$	2,757,594							$	2,917,462

Liabilities
Deposits:
Interest bearing demand	$	352,661		$	98		0.11	%	$	313,624		$	65		0.08	%	$	690,246		$	742		0.43	%	$	706,872		$	40		0.02	%
Savings and money market accounts		551,917			454		0.33			522,697			239		0.19			903,236			3,017		1.35			894,976			65		0.03
Time deposits		88,933			180		0.81			81,769			126		0.62			134,401			735		2.22			92,244			53		0.23
Borrowings:
Other borrowed funds		74,190			314		1.66			94,384			419		1.74			30,000			156		2.08			85,002			320		1.51
Long-term debt		41,238			442		4.20			41,238			371		3.52
Total interest bearing liabilities		1,108,939			1,488		0.53			1,053,712			1,220		0.45			1,757,883			4,650		1.07			1,779,094			478		0.11

Noninterest bearing liabilities:
Noninterest bearing demand accounts		488,028								459,372								732,434								875,223
Other noninterest bearing liabilities		6,348								6,817								17,117								11,545
Shareholders' equity		171,987								160,196
Total liabilities and shareholders' equity	$	1,775,302							$	1,680,097

Shareholders’ equity																		250,160								251,600
Total liabilities and shareholders’ equity																	$	2,757,594							$	2,917,462
Net interest income				$	13,138							$	11,902							$	22,616							$	12,665
Net interest spread (1)							3.04	%							2.94	%							3.08	%							1.81	%
Net interest margin (1)							3.21	%							3.04	%							3.44	%							1.85	%
Ratio of average interest earning assets to average interest bearing liabilities		148.97	%							147.63	%							150.80	%							156.72	%

(1)	Yields are presented on a tax equivalent basis using ~~a 35%~~an assumed tax ~~rate.~~rate of 21% at March 31, 2023 and 2022.

(2)

Includes loan fees of ~~$117,000~~$148,000 and ~~$200,000~~$99,000 for the three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~2022, respectively. Includes average nonaccrual loans of approximately ~~$558,000~~$75,000 and ~~$270,000~~$90,000 for the three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~2022, respectively. Excludes PPP loans.

(3)	Includes loan fees of $0 and $1.0 million for the three months ended March 31, 2023 and 2022, respectively.

-42-

Index

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

For the nine months ended September 30,
2017 2016

Average
Balance

Interest
Earned
or Paid

Average
Yield
or Cost

Average
Balance

Interest
Earned
or Paid

Average
Yield
or Cost

Assets

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

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

Liabilities

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

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

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

	For the three months ended March 31, 2023 vs 2022 Increase (Decrease) Due to
	Volume			Rate		Total

Interest income
Taxable securities	$	1,778		$	1,269	$	3,047
Tax-exempt securities		(223	)		190		(33	)
Commercial loans, excluding PPP loans		782			4,630		5,412
PPP loans		(1,052	)		—		(1,052	)
Residential mortgage loans		241			163		404
Consumer loans		32			466		498
Federal Home Loan Bank stock		(4	)		18		14
Federal funds sold and other short-term investments		(394	)		6,227		5,833
Total interest income		1,160			12,963		14,123
Interest expense
Interest bearing demand	$	(1	)	$	703	$	702
Savings and money market accounts		1			2,951		2,952
Time deposits		35			647		682
Other borrowed funds		(257	)		93		(164	)
Long-term debt		—			—		—
Total interest expense		(222	)		4,394		4,172
Net interest income	$	1,382		$	8,569	$	9,951

~~(1)~~

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

~~(2)~~

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

~~-43-~~

~~Index~~

Provision for ~~Loan~~Credit Losses: The provision for ~~loan~~credit losses for the three months ended ~~September 30, 2017~~March 31, 2023 was ~~a negative $350,000~~$0 compared to a ~~negative $250,000 for the same period in 2016. The negative provisions for loan losses for each period were the result~~benefit 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. The provision for loan losses for the first nine months of 2017 was a negative $1.35 million compared to a negative $1.1$1.5 million for the same period in ~~2016.~~2022. Total loans increased by $43.2 million in the three months ended March 31, 2023 which, on its own, creates a need for provision expense; however, the economic forecast used in our calculation improved slightly from January 1, 2023 to March 31, 2023, thereby offsetting the need to record provision expense due to loan portfolio growth. Net loan recoveries were $33,000 in the three months ended March 31, 2023 compared to net loan recoveries of $227,000 in the same period in 2022.

Gross loan recoveries were ~~$269,000~~$54,000 for the three months ended ~~September 30, 2017~~March 31, 2023 and ~~$184,000~~$262,000 for the same period in ~~2016.~~2022. In the three months ended ~~September 30, 2017,~~March 31, 2023, we had ~~$55,000~~$21,000 in gross loan charge-offs, compared to ~~$46,000~~$35,000 in the same period in ~~2016. For~~2022.

We adopted CECL effective January 1, 2023 using the ~~nine months ended September 30, 2017, we experienced gross loan recoveries of $1,043,000 compared to $1,024,000~~modified retrospective method for ~~the same~~all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period ~~in 2016. Loan charge-offs were $221,000 for the nine months ended September 30, 2017 compared to $158,000 for the same period in 2016. We~~amounts continue to ~~experience positive results from~~be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $1.5 million, $62,000 to establish a reserve for unfunded commitments and a $1.2 million decrease to retained earnings to reflect the cumulative effect of adoption of CECL, with the $323,000 tax impact portion being recorded as part of the deferred tax asset on 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.

Consolidated Balance Sheet. The amounts of ~~loan loss~~ provision for credit losses in both the most recent quarter and comparable prior year period were the result of establishing our allowance for ~~loan~~credit losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The ~~sustained lower level of quarterly~~provision for credit losses for the three months ended March 31, 2022 was impacted by net ~~charge-offs over~~reductions to certain qualitative factors that had been elevated in response to the ~~past several quarters had a significant effect on the historical loss component of our methodology.~~COVID-19 pandemic. More information about our allowance for loan losses and our methodology for establishing its level may be found under the heading ~~"Allowance~~“Allowance for ~~Loan Losses"~~Credit Losses” below.

-43-

Index

Noninterest Income: Noninterest income for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2023 was ~~$4.3 million and $13.0~~$4.5 million compared to ~~$5.1 million and $14.2~~$5.0 million for the same ~~periods~~period in ~~2016.~~2022. The components of noninterest income are shown in the table below (in thousands):

	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016		Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Service charges and fees on deposit accounts	$	1,172	$	1,152	$	3,342	$	3,312	$	994	$	1,211
Net gains on mortgage loans		369		1,175		1,273		2,235		11		308
Trust fees		801		790		2,412		2,286		1,033		1,088
Gain as sales of securities		---		---		3		99
ATM and debit card fees		1,324		1,272		3,863		3,715		1,662		1,599
Bank owned life insurance (“BOLI”) income		249		146		730		748		199		240
Investment services fees		239		181		705		755		411		313
Other income		146		359		681		1,069		218		206
Total noninterest income	$	4,300	$	5,075	$	13,009	$	14,219	$	4,528	$	4,965

Net gains on mortgage loans were down ~~$806,000~~$297,000 in the three months ended ~~September 30, 2017~~March 31, 2023 compared to the same period in ~~2016~~2022 as a result of ~~an overall lower level~~changes in the volume of ~~volume.~~loans originated for sale. Mortgage rates increased sharply throughout 2022 and into the first quarter of 2023, causing a reduction in mortgage volume compared to the first quarter of 2022. In addition, more of our origination volume in the first three months of 2023 was in variable rate products, which we hold in portfolio. Mortgage loans originated for sale in the three months ended ~~September 30, 2017~~March 31, 2023 were ~~$11.4 million,~~$179,000, compared to ~~$38.2~~$10.1 million in the same period in ~~2016. Mortgage loans originated for portfolio~~2022.

Service charges on deposit accounts decreased by $217,000 in the three months ended ~~September 30, 2017 were $16.2 million,~~March 31, 2023 as compared to ~~$25.4 million in~~ the same period in ~~2016. Mortgage loans originated~~2022 largely due to higher earnings credit offsets for ~~sale~~treasury management accounts. Trust fees were down $55,000 in the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The decrease for the ~~first nine~~three months ended March 31, 2023 was largely due to lower market valuations of ~~2017 were $45.0 million, down from $76.1 million in the first nine months of 2016.~~underlying trust investments. ATM and debit card fees were up $63,000 in the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 as compared to the three months ended March 31, 2022 due to higher volume of usage by our customers. BOLI income in the first nine months of 2016 included $290,000 in net benefits from the distribution of a death claim on a covered former employee. Trust fees were up in the first nine months of 2017 due to investment market value changes and growth in trust assets. Other noninterest income for the three month period ended September 30, 2017 was reduced by a net loss of $176,000 on the sale of property in southwest Grand Rapids (Metro Village) during the quarter. This also impacted the nine month period ended September 30, 2017, along with a net loss of $70,000 on sale of property in northwest Grand Rapids (Walker) in the second quarter of 2017.

~~-44-~~

~~Index~~

Noninterest Expense: Noninterest expense ~~decreased~~increased by $426,000 to ~~$10.8~~$12.2 million for the three month period ended ~~September 30, 2017, from $11.3 million for~~March 31, 2023 as compared to 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.~~2022. The components of noninterest expense are shown in the table below (in thousands):

	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016		Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Salaries and benefits	$	6,211		$	6,166	$	18,363		$	18,521	$	6,698	$	6,289
Occupancy of premises		922			901		2,939			2,784		1,137		1,172
Furniture and equipment		797			772		2,278			2,476		1,031		1,016
Legal and professional		199			153		621			500		348		194
Marketing and promotion		226			275		678			825		219		195
Data processing		655			741		2,068			2,089		955		884
FDIC assessment		134			166		404			638		330		180
Interchange and other card expense		333			334		970			927		384		373
Bond and D&O insurance		119			132		353			395		122		130
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		469		494
Other noninterest expense		814			896		2,620			2,772		472		812
Total noninterest expense	$	10,756		$	11,273	$	32,434		$	34,294	$	12,165	$	11,739

Most categories of noninterest expense were relatively ~~flat or had reductions~~unchanged compared to the three months ended ~~September 30, 2016~~March 31, 2022 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased by ~~$45,000~~$409,000 in the three months ended ~~September 30, 2017~~March 31, 2023 from the same period in ~~2016.~~2022. This increase is ~~largely~~primarily due to a higher ~~level~~base compensation, higher variable compensation, higher medical costs and lower salary deferral from commercial loan originations partially offset by lower variable compensation tied to lower mortgage production. The table below identifies the primary components of ~~costs associated with employee~~salaries and benefits ~~particularly medical insurance, which was~~(in thousands):

-44-

Index

	Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
Salaries and other compensation	$	5,912		$	5,627
Salary deferral from commercial loan originations		(145	)		(215	)
Bonus accrual		287			221
Mortgage production - variable comp		58			144
401k matching contributions		211			212
Medical insurance costs		375			300
Total salaries and benefits	$	6,698		$	6,289

Legal and professional fees were up ~~$25,000 compared to~~$154,000 in 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~~March 31, 2023 compared to the same period in ~~2016~~2022 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 2017 and were up $155,000 for the first nine months of 2017 compared to the same periods in 2016 due to higher property taxes and maintenance~~ costs ~~incurred~~ associated with ~~certain branch facilities.~~

~~Our~~new accounting and proxy disclosures as well as regulatory compliance matters related to loan and deposit accounts referred to legal counsel during the quarter. FDIC assessment costs ~~decreased by $32,000~~were up $150,000 in the ~~third quarter of 2017~~three months ended March 31, 2023 compared to the same period in ~~2016 and~~2022 due to higher assessment rates imposed by ~~$234,000 for~~ the ~~first nine~~FDIC on all banks. Other noninterest expense was down $340,000 in the three months ~~of 2017~~ended March 31, 2023 compared to the same period in 2022 due ~~primarily~~ to positive changes in our assessment rates. These costs have been trending down for the past few years and we believe the rate has stabilized and future expense fluctuations will likely be dependent on changes in our asset size.

Costs associated with administration and disposition of problem assets have 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$356,000 net ~~gains and losses~~gain recognized on the sale of properties and unrealized losses from value declines for outstanding properties. We experienced decreases in almost every category in the third quarter of 2017 and the first nine months of 2017 compared to the same periods in the prior year.

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

Three Months
Ended
September 30,
2017

Three Months
Ended
September 30,
2016

Nine Months
Ended
September 30,
2017

Nine Months
Ended
September 30,
2016

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

~~-45-~~

~~Index~~

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~~last remaining 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~~during the first ~~nine months~~quarter 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 2016.2023.

Federal Income Tax Expense:We recorded ~~$2.2 million and $6.3~~$3.0 million in federal income tax expense for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2023 compared to $1.4 million ~~and $4.4 million, respectively, in~~for the same ~~periods~~period in ~~2016.~~2022. Our effective tax rate for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2023 was ~~30.67% and 30.73%,~~19.86% compared to ~~22.67% and 27.22%, respectively,~~18.82% for the same ~~periods~~period in 2016. Federal income tax expense and related effective tax rates were lower in the 2016 periods due to tax credits and other adjustments recognized in our 2015 federal tax return which was filed in the third quarter of 2016.2022.

FINANCIAL CONDITION

Total assets were ~~$1.80~~$2.64 billion at ~~September 30, 2017, an increase~~March 31, 2023, a decrease of ~~$62.0~~$269.8 million from ~~$1.74 billion at~~ December 31, ~~2016.~~2022. This ~~change reflected increases~~decrease was caused primarily by a decrease in total deposits of $70.1 million in cash and cash equivalents and $29.7 million in securities available for sale, offset by decreases of $20.8 million in our loan portfolio, $7.5 million in securities held to maturity and $6.0 million in other real estate owned. Total deposits increased by $57.5 million and other borrowed funds decreased by $12.1$284.2 million at ~~September 30, 2017~~March 31, 2023 compared to December 31, ~~2016.~~2022.

Cash and Cash Equivalents:Our cash and cash equivalents, which include federal funds sold and short-term investments, were ~~$159.9~~$420.7 million at ~~September 30, 2017~~March 31, 2023 compared to ~~$89.8~~$755.2 million at December 31, ~~2016.~~2022. The ~~increase~~decrease in these balances primarily related ~~primarily~~ to ~~the decrease~~an increase in our ~~total loans~~loan and ~~increase~~investment portfolios as well as a reduction in ~~total deposits in the same period.~~deposit balances.

Securities:~~Securities~~ Debt securities available for sale were ~~$214.2~~$526.0 million at ~~September 30, 2017~~March 31, 2023 compared to ~~$184.4~~$499.3 million at December 31, ~~2016.~~2022. The balance at ~~September 30, 2017~~March 31, 2023 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio ~~decreased from $69.4~~was $348.4 million at March 31, 2023 compared to $348.8 million at December 31, ~~2016 to $61.9 million at September 30, 2017.~~2022. Our held to maturity portfolio is comprised of U.S. Treasury securities and state, municipal and ~~municipal~~privately placed commercial bonds.

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

At March 31, 2023, the overall duration of our debt security available for sale portfolio was 3.11 years and the overall duration of our debt security held to maturity portfolio was 2.18 years and were similar to durations for these portfolios before the pandemic. Net unrealized losses on debt securities available for sale decreased by $6.7 million from $40.1 million at December 31, 2022 to $33.7 million at March 31, 2023. Net unrealized losses on debt securities held to maturity decreased by $3.3 million from $16.1 million at December 31, 2022 to $12.8 million at March 31, 2023. Our overall bond portfolio will provide nearly $400 million in liquidity through maturities and scheduled paydowns over the next 24 months ending March 31, 2025.

Per U.S. generally accepted accounting principles, unrealized gains or losses on debt securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on debt securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss).

Portfolio Loans and Asset Quality: Total portfolio loans ~~decreased~~increased by ~~$20.8~~$43.2 million in the first ~~nine~~three months of ~~2017~~2023 and were ~~$1.26~~$1.22 billion at ~~September 30, 2017~~March 31, 2023 compared to ~~$1.28~~$1.18 billion at December 31, ~~2016.~~2022. During the first ~~nine~~three months of ~~2017,~~2023, our commercial portfolio ~~decreased~~increased by ~~$18.1 million, while~~$37.4 million. During the same period, our consumer portfolio decreased by ~~$6.9~~$3.7 million and our residential mortgage portfolio increased by ~~$4.2~~$9.5 million.

The volume of residential mortgage loans originated for sale in the first nine months of 2017 decreased $31.1 million compared to the same period in 2016 due to a higher interest rate environment. Residential mortgage loans originated for sale were $45.0 million in the first nine months of 2017 compared to $76.1 million in the first nine months of 2016. Mortgage loans originated for portfolio in the first nine months of 2017 were $37.4 million, compared to $62.6 million in the first nine months of 2016.

-45-

Index

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. However, given the significant increase in residential mortgage rates, we have increased the percentage of our longer term fixed rate mortgage production that we hold in portfolio as they will typically have lower duration due to refinancings that occur when interest rates decline. Mortgage loans originated for portfolio in the first three months of 2023 decreased $1.7 million compared to the same period in 2022, from $14.8 million in the first three months of 2022 to $13.1 million in the same period in 2023.

The volume of residential mortgage loans originated for sale in the first three months of 2023 decreased $10.0 million compared to the same period in 2022. Residential mortgage loans originated for sale were $179,000 in the first three months of 2023 compared to $10.1 million in the first three months of 2022.

~~-46-~~

~~Index~~

The following table shows our loan origination activity for loans to be held in portfolio ~~loans~~ during the first ~~nine~~three months of ~~2017~~2023 and ~~2016,~~2022, 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

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
Unsecured to residential developers --- --- --- --- --- ---
Vacant and unimproved 2,149 0.9 269 552 --- 184
Commercial development 125 --- 125 2,342 1.0 1,171
Residential improved 38,828 16.5 254 48,718 19.4 350
Commercial improved 41,436 17.6 1,480 29,632 11.8 988
Manufacturing and industrial 12,039 5.1 926 11,457 4.6 955
Total commercial real estate 101,804 43.2 482 97,928 38.9 510
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

Consumer
Residential mortgage 37,439 15.9 234 62,616 24.9 204
Unsecured --- --- --- 20 --- 10
Home equity 34,070 14.5 85 31,006 12.3 84
Other secured 1,850 0.8 16 1,808 0.7 17
Total consumer 73,359 31.2 108 95,450 37.9 121
Total loans $ 235,432 100.0 % 240 $ 251,810 100.0 % 231

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

	Three months ended March 31, 2023							Three months ended March 31, 2022
	Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size
Commercial real estate:
Residential developed	$	125		0.1	%	$	63	$	4,322		2.7	%	$	1,080
Unsecured to residential developers		—		—			—		—		—			—
Vacant and unimproved		2,779		3.1			463		1,570		1.0			523
Commercial development		—		—			—		—		—			—
Residential improved		11,852		13.1			539		23,944		15.1			684
Commercial improved		3,161		3.5			316		22,907		14.5			1,909
Manufacturing and industrial		5,364		5.9			894		44,128		27.8			4,413
Total commercial real estate		23,281		25.7			506		96,871		61.1			1,514
Commercial and industrial		47,097		52.0			1,002		32,371		20.4			549
Total commercial and commercial real estate		70,378		77.7			757		129,242		81.5			1,051
Consumer
Residential mortgage		13,084		14.4			262		14,829		9.4			362
Unsecured		—		—			—		—		—			—
Home equity		6,818		7.5			114		13,372		8.4			131
Other secured		348		0.4			29		1,080		0.7			154
Total consumer		20,250		22.3			166		29,281		18.5			195
Total loans	$	90,628		100.0	%	$	422	$	158,523		100.0	%	$	581

Nine Months
Ended
September 30,
2017
Nine Months
Ended
September 30,
2016

Commercial loans originated $ 162,073 $ 156,360
Repayments of commercial loans (125,828 ) (115,858 )
Change in undistributed - available credit (54,368 ) (3,302 )
Net increase/(decrease) in total commercial loans $ (18,123 ) $ 37,200

Overall, the commercial loan portfolio ~~decreased $18.1~~increased $37.4 million in the first ~~nine~~three months of ~~2017.~~2023. Our commercial and industrial portfolio ~~decreased~~increased by ~~$30.5~~$31.7 million ~~and~~while our commercial real estate loans increased by ~~$12.4~~$5.7 million. ~~However, our production of commercial loans increased by $5.7 million from $156.4 million~~While overall originations as shown in the table above were down compared to the first ~~nine~~three months of ~~2016 compared to $162.1~~2022, our on-balance-sheet commercial loan balances grew since year end 2022. This largely resulted from the funding of various construction projects originating in 2022 and higher usage of approved commercial lines by our commercial borrowers. This utilization was up $22.2 million ~~in the same period of 2017. The decrease in ending portfolio balance~~ from December 31, ~~2016~~2022 to ~~September 30, 2017 was due primarily~~March 31, 2023.

We also have a significant amount of unfunded commercial lines of credit, that can be drawn on by our commercial loan customers. The table below shows the total commitment, the unused portion and the percentage of unused to ~~changes~~total commitment at March 31, 2023 and December 31, 2022 (dollars in ~~undistributed balances/available credit. Considering our pipeline~~thousands):

	March 31, 2023			December 31, 2022
Commercial - Lines of credit commitments	$	1,011,846		$	1,021,795
Commercial - Unused portion of lines of credit		580,120			612,317
Commercial - Unused lines of credit to total commitment		57.33	%		60.07	%

Total commercial lines of ~~commercial credits at September 30, 2017, we expect~~credit commitments decreased by $9.9 million from December 31, 2022 to ~~achieve measured, high quality loan portfolio growth throughout the remainder of 2017.~~March 31, 2023.

-46-

Index

Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately ~~75.3%~~83.3% and ~~75.5%~~83.2% of the total loan portfolio at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022, respectively. Residential mortgage and consumer loans comprised approximately ~~24.7%~~16.7% and ~~24.5%~~16.8% of total loans at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022, respectively.

~~-47-~~

~~Index~~

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

	September 30, 2017					December 31, 2016					March 31, 2023					December 31, 2022
	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	%	$	7,001		0.6	%	$	7,234		0.6	%
Unsecured to residential developers		2,410		0.2			4,734		0.4			—		—			—		—
Vacant and unimproved		38,677		3.1			40,286		3.1			38,700		3.2			36,270		3.1
Commercial development		486		---			378		---			99		—			103		—
Residential improved		83,441		6.6			75,348		5.9			116,177		9.5			112,791		9.6
Commercial improved		295,924		23.5			289,478		22.6			255,894		20.9			259,281		22.0
Manufacturing and industrial		100,347		8.0			95,787		7.5			125,477		10.3			121,924		10.4
Total commercial real estate		530,362		42.1			517,981		40.4			543,348		44.5			537,603		45.7
Commercial and industrial		418,838		33.2			449,342		35.1			473,354		38.8			441,716		37.5
Total commercial		949,200		75.3			967,323		75.5

Total commercial and commercial real estate												1,016,702		83.3			979,319		83.2
Consumer
Residential mortgage		221,829		17.6			217,614		17.0			148,676		12.2			139,148		11.8
Unsecured		254		---			396		---			106		—			121		—
Home equity		82,296		6.6			88,113		6.9			52,647		4.3			56,321		4.8
Other secured		6,458		0.5			7,366		0.6			2,808		0.2			2,839		0.2
Total consumer		310,837		24.7			313,489		24.5			204,237		16.7			198,429		16.8
Total loans	$	1,260,037		100.0	%	$	1,280,812		100.0	%	$	1,220,939		100.0	%	$	1,177,748		100.0	%

(1)

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

Commercial real estate loans accounted for ~~42.1%~~44.5% and ~~40.4%~~45.7% of the total loan portfolio at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022, 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%~~12.2% of portfolio loans at ~~September 30, 2017~~March 31, 2023 and ~~17.0%~~11.8% at December 31, ~~2016.~~2022. We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan-to-value loans) in an effort to continue to diversify our credit risk and deploy our excess liquidity. ~~A large portion of our residential mortgage loan production continues to be sold on the secondary market with servicing released.~~

The volume of residential mortgage loans originated for sale during the first nine months of 2017 decreased from the first nine months of 2016 as a result of interest rate conditions. We are also experiencing a shift in production to financing new home purchases versus refinancings.

Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. ~~Consumer loans~~This portfolio decreased by ~~$6.9~~$3.7 million to ~~$89.0~~$55.6 million at ~~September 30, 2017~~March 31, 2023 from ~~$95.9~~$59.3 million at December 31, ~~2016, due primarily to a decrease in home equity loans. Consumer~~2022. These other consumer loans comprised ~~7.1%~~4.5% of our portfolio loans at ~~September 30, 2017~~March 31, 2023 and ~~7.5%~~5.0% at December 31, ~~2016.~~2022.

Given that current industry credit conditions are tightening, we expect industry pricing will increase in response to cost of funds increases and we will respond accordingly.

~~-48-~~

~~Index~~

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

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

-47-

Index

Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At ~~September 30, 2017,~~March 31, 2023, nonperforming assets totaled ~~$7.2~~just $75,000, down $2.3 million ~~compared to $12.6~~from $2.4 million at December 31, ~~2016. Additions~~2022. There were no additions to other real estate owned in the first ~~nine~~three months of ~~2017 were $60,000, compared to $102,000~~2023 or in the first ~~nine~~three months of ~~2016.~~2022. At ~~September 30, 2017,~~March 31, 2023, there ~~was just one loan~~were no loans in ~~redemption,~~foreclosure, so we expect there to be few, if any, additions to other real estate owned in ~~2017.~~the remainder of 2023. Proceeds from sales of foreclosed properties were ~~$6.2~~$2.7 million in the first ~~nine~~three months of ~~2017,~~2023, resulting in net realized gains on sales of ~~$660,000. We sold our largest individual foreclosed property in the second quarter of 2017.~~$356,000. Proceeds from sales of foreclosed properties were ~~$4.2 million~~$0 in the first ~~nine~~three months of ~~2016~~2022, resulting in net realized ~~gains~~loss on sales of ~~$365,000. Based upon purchase agreements in place at September 30, 2017 and~~$0. With 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~~quarter of ~~2017.~~2023, we have no remaining other real estate owned at March 31, 2023.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. Nonperforming loans at March 31, 2023 consisted of $75,000 of residential mortgage loans. As of ~~September 30, 2017,~~March 31, 2023, nonperforming loans ~~were negligible and~~ totaled ~~$521,000,~~$75,000, or ~~0.04%~~0.01% of total portfolio loans, compared to ~~$300,000,~~$78,000, or ~~0.02%~~0.01% of total portfolio loans, at December 31, ~~2016.~~2022.

~~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.~~

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled ~~$6.7 million~~$0 at ~~September 30, 2017~~March 31, 2023 and ~~$12.3~~$2.3 million at December 31, 2016. Of this balance at September 30, 2017, there were 21 commercial real estate properties totaling approximately $6.6 million. The remaining balance was comprised of 4 residential properties totaling approximately $109,000.2022. 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

~~-49-~~

~~Index~~

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

	September 30, 2017			December 31, 2016			March 31, 2023			December 31, 2022
Nonaccrual loans	$	521		$	300		$	75		$	78
Loans 90 days or more delinquent and still accruing		---			---			—			—
Total nonperforming loans (NPLs)		521			300			75			78
Foreclosed assets		6,661			12,253			—			2,343
Repossessed assets		---			---			—			—
Total nonperforming assets (NPAs)	$	7,182		$	12,553		$	75		$	2,421

NPLs to total loans		0.04	%		0.02	%		0.01	%		0.01	%
NPAs to total assets		0.40	%		0.72	%		0.00	%		0.08	%

We adopted ASU 2022-02 effective January 1, 2023. This standard eliminated the previous troubled debt restructuring (“TDR”) accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. The following table shows the ~~composition and amount~~balance of ~~our troubled debt restructurings (TDRs) at September 30, 2017 and December~~loans modified to borrowers experiencing financial difficulty as of March 31, ~~2016~~2023 (dollars in thousands):

September 30, 2017 December 31, 2016
Commercial Consumer Total Commercial Consumer Total
Performing TDRs $ 12,974 $ 8,609 $ 21,583 $ 17,786 $ 12,051 $ 29,837
Nonperforming TDRs (1) 322 55 377 141 8 149
Total TDRs $ 13,296 $ 8,664 $ 21,960 $ 17,927 $ 12,059 $ 29,986

	March 31, 2023
	Number of Loans		Outstanding Recorded Balance		Percentage to Total Loans
Commercial and industrial		3	$	309		0.07	%
Commercial real estate		3		509		0.09	%
Consumer		32		2,847		1.39	%
		38	$	3,665		0.30	%

~~(1)~~

~~Included in nonperforming asset table above~~

~~We had a total~~Allowance for credit losses: The allowance for credit losses at March 31, 2023 was $16.8 million, an increase of $22.0 million and $30.0 million of loans whose terms have been modified in TDRs as of September 30, 2017 and December 31, 2016, respectively. These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that 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$1.5 million from December 31, 2016 to September 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 primarily due to paydowns on commercial TDRs.

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

~~Allowance for loan losses:~~2022. The allowance for ~~loan losses at September 30, 2017 was $16.4 million, a decrease of $528,000 from $17.0 million at December 31, 2016. The balance of the allowance for loan~~credit losses represented ~~1.30%~~1.38% of total portfolio loans at ~~September 30, 2017~~March 31, 2023 and 1.30% at December 31, ~~2016.~~2022. The allowance for ~~loan~~credit losses to nonperforming loan coverage ratio ~~decreased~~increased from ~~5654%~~19596.2% at December 31, ~~2016~~2022 to ~~3154%~~22392.0% at ~~September 30, 2017.~~March 31, 2023.

We adopted the Current Expected Credit Loss (“CECL”) standard effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $1.5 million, $62,000 to establish a reserve for unfunded commitments and a $1.2 million decrease to retained earnings to reflect the cumulative effect of adoption of CECL, with the $323,000 tax impact portion being recorded as part of the deferred tax asset on our Consolidated Balance Sheet.

~~-50-~~-48-

Index

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

	Quarter Ended March 31, 2023			Quarter Ended December 31, 2022			Quarter Ended September 30, 2022			Quarter Ended June 30, 2022			Quarter Ended March 31, 2022
Nonperforming loans	$	75		$	78		$	85		$	90		$	90
Other real estate owned and repo assets		—			2,343			2,343			2,343			2,343
Total nonperforming assets		75			2,421			2,428			2,433			2,433
Net charge-offs (recoveries)		(33	)		(89	)		(190	)		(15	)		(227	)
Total delinquencies		277			172			84			197			171

(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
Nonperforming loans 0.5 0.7 0.4 0.3 0.2
Other real estate owned and repo assets 6.7 7.1 12.1 12.3 13.1
Total nonperforming assets 7.2 7.8 12.5 12.6 13.3
Net charge-offs (recoveries) (0.2 ) (0.4 ) (0.2 ) (1.2 ) (0.1 )
Total delinquencies 0.8 0.8 0.9 1.4 0.3

~~As discussed earlier,~~At March 31, 2023, we ~~have~~ had net loan recoveries in ~~each~~thirty-one of the ~~last eleven~~past thirty-three quarters. Our total delinquencies ~~have continued to be negligible~~were $277,000 at March 31, 2023 and ~~were $872,000 at September 30, 2017 and $1.4 million~~$172,000 at December 31, ~~2016.~~2022. Our delinquency percentage at ~~September 30, 2017~~March 31, 2023 was ~~just 0.07%, well below the Bank’s peers.~~0.02%.

~~These factors all impact our necessary level of allowance for loan losses and our provision for loan losses.~~ The allowance for ~~loan~~credit losses ~~decreased $528,000~~increased $1.5 million in the first ~~nine~~three months of ~~2017.~~2023. As discussed above, the increase in the first three months of 2023 was due to the effect of adopting CECL on January 1, 2023. We recorded a ~~negative~~ provision for ~~loan~~credit losses expense of ~~$1.35 million~~$0 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 compared to a ~~negative $1.1~~provision benefit of $1.5 million for the same period of ~~2016.~~2022. Net loan recoveries were ~~$822,000~~$33,000 for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023, compared to net loan recoveries of ~~$866,000~~$227,000 for the same period in ~~2016.~~2022. The ratio of net charge-offs (recoveries) to average loans was ~~-0.09%~~-0.01% on an annualized basis for the first ~~nine~~three months of ~~2017, compared to -0.10%~~2023 and -0.03% for the first ~~nine~~three months of ~~2016.~~2022.

~~We are encouraged by the reduced level~~While we have experienced low levels of gross charge-offs over recent ~~quarters. We do, however,~~quarters, we recognize that future charge-offs and resulting provisions for ~~loan~~credit 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~~The allowance for credit loss accounting in effect at December 31, 2022 and all prior periods was based on our estimate of probable incurred loan losses ~~is maintained at a level believed appropriate based upon our assessment~~as of the ~~probable estimated~~reporting date (“incurred loss” methodology). Under the CECL methodology, our allowance is based on the total amount of credit losses ~~inherent in~~that are expected over the remaining life of the loan portfolio. Our ~~methodology for measuring the appropriate level~~estimate of ~~allowance and related provision for loan~~credit losses under CECL is determined using a complex model that relies on historical loss information including our own history as well as peer loss history, reasonable and supportable economic forecasts, and various qualitative factors.

The primary risk elements with respect to our commercial loans are the financial condition of the borrower, sufficiency of collateral and timeliness of scheduled payments. We have a policy of reviewing periodic financial statements from commercial loan customers and have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to residential and consumer loans is the timeliness of scheduled payments. We have a reporting process that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position. Over the past several ~~key elements, which include specific allowances for loans considered impaired, general allowance~~years, consumer delinquency has been nominal.

Under CECL, for commercial loans not ~~considered impaired~~identified as collateral dependent, we estimate the CECL reserve 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 million to $22.0 million at September 30, 2017 compared to $29.7 million at December 31, 2016. The specific allowance for impaired loans decreased $350,000 to $1.3 million at September 30, 2017, compared to $1.7 million at December 31, 2016. The specific allowance for impaired loans represented 6.1% of total impaired loans at September 30, 2017 and 5.7% at December 31, 2016. The overall balance of impaired loans remained elevated partially due to an accounting rule (ASU 2011-02) adopted in 2011 that requires us to identify classified loans that renew at existing contractual rates as TDRs if the contractual rate is less than market rates for similar loans at the time of renewal.

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

We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (27.5%), followed by Manufacturing (13.3%) and Retail Trade (11.7%).

The ~~determination~~table below breaks down our commercial loan portfolio by industry type at March 31, 2023 and identifies the percentage of loans in each type that have a pass rating within our ~~loss factors is based upon our actual loss history by loan grade~~grading system (4 or better) and ~~adjusted for significant factors that,~~criticized rating (5 or worse) (dollars in management's judgment, affect the collectability of the portfolio as of the analysis date. We use a rolling 18 month actual net chargeoff history as the base for our computation. Over the past few years, the 18 month period computations have reflected sizeable decreases in net chargeoff experience. We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. Adjustments to the qualitative factors also involved consideration of different loss periods for the Bank, including 12, 24, 36, 48 and 60 month periods. We also considered the extended period of improved asset quality in assessing the overall qualitative component. thousands):

-49-

Index

	Total		Percent of Total Loans			Percent Grade 4 or Better			Percent Grade 5 or Worse
Industry:
Agricultural Products	$	47,478		4.67	%		85.04	%		14.96	%
Mining and Oil Extraction		397		0.04	%		89.17	%		10.83	%
Construction		86,876		8.54	%		97.56	%		2.44	%
Manufacturing		134,851		13.26	%		96.34	%		3.66	%
Wholesale Trade		68,215		6.71	%		100.00	%		0.00	%
Retail Trade		119,262		11.73	%		99.95	%		0.05	%
Transportation and Warehousing		68,983		6.78	%		99.94	%		0.06	%
Information		567		0.06	%		5.47	%		94.53	%
Finance and Insurance		44,467		4.37	%		100.00	%		0.00	%
Real Estate and Rental and Leasing		279,131		27.45	%		99.98	%		0.02	%
Professional, Scientific and Technical Services		5,807		0.57	%		96.68	%		3.32	%
Management of Companies and Enterprises		756		0.07	%		100.00	%		0.00	%
Administrative and Support Services		24,246		2.38	%		98.41	%		1.59	%
Education Services		4,639		0.46	%		100.00	%		0.00	%
Health Care and Social Assistance		37,907		3.73	%		100.00	%		0.00	%
Arts, Entertainment and Recreation		3,588		0.35	%		91.56	%		8.44	%
Accommodations and Food Services		51,198		5.04	%		86.78	%		13.22	%
Other Services		38,334		3.77	%		100.00	%		0.00	%
Total commercial loans	$	1,016,702		100.00	%		97.78	%		2.22	%

Considering ~~the change in~~ our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was ~~$12.0~~$13.8 million at ~~September 30, 2017~~March 31, 2023 (under CECL) and ~~$12.1~~$12.8 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.~~2022 (under incurred loss). The qualitative component of our allowance allocated to commercial loans was ~~$12.0~~$11.2 million at ~~September 30, 2017 (down from $12.4~~March 31, 2023 (under CECL) compared to $12.7 million at December 31, ~~2016)~~2022 (under incurred loss). Under CECL, we use historical peer loss history so the quantitative component receives a higher allocation and, with the addition of reasonable and supportable forecast assumption under CECL in choosing the historical loss period, less qualitative allocations related to economic conditions are necessary.

~~-51-~~

~~Index~~

Groups of homogeneous loans, such as residential real estate and open- and closed-end consumer loans, receive allowance allocations based on loan type. ~~A rolling 12 month (four quarter) historical loss experience period was applied to residential mortgage and consumer loan portfolios. As with commercial loans that are not considered impaired, the~~The determination of the allowance allocation percentage is based principally on ~~our~~peer historical loss ~~experience.~~experience under CECL. 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 for credit losses for consumer loans was ~~$3.0~~$2.8 million at ~~September 30, 2017~~March 31, 2023 (under CECL) and ~~$3.1~~$2.2 million at December 31, ~~2016.~~2022 (under incurred loss).

Allowance for credit losses allocated to loans identified as collateral dependent were $6,000 at March 31, 2023 (under CECL). Allowance allocations for loans identified as impaired at December 31, 2022 (under incurred loss) were $295,000.

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

See Note 1 - Significant Accounting Policies in this Form 10-Q for further descriptions of our allowance for credit loss estimation process. See also Note 3 - Loans in this Form 10-Q for further information regarding our loan portfolio and allowance.

Bank-Owned Life Insurance: Bank-owned life insurance increased $212,000 from December 31, 2022 to March 31, 2023 due to earnings on the underlying policies.

Premises and Equipment: Premises and equipment totaled ~~$46.8~~$40.2 million at ~~September 30, 2017,~~March 31, 2023, down ~~$3.2 million~~$57,000 from ~~$50.0~~$40.3 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 $176,000.2022.

Deposits and Other Borrowings: Total deposits ~~increased $57.5~~decreased $284.2 million to ~~$1.51~~$2.33 billion at ~~September 30, 2017,~~March 31, 2023, as compared to ~~$1.45~~$2.62 billion at December 31, ~~2016.~~ 2022. While the Bank experienced a decline in deposit balances during the three months ended March 31, 2023, most of the decline took place prior to the early March 2023 bank failures noted earlier. We experienced a seasonal run up in business deposits of about $90 million in December 2022, which came back out in January 2023. In addition, a couple of large business customers removed deposits totaling nearly $90 million in early March 2023 for specific designated purposes. We saw very little change in our deposit balances overall following the news of the bank failures and banking system disruption.

-50-

Index

Our deposit base is primarily made up of many small accounts, and balances at March 31, 2023 were comprised of 48% personal customers and 52% business customers. Our core deposits - which we define as deposits we have sourced within our local markets - represented 100% of our total deposits at March 31, 2023. Our total balances of $2.33 billion at March 31, 2023 remain elevated, reflecting a $625.5 million increase, or 37%, over pre-pandemic totals of $1.71 billion as of March 31, 2020.

Non-interest checking account balances decreased ~~$4.1~~$144.4 million during the ~~nine~~first three months of ~~2017.~~2023. Interest bearing demand account balances ~~increased $11.0~~decreased $151.9 million and savings and money market account balances ~~increased $32.0~~decreased $63.5 million in the first ~~nine~~three months of ~~2017.~~2023 as municipal and business customers have begun deploying their excess balances they carried during the pandemic, including stimulus funding. Certificates of deposits increased by ~~$18.6~~$75.6 million in the first ~~nine~~three months of ~~2017.~~2023 reflecting our increases in offered interest rates, particularly in the 12-18 month term. 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%~~30% of total deposits at ~~September 30, 2017~~March 31, 2023 and ~~35%~~31% of total deposits at December 31, ~~2016. These balances typically increase at year end for many of our commercial customers, then decline in the first quarter. Because~~2022. In recent years, because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types. We have begun to see some of these balances move to higher earning deposit types. Interest bearing demand, including money market and savings accounts, comprised ~~61%~~63% of total deposits at ~~September 30, 2017~~March 31, 2023 and ~~60%~~64% at December 31, ~~2016.~~2022. Time accounts as a percentage of total deposits were 6%7% at ~~September 30, 2017~~March 31, 2023 and 5%4% at December 31, ~~2016.~~2022.

Deposit balances in excess of the $250,000 FDIC insured limit totaled approximately $962.7 million, or 41% of total deposits, at March 31, 2023 and approximately $1.21 billion, or 45% of total deposits, at December 31, 2022. As discussed previously, we have sufficient liquid resources to cover all of the uninsured balances at March 31, 2023.

Borrowed funds ~~totaled $113.4 million~~ at ~~September 30, 2017, including $72.1~~March 31, 2023 consisted of $30.0 million of Federal Home Loan Bank (“FHLB”) ~~advances and $41.2~~advances. Borrowed funds at December 31, 2022 consisted of $30.0 million of FHLB advances. At March 31, 2023, we had $242.3 million in ~~long-term debt associated with trust preferred securities. Borrowed funds totaled $125.4~~available borrowing capacity at the FHLB.

CAPITAL RESOURCES

Total shareholders’ equity of $260.6 million at March 31, 2023 reflected an increase of $13.5 million from $247.0 million at December 31, 2016, including $84.2 million of FHLB advances and $41.2 million in long-term debt associated with trust preferred securities. Borrowed funds decreased by $12.1 million in the first nine months of 2017 primarily due to an early payoff of $10.0 million of an FHLB advance in July 2017.

~~CAPITAL RESOURCES~~

~~Total shareholders' equity of $173.5 million at September 30, 2017 increased $11.2 million from $162.2 million at December 31, 2016.~~2022. The increase was primarily a result of net income of ~~$14.1~~$12.0 million earned in the first ~~nine~~three months of ~~2017~~2023 and ~~an increase~~a positive swing of ~~$1.2~~$5.3 million in accumulated other comprehensive income (“AOCI”), partially offset by ~~the~~a payment of ~~$4.4~~$2.7 million in cash dividends to ~~shareholders.~~shareholders and $1.2 million reduction from adoption of the ASU 2016-13 CECL standard on January 1, 2023. The positive swing in AOCI was attributable to a decrease in market interest rates on bonds during the first quarter 2023 causing an increase in market value on our investment securities available for sale. The Bank was categorized as “well capitalized” at ~~September 30, 2017.~~March 31, 2023. The amount of capital retained by the Bank in excess of well capitalized minimums was $127.2 million at March 31, 2023.

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

~~-52-~~

~~Index~~

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

Macatawa Bank Corporation	Sept 30, 2017		June 30, 2017		March 31, 2017		Dec 31, 2016		Sept 30, 2016		March 31, 2023			Dec 31, 2022			Sept 30, 2022			June 30, 2022			March 31, 2022
Total capital to risk weighted assets	15.5	%	15.5	%	15.1	%	14.9	%	15.2	%		18.1	%		17.9	%		17.6	%		17.5	%		17.9	%
Common Equity Tier 1 to risk weighted assets	11.7		11.6		11.3		11.0		11.3			17.1			16.9			16.7			16.5			16.9
Tier 1 capital to risk weighted assets	14.4		14.3		14.0		13.7		14.1			17.1			16.9			16.7			16.5			16.9
Tier 1 capital to average assets	12.0		12.2		12.1		12.0		12.0			10.3			9.7			9.3			9.1			8.8

-51-

Index

LIQUIDITY

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

~~LIQUIDITY~~

Liquidity of Macatawa Bank: The liquidity of a financial institution reflects its ability to manage a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus on developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for our investment and loan portfolios. Our sources of liquidity include our borrowing capacity with the ~~FRB's~~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, maturities of our securities held to maturity, growth of our deposits, federal funds sold and other short-term investments, and the various capital resources discussed above. In March 2023, the Federal Reserve Bank introduced a new borrowing facility named the Bank Term Funding Program. This program allows an institution to borrow against its investment portfolio at a fixed rate for up to one year and to use their investment portfolio for liquidity without incurring losses by liquidating those investments. At March 31, 2023, we would qualify for approximately $642.2 million in such borrowing capacity.

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

We have actively pursued initiatives to maintain a strong liquidity position. The Bank has reduced its reliance on non-core funding sources, including brokered deposits, and focused on achieving a non-core funding dependency ratio below its peer group average. We have had no brokered deposits on our balance sheet since December 2011. We continue to maintain significant on-balance sheet liquidity. At ~~September 30, 2017,~~March 31, 2023, the Bank held ~~$131.6~~$391.3 million of federal funds sold and other short-term investments. In addition, the Bank had available borrowing capacity from correspondent banks, including the Bank Term Funding Program discussed above, of approximately ~~$304.1~~$951.0 million as of ~~September 30, 2017.~~

InMarch 31, 2023. Finally, because we have maintained the ~~normal course~~discipline of ~~business, we enter into certain contractual obligations, including obligations which are considered~~buying shorter-term bond durations in our ~~overall liquidity management. The table below summarizes our significant contractual obligations at September 30, 2017 (dollars~~investment securities portfolio, we have $393.0 million in ~~thousands):~~bond maturities and paydowns coming into the Bank in the next 24 months ending March 31, 2025.

Less than
1 year
1-3 years 3-5 years
More than
5 years

Long term debt $ --- $ --- $ --- $ 41,238
Time deposit maturities 59,436 30,505 2,262 40
Other borrowed funds 42,118 20,000 10,000 ---
Operating lease obligations 243 422 --- ---
Total $ 101,797 $ 50,927 $ 12,262 $ 41,278

In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan commitments and standby letters of credit. The level and fluctuation of these commitments is also considered in our overall liquidity management. At ~~September 30, 2017,~~March 31, 2023, we had a total of ~~$495.2~~$719.0 million in unused lines of credit, ~~$121.8~~$115.1 million in unfunded loan commitments and ~~$12.1~~$11.9 million in standby letters of credit.

~~-53-~~

~~Index~~

Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises. Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year. Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings. In ~~2016,~~2022, the Bank paid dividends to the Company totaling ~~$6.2~~$11.9 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,~~2023, the Bank paid a dividend totaling ~~$1.8~~$3.1 million to the Company in anticipation of the common share cash dividend of ~~$0.04~~$0.08 per share paid on February 28, ~~2017~~2023 to shareholders of record on February 13, ~~2017.~~2023. The cash distributed for this cash dividend payment totaled $1.4 million. On May 30, 2017, the Bank paid a dividend totaling $1.9 million to the Company in anticipation of the common share cash dividend of $0.04 per share paid on May 30, 2017 to shareholders of record on May 15, 2017. The cash distributed for this cash dividend payment totaled $1.4 million. On August 29, 2017, the Bank paid a dividend totaling $2.0 million to the Company in anticipation of the common share cash dividend of $0.05 per share paid on August 30, 2017 to shareholders of record on August 15, 2017. The cash distributed for this cash dividend payment totaled $1.7$2.7 million. The Company retained the remaining balance in each period for general corporate purposes. At ~~September 30, 2017,~~March 31, 2023, the Bank had a retained earnings balance of ~~$46.6~~$114.5 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 ~~September 30, 2017~~March 31, 2023 was ~~$6.0~~$8.1 million. The Company believes that it has sufficient liquidity to meet its cash flow obligations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and future results could differ. The allowance for ~~loan~~credit 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~~credit losses and the related provision for ~~loan~~credit losses is described above in the ~~"Allowance~~“Allowance for ~~Loan Losses"~~Credit 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~~credit losses and the related provision for ~~loan~~credit losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for ~~loan~~credit 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~~credit losses that may be significantly different than the levels that we recorded in the first ~~nine~~three months of ~~2017.~~2023.

-52-

Index

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

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

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

Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. At ~~September 30, 2017,~~March 31, 2023, we had gross deferred tax assets of ~~$8.4~~$10.8 million and gross deferred tax liabilities of ~~$2.4~~$2.3 million resulting in a net deferred tax asset of ~~$6.0~~$8.5 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, we~~standard. We concluded at ~~September 30, 2017~~March 31, 2023 that no valuation allowance on our net deferred tax asset was required. Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.

~~-54-~~

~~Index~~

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Macatawa Bank has only limited agricultural-related loan assets, and therefore has no significant exposure to changes in commodity prices.

Our balance sheet has sensitivity, in various categories of assets and liabilities, to changes in prevailing rates in the U.S. for prime rate, mortgage rates, U.S. Treasury rates and various money market indexes. Our asset/liability management process aids us in providing liquidity while maintaining a balance between interest earning assets and interest bearing liabilities.

We utilize a simulation model as our primary tool to assess the direction and magnitude of variations in net interest income and the economic value of equity (“EVE”) resulting from potential changes in market interest rates. Key assumptions in the model include contractual cash flows and maturities of interest-sensitive assets and interest-sensitive liabilities, prepayment speeds on certain assets, and changes in market conditions impacting loan and deposit pricing. We also include pricing floors on discretionary priced liability products which limit how low various checking and savings products could go under declining interest rates. These floors reflect our pricing philosophy in response to changing interest rates.

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

-53-

Index

The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of ~~September 30, 2017~~March 31, 2023 (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	%	$	380,272		(6.13	)%	$	92,806		1.64	%
Interest rates up 100 basis points		227,555		(1.46	)		54,498		1.75			392,526		(3.10	)		92,049		0.81
No change		230,918		---			53,559		---			405,104		—			91,313		—
Interest rates down 100 basis points		214,540		(7.09	)		51,752		(3.37	)		412,343		1.79			90,291		(1.12	)
Interest rates down 200 basis points		206,841		(10.43	)		50,249		(6.18	)		402,802		(0.57	)		87,957		(3.68	)

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.

~~-55-~~

~~Index~~

Item 4:

CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and ~~Procedures.~~Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer ~~("CEO"~~(“CEO”) and Chief Financial Officer ~~("CFO"~~(“CFO”), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) as of ~~September 30, 2017,~~March 31, 2023, 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~~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~~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~~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~~Commission’s rules and forms.

(b)

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

~~-56-~~-54-

Index

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 first quarter of 2023. 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
January 1 - January 31, 2023
Employee Transactions		1,338	$	10.92
February 1 - February 28, 2023
Employee Transactions		—	$	—
March 1 - March 31, 2023
Employee Transactions		—	$	—
Total for First Quarter ended March 31, 2023
Employee Transactions		1,338	$	10.92

Item 6.

EXHIBITS.

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

~~-57-~~-55-

Index

SIGNATURES

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

	MACATAWA BANK CORPORATION

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

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

Dated: ~~October 26, 2017~~April 27, 2023

~~-58-~~-56-

		Page Number
		~~Number~~

Part I.	Financial Information:

	Item 1.
	Consolidated Financial Statements	4

	Notes to Consolidated Financial Statements	10

	Item 2.
	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	5553

	Item 4.
	Controls and Procedures	5654

Part II.	Other Information:

	Item 6. 2.
	Unregistered Sales of Equity Securities and Use of Proceeds	55

	Item 6.
	Exhibits	5755

Signatures	58	56

	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

	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

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

	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

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	$	---

	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

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

	Nine Months Ended September 30, 2017								Nine Months Ended September 30, 2016
	# 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		$	---

	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

	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

	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

	Level in Fair Value Hierarchy	September 30, 2017						December 31, 2016
	Level in Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and due from banks	Level 1	$	28,318		$	28,318		$	27,690		$	27,690
Cash equivalents	Level 2		131,571			131,571			62,129			62,129
Securities held to maturity	Level 3		61,927			62,854			69,378			69,849
FHLB stock			11,558		NA				11,558		NA
Loans, net	Level 2		1,240,828			1,237,274			1,260,414			1,247,842
Bank owned life insurance	Level 3		40,042			40,042			39,274			39,274
Accrued interest receivable	Level 2		4,532			4,532			4,092			4,092

Financial liabilities
Deposits	Level 2		(1,506,178	)		(1,506,115	)		(1,448,724	)		(1,448,692	)
Other borrowed funds	Level 2		(72,118	)		(71,946	)		(84,173	)		(84,051	)
Long-term debt	Level 2		(41,238	)		(36,562	)		(41,238	)		(36,112	)
Accrued interest payable	Level 2		(545	)		(545	)		(282	)		(282	)

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

	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

	Notional Amount		Balance Sheet Location	Fair Value
March 31, 2023
Derivative assets
Interest rate swaps	$	57,560	Other Assets	$	5,294

Derivative liabilities
Interest rate swaps		57,560	Other Liabilities		5,294

2017	$	---
2018		52,118
2019		10,000
2020		---
2021		10,000
Thereafter		---
	$	72,118

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

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

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

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


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

		Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
Commercial loans originated	$	162,073		$	156,360
Repayments of commercial loans		(125,828	)		(115,858	)
Change in undistributed - available credit		(54,368	)		(3,302	)
Net increase/(decrease) in total commercial loans	$	(18,123	)	$	37,200

	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

(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
Nonperforming loans		0.5			0.7			0.4			0.3			0.2
Other real estate owned and repo assets		6.7			7.1			12.1			12.3			13.1
Total nonperforming assets		7.2			7.8			12.5			12.6			13.3
Net charge-offs (recoveries)		(0.2	)		(0.4	)		(0.2	)		(1.2	)		(0.1	)
Total delinquencies		0.8			0.8			0.9			1.4			0.3

	Less than 1 year		1-3 years		3-5 years		More than 5 years
Long term debt	$	---	$	---	$	---	$	41,238
Time deposit maturities		59,436		30,505		2,262		40
Other borrowed funds		42,118		20,000		10,000		---
Operating lease obligations		243		422		---		---
Total	$	101,797	$	50,927	$	12,262	$	41,278