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Section 1: 10-Q (10-Q)


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, 2019

OR

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

For the transition period from _______ to _______

Commission file number: 000-25927

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

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

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

Registrant's telephone number, including area code: (616) 820-1444
 
Securities registered pursuant to Section 12(b) of the Act:

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

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
 
The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 34,061,080 shares of the Company's Common Stock (no par value) were outstanding as of October 24, 2019.



Forward-Looking Statements
 
This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “could”, “may”, “should”, “will”, “is likely”, or is “possible” or “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, those related to future levels of earning assets, future composition of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for loan losses and reserve recoveries, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future interest rate levels, future net interest margin levels, the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, loan demand and loan growth and the future level of other revenue sources. Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.
 
Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2018. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.


INDEX

 
 
Page
Number
 
 
 
Part I.
Financial Information:
 
 
 
 
 
Item 1.
 
 
4
 
 
 
 
10
 
 
 
 
Item 2.
 
 
37
 
 
 
 
Item 3.
 
 
49
 
 
 
 
Item 4.
 
 
50
 
 
 
Part II.
Other Information:
 
 
 
 
 
Item 2.
 
 
51
 
 
 
 
Item 6.
 
 
51
 
 
 
 
52
 
Part I  Financial Information
Item 1.
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2019 (unaudited) and December 31, 2018
(Dollars in thousands, except per share data)
 

   
September 30,
2019
   
December 31,
2018
 
ASSETS
           
Cash and due from banks
 
$
50,870
   
$
40,526
 
Federal funds sold and other short-term investments
   
319,566
     
130,758
 
Cash and cash equivalents
   
370,436
     
171,284
 
Debt securities available for sale, at fair value
   
209,895
     
226,986
 
Debt securities held to maturity (fair value 2019 - $85,109 and 2018 - $71,505)
   
81,995
     
70,334
 
Federal Home Loan Bank (FHLB) stock
   
11,558
     
11,558
 
Loans held for sale, at fair value
   
1,317
     
415
 
Total loans
   
1,377,227
     
1,405,658
 
Allowance for loan losses
   
(17,145
)
   
(16,876
)
Net loans
   
1,360,082
     
1,388,782
 
Premises and equipment – net
   
43,956
     
44,862
 
Accrued interest receivable
   
5,335
     
5,279
 
Bank-owned life insurance
   
41,960
     
41,185
 
Other real estate owned - net
   
3,109
     
3,380
 
Net deferred tax asset
   
2,097
     
3,380
 
Other assets
   
12,758
     
7,679
 
Total assets
 
$
2,144,498
   
$
1,975,124
 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Deposits
               
Noninterest-bearing
 
$
501,731
   
$
485,530
 
Interest-bearing
   
1,318,409
     
1,191,209
 
Total deposits
   
1,820,140
     
1,676,739
 
Other borrowed funds
   
60,000
     
60,000
 
Long-term debt
   
41,238
     
41,238
 
Accrued expenses and other liabilities
   
11,335
     
6,294
 
Total liabilities
   
1,932,713
     
1,784,271
 
Commitments and contingent liabilities
   
     
 
Shareholders' equity
               
Common stock, no par value, 200,000,000 shares authorized; 34,061,080 and 34,045,411 shares issued and outstanding at September 30, 2019 and December 31, 2018
   
218,052
     
217,783
 
Retained deficit
   
(7,978
)
   
(24,652
)
Accumulated other comprehensive income (loss)
   
1,711
     
(2,278
)
Total shareholders' equity
   
211,785
     
190,853
 
Total liabilities and shareholders' equity
 
$
2,144,498
   
$
1,975,124
 

See accompanying notes to consolidated financial statements.

-4-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three and nine month periods ended September 30, 2019 and 2018
(unaudited)
(Dollars in thousands, except per share data)
 

   
Three Months
Ended
September 30,
2019
   
Three Months
Ended
September 30,
2018
   
Nine Months
Ended
September 30,
2019
   
Nine Months
Ended
September 30,
2018
 
Interest income
                       
Loans, including fees
 
$
15,604
   
$
14,952
   
$
48,179
   
$
43,068
 
Securities
                               
Taxable
   
968
     
945
     
2,952
     
2,730
 
Tax-exempt
   
919
     
846
     
2,623
     
2,627
 
FHLB Stock
   
158
     
130
     
476
     
447
 
Federal funds sold and other short-term investments
   
1,430
     
814
     
3,278
     
1,670
 
Total interest income
   
19,079
     
17,687
     
57,508
     
50,542
 
Interest expense
                               
Deposits
   
2,343
     
1,609
     
6,965
     
3,921
 
Other borrowings
   
349
     
364
     
1,021
     
1,056
 
Long-term debt
   
551
     
552
     
1,710
     
1,567
 
Total interest expense
   
3,243
     
2,525
     
9,696
     
6,544
 
Net interest income
   
15,836
     
15,162
     
47,812
     
43,998
 
Provision for loan losses
   
     
     
(450
)
   
(400
)
Net interest income after provision for loan losses
   
15,836
     
15,162
     
48,262
     
44,398
 
Noninterest income
                               
Service charges and fees
   
1,139
     
1,132
     
3,267
     
3,242
 
Net gains on mortgage loans
   
824
     
270
     
1,650
     
633
 
Trust fees
   
920
     
889
     
2,813
     
2,759
 
ATM and debit card fees
   
1,469
     
1,426
     
4,276
     
4,117
 
Gain on sales of securities
   
     
     
     
 
Bank owned life insurance ("BOLI") income
   
252
     
239
     
737
     
715
 
Other
   
609
     
543
     
1,896
     
1,632
 
Total noninterest income
   
5,213
     
4,499
     
14,639
     
13,098
 
Noninterest expense
                               
Salaries and benefits
   
6,272
     
6,360
     
18,895
     
18,942
 
Occupancy of premises
   
966
     
939
     
3,055
     
2,984
 
Furniture and equipment
   
887
     
760
     
2,597
     
2,338
 
Legal and professional
   
211
     
188
     
652
     
606
 
Marketing and promotion
   
228
     
228
     
689
     
685
 
Data processing
   
735
     
747
     
2,226
     
2,239
 
FDIC assessment
   
     
127
     
239
     
391
 
Interchange and other card expense
   
347
     
361
     
1,057
     
1,053
 
Bond and D&O Insurance
   
103
     
111
     
309
     
330
 
Net (gains) losses on repossessed and foreclosed properties
   
     
26
     
(69
)
   
450
 
Administration and disposition of problem assets
   
46
     
82
     
183
     
202
 
Other
   
1,214
     
1,310
     
3,749
     
3,712
 
Total noninterest expenses
   
11,009
     
11,239
     
33,582
     
33,932
 
Income before income tax
   
10,040
     
8,422
     
29,319
     
23,564
 
Income tax expense
   
1,882
     
1,570
     
5,512
     
4,228
 
Net income
 
$
8,158
   
$
6,852
   
$
23,807
   
$
19,336
 
Basic earnings per common share
 
$
0.24
   
$
0.20
   
$
0.70
   
$
0.57
 
Diluted earnings per common share
 
$
0.24
   
$
0.20
   
$
0.70
   
$
0.57
 
Cash dividends per common share
 
$
0.07
   
$
0.06
   
$
0.21
   
$
0.18
 

See accompanying notes to consolidated financial statements.

-5-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and nine month periods ended September 30, 2019 and 2018
(unaudited)
(Dollars in thousands)
 

   
Three Months
Ended
September 30,
2019
   
Three Months
Ended
September 30,
2018
   
Nine Months
Ended
September 30,
2019
   
Nine Months
Ended
September 30,
2018
 
Net income
 
$
8,158
   
$
6,852
   
$
23,807
   
$
19,336
 
Other comprehensive income:
                               
Unrealized gains (losses):
                               
Net change in unrealized gains (losses) on debt securities available for sale
   
468
     
(856
)
   
5,049
     
(3,725
)
Tax effect
   
(98
)
   
180
     
(1,060
)
   
782
 
Net change in unrealized gains (losses) on debt securities available for sale, net of tax
   
370
     
(676
)
   
3,989
     
(2,943
)
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
   
370
     
(676
)
   
3,989
     
(2,943
)
Comprehensive income
 
$
8,528
   
$
6,176
   
$
27,796
   
$
16,393
 

See accompanying notes to consolidated financial statements.

-6-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three and nine month periods ended September 30, 2019 and 2018
(unaudited)
(Dollars in thousands, except per share data)
 

   
Common
Stock
   
Retained
Deficit
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders'
Equity
 
Balance, July 1, 2018
 
$
217,675
   
$
(34,149
)
 
$
(3,812
)
 
$
179,714
 
Net income for the three months ended September 30, 2018
   
     
6,852
     
     
6,852
 
Cash dividends at $.06 per share
   
     
(2,024
)
   
     
(2,024
)
Net change in unrealized loss on debt securities available for sale, net of tax
   
     
     
(676
)
   
(676
)
Stock compensation expense
   
110
     
     
     
110
 
Balance, September 30, 2018
 
$
217,785
   
$
(29,321
)
 
$
(4,488
)
 
$
183,976
 
                                 
Balance, July 1, 2019
 
$
217,942
   
$
(13,764
)
 
$
1,341
   
$
205,519
 
Net income for the three months ended September 30, 2019
   
     
8,158
     
     
8,158
 
Cash dividends at $.07 per share
   
     
(2,372
)
   
     
(2,372
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
370
     
370
 
Stock compensation expense
   
110
     
     
     
110
 
Balance, September 30, 2019
 
$
218,052
   
$
(7,978
)
 
$
1,711
   
$
211,785
 

   
Common
Stock
   
Retained
Deficit
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders'
Equity
 
Balance, January 1, 2018, as reported
 
$
217,081
   
$
(42,804
)
 
$
(1,291
)
 
$
172,986
 
Cumulative effect adjustment upon adoption of ASU 2018-02
   
     
278
     
(278
)
   
 
Balance, January 1, 2018, adjusted
 
$
217,081
   
$
(42,526
)
 
$
(1,569
)
 
$
172,986
 
Reclassification for equity securities upon adoption of ASU 2016-01
   
     
(24
)
   
24
     
 
Net income for the nine months ended September 30, 2018
   
     
19,336
     
     
19,336
 
Cash dividends at $.18 per share
   
     
(6,107
)
   
     
(6,107
)
Repurchase of 452 shares for taxes withheld on vested restricted stock
   
(5
)
   
     
     
(5
)
Issuance of 45,000 shares for stock option exercise
   
386
     
     
     
386
 
Net change in unrealized loss on debt securities available for sale, net of tax
   
     
     
(2,943
)
   
(2,943
)
Stock compensation expense
   
323
     
     
     
323
 
Balance, September 30, 2018
 
$
217,785
   
$
(29,321
)
 
$
(4,488
)
 
$
183,976
 
                                 
Balance, January 1, 2019
 
$
217,783
   
$
(24,652
)
 
$
(2,278
)
 
$
190,853
 
Net income for the nine months ended September 30, 2019
   
     
23,807
     
     
23,807
 
Cash dividends at $.21 per share
   
     
(7,133
)
   
     
(7,133
)
Repurchase of 452 shares for taxes withheld on vested restricted stock
   
(5
)
   
     
     
(5
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
3,989
     
3,989
 
Stock compensation expense
   
274
     
     
     
274
 
Balance, September 30, 2019
 
$
218,052
   
$
(7,978
)
 
$
1,711
   
$
211,785
 

See accompanying notes to consolidated financial statements.

-7-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine month periods ended September 30, 2019 and 2018
(unaudited)
(Dollars in thousands)
 

   
Nine Months
Ended
September 30,
2019
   
Nine Months
Ended
September 30,
2018
 
Cash flows from operating activities
           
Net income
 
$
23,807
   
$
19,336
 
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization
   
1,675
     
1,894
 
Stock compensation expense
   
274
     
323
 
Provision for loan losses
   
(450
)
   
(400
)
Origination of loans for sale
   
(53,709
)
   
(23,629
)
Proceeds from sales of loans originated for sale
   
54,457
     
25,470
 
Net gains on mortgage loans
   
(1,650
)
   
(633
)
Write-down of other real estate
   
10
     
291
 
Net (gain) loss on sales of other real estate
   
(79
)
   
158
 
Deferred income tax expense
   
222
     
565
 
Change in accrued interest receivable and other assets
   
(5,173
)
   
(1,473
)
Earnings in bank-owned life insurance
   
(737
)
   
(715
)
Change in accrued expenses and other liabilities
   
4,391
     
528
 
Net cash from operating activities
   
23,038
     
21,715
 
Cash flows from investing activities
               
Loan originations and payments, net
   
29,150
     
(24,064
)
Purchases of securities available for sale
   
(23,023
)
   
(24,015
)
Purchases of securities held to maturity
   
(17,778
)
   
(7,624
)
Proceeds from:
               
Maturities and calls of securities
   
45,839
     
28,085
 
Principal paydowns on securities
   
6,324
     
15,471
 
Sales of other real estate
   
340
     
2,146
 
Additions to premises and equipment
   
(1,001
)
   
(894
)
Net cash from investing activities
   
39,851
     
(10,895
)
Cash flows from financing activities
               
Change in deposits
   
143,401
     
38,733
 
Repayments and maturities of other borrowed funds
   
(10,000
)
   
(42,118
)
Proceeds from other borrowed funds
   
10,000
     
20,000
 
Proceeds from exercise of stock options
   
     
386
 
Repurchase of shares for taxes withheld on vested restricted stock
   
(5
)
   
(5
)
Cash dividends paid
   
(7,133
)
   
(6,107
)
Net cash from financing activities
   
136,263
     
10,889
 
Net change in cash and cash equivalents
   
199,152
     
21,709
 
Cash and cash equivalents at beginning of period
   
171,284
     
161,467
 
Cash and cash equivalents at end of period
 
$
370,436
   
$
183,176
 

See accompanying notes to consolidated financial statements.

-8-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine month periods ended September 30, 2019 and 2018
(unaudited)
(Dollars in thousands)
 

   
Nine Months
Ended
September 30,
2019
   
Nine Months
Ended
September 30,
2018
 
Supplemental cash flow information
           
Interest paid
 
$
9,646
   
$
6,379
 
Income taxes paid
   
5,100
     
3,500
 
Supplemental noncash disclosures:
               
Transfers from loans to other real estate
   
     
293
 
Security settlement
   
650
     
(908
)
Reclassification for equity securities upon adoption of ASU 2016-01
   
     
1,470
 

See accompanying notes to consolidated financial statements.

-9-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Macatawa Bank Corporation ("the Company", "our", "we") and its wholly-owned subsidiary, Macatawa Bank ("the Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank operates 26 full service branch offices providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan.
 
The Company owns all of the common stock of Macatawa Statutory Trust 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 accepted in the United States of America.
 
Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) believed necessary for a fair presentation have been included.
 
Operating results for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
 
Use of Estimates:  To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.  The allowance for loan losses, valuation of deferred tax assets, loss contingencies, fair value of other real estate owned and fair values of financial instruments are particularly subject to change.
 
Allowance for Loan Losses: The allowance for loan losses (allowance) is a valuation allowance for probable incurred credit losses inherent in our loan portfolio, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans. Management believes the allowance for loan losses balance to be adequate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, economic conditions and other relevant factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance for loan losses.
 
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. At September 30, 2019, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.
 
A loan is impaired when, based on current information and events, it is believed to be probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified and a concession has been made, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
 
Commercial and commercial real estate loans with relationship balances exceeding $500,000 and an internal risk grading of 6 or worse are evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated and the loan is reported at the present value of estimated future cash flows using the loan’s existing interest rate or at the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and they are not separately identified for impairment disclosures.

-10-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Troubled debt restructurings are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.
 
Foreclosed Assets: Assets acquired through or instead of loan foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed unless they add value to the property.
 
Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
 
The Company recognizes a tax position as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognizes interest and penalties related to income tax matters in income tax expense.
 
During the first quarter of 2018, the Company adopted ASU 2018-02, allowing for the reclassification of the income tax effects of the revaluation the deferred tax impact on accumulated other comprehensive income (AOCI) due to the enactment of tax reform at the end of 2017.  The Company’s only component of AOCI is the fair value adjustment for securities available for sale.  Upon adoption of this ASU, a transfer was made from AOCI to retained earnings in the amount of $278,000.
 
Revenue Recognition:  The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured.  The Company’s primary source of revenue is interest income from the Bank’s loans and investment securities.  The Company also earns noninterest revenue from various banking services offered by the Bank.
 
Interest Income: The Company’s largest source of revenue is interest income which is primarily recognized on an accrual basis based on contractual terms written into loans and investment contracts.
 
Noninterest Revenue:  The Company derives the majority of its noninterest revenue from: (1) service charges for deposit related services, (2) gains related to mortgage loan sales, (3) trust fees and (4) debit and credit card interchange income.  Most of these services are transaction based and revenue is recognized as the related service is provided.
 
Derivatives:  Certain of the Bank’s commercial loan customers have entered into interest rate swap agreements directly with the Bank.  At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer.   This is known as a back-to-back swap agreement.  Under this arrangement the Bank has five freestanding interest rate swaps, each of which is carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At September 30, 2019 and December 31, 2018, the total notional amount of such agreements was $59.1 million and $66.0 million, respectively, and resulted in a derivative asset with a fair value of $2.4 million and $700,000, respectively, which were included in other assets and a derivative liability of $2.4 million and $700,000, 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:  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 applies primarily to operating leases and the impact of adoption of this ASU by the Company had a nominal income impact and resulted in a right-of-use asset of $800,000 and a corresponding lease obligation liability of $800,000 being established as of January 1, 2019.  The right-of-use asset is included in other assets and the lease obligation liability is included in other liabilities in the September 30, 2019 consolidated balance sheet.

-11-

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 was effective for years beginning after December 15, 2018, and interim periods within those years.  The impact of adoption of this ASU was not material.
 
Newly Issued Not Yet Effective Standards:  FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2019, and for interim periods within those years.  The Company selected a software vendor for applying this new ASU, began implementation of the software in the second quarter of 2018, completed integration during the third quarter of 2018 and ran parallel computations with both systems using the current GAAP incurred loss model in the fourth quarter of 2018.  The Company went live with this software beginning in January 2019 for its monthly incurred loss computations and began modeling the new current expected credit loss model assumptions to the allowance for loan losses computation in the first quarter of 2019 and will continue throughout 2019.  In the second and third quarters of 2019, the Company modeled the various methods prescribed in the ASU against the Company’s identified loan segments.  The Company anticipates continuing to run parallel computations as it continues to evaluate the impact of adoption of the new standard.  On October 16, 2019, FASB voted to delay the effective date of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022.
 
-12-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 


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

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
September 30, 2019
                       
Available for Sale
                       
U.S. Treasury and federal agency securities
 
$
79,489
   
$
85
   
$
(182
)
 
$
79,392
 
U.S. Agency MBS and CMOs
   
34,512
     
614
     
(27
)
   
35,099
 
Tax-exempt state and municipal bonds
   
45,282
     
1,192
     
     
46,474
 
Taxable state and municipal bonds
   
43,319
     
459
     
(24
)
   
43,754
 
Corporate bonds and other debt securities
   
5,128
     
55
     
(7
)
   
5,176
 
   
$
207,730
   
$
2,405
   
$
(240
)
 
$
209,895
 
Held to Maturity
                               
Tax-exempt state and municipal bonds
 
$
81,995
   
$
3,114
   
$
   
$
85,109
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
December 31, 2018
                       
Available for Sale
                       
U.S. Treasury and federal agency securities
 
$
97,102
   
$
6
   
$
(1,710
)
 
$
95,398
 
U.S. Agency MBS and CMOs
   
33,287
     
97
     
(494
)
   
32,890
 
Tax-exempt state and municipal bonds
   
45,212
     
246
     
(331
)
   
45,127
 
Taxable state and municipal bonds
   
46,565
     
59
     
(690
)
   
45,934
 
Corporate bonds and other debt securities
   
7,703
     
2
     
(68
)
   
7,637
 
   
$
229,869
   
$
410
   
$
(3,293
)
 
$
226,986
 
Held to Maturity
                               
Tax-exempt state and municipal bonds
 
$
70,334
   
$
1,488
   
$
(317
)
 
$
71,505
 

There were no sales of securities in the three and nine month periods ended September 30, 2019 and 2018. 

Contractual maturities of debt securities at September 30, 2019 were as follows (dollars in thousands):

   
Held–to-Maturity Securities
   
Available-for-Sale Securities
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
Due in one year or less
 
$
18,061
   
$
18,143
   
$
22,217
   
$
22,217
 
Due from one to five years
   
30,741
     
31,472
     
111,718
     
112,399
 
Due from five to ten years
   
13,403
     
14,253
     
39,863
     
40,781
 
Due after ten years
   
19,790
     
21,241
     
33,932
     
34,498
 
   
$
81,995
   
$
85,109
   
$
207,730
   
$
209,895
 
-13-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 


NOTE 2 – SECURITIES (Continued)

Securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (dollars in thousands):

   
Less than 12 Months
   
12 Months or More
   
Total
 
September 30, 2019
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Available for Sale
                                   
U.S. Treasury and federal agency securities
 
$
4,007
   
$
(10
)
 
$
39,233
   
$
(172
)
 
$
43,240
   
$
(182
)
U.S. Agency MBS and CMOs
   
2,857
     
(15
)
   
1,282
     
(12
)
   
4,139
     
(27
)
Tax-exempt state and municipal bonds
   
447
     
     
     
     
447
     
 
Taxable state and municipal bonds
   
3,036
     
(7
)
   
6,729
     
(17
)
   
9,765
     
(24
)
Corporate bonds and other debt securities
   
     
     
1,253
     
(7
)
   
1,253
     
(7
)
Total
 
$
10,347
   
$
(32
)
 
$
48,497
   
$
(208
)
 
$
58,844
   
$
(240
)
                                                 
Held to Maturity
                                               
Tax-exempt state and municipal bonds
 
$
   
$
   
$
   
$
   
$
   
$
 

   
Less than 12 Months
   
12 Months or More
   
Total
 
December 31, 2018
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Available for Sale
                                   
U.S. Treasury and federal agency securities
 
$
1,974
   
$
(26
)
 
$
82,895
   
$
(1,622
)
 
$
84,869
   
$
(1,648
)
U.S. Agency MBS and CMOs
   
1,728
     
(13
)
   
18,712
     
(481
)
   
20,440
     
(494
)
Tax-exempt state and municipal bonds
   
8,987
     
(69
)
   
10,785
     
(262
)
   
19,772
     
(331
)
Taxable state and municipal bonds
   
4,035
     
(19
)
   
37,021
     
(671
)
   
41,056
     
(690
)
Corporate bonds and other debt securities
   
2,698
     
(12
)
   
8,170
     
(118
)
   
10,868
     
(130
)
Total temporarily impaired
 
$
19,422
   
$
(139
)
 
$
157,583
   
$
(3,154
)
 
$
177,005
   
$
(3,293
)
                                                 
Held to Maturity
                                               
Tax-exempt state and municipal bonds
 
$
8,533
   
$
(76
)
 
$
4,683
   
$
(241
)
 
$
13,216
   
$
(317
)

Other-Than-Temporary-Impairment
 
Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. At September 30, 2019, 62 securities available for sale with fair values totaling $58.8 million had unrealized losses totaling $240,000.  There were no  securities held to maturity with  unrealized losses at September 30, 2019.  Management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities.  In addition, management believes it is more likely than not that the Company will not be required to sell any if its investment securities before a recovery of cost.  Management determined that the unrealized losses for the three and nine month periods ended September 30, 2019 and 2018 were attributable to changes in interest rates and not due to credit quality.  As such, no OTTI charges were necessary during each period.
 
Securities with a carrying value of approximately $3.0 million and $1.0 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at September 30, 2019 and December 31, 2018, respectively.

-14-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 


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

   
September 30,
2019
   
December 31,
2018
 
Commercial and industrial
 
$
492,085
   
$
513,345
 
Commercial real estate:
               
Residential developed
   
15,516
     
14,825
 
Unsecured to residential developers
   
     
 
Vacant and unimproved
   
36,083
     
44,169
 
Commercial development
   
677
     
712
 
Residential improved
   
114,147
     
98,500
 
Commercial improved
   
292,976
     
295,618
 
Manufacturing and industrial
   
121,069
     
114,887
 
Total commercial real estate
   
580,468
     
568,711
 
Consumer
               
Residential mortgage
   
225,012
     
238,174
 
Unsecured
   
303
     
130
 
Home equity
   
73,746
     
78,503
 
Other secured
   
5,613
     
6,795
 
Total consumer
   
304,674
     
323,602
 
Total loans
   
1,377,227
     
1,405,658
 
Allowance for loan losses
   
(17,145
)
   
(16,876
)
   
$
1,360,082
   
$
1,388,782
 

-15-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 


NOTE 3 – LOANS (Continued)

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


Three months ended September 30, 2019
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
7,231
   
$
6,309
   
$
3,296
   
$
50
   
$
16,886
 
Charge-offs
   
     
     
(48
)
   
     
(48
)
Recoveries
   
233
     
51
     
23
     
     
307
 
Provision for loan losses
   
23
     
105
     
(105
)
   
(23
)
   
 
Ending Balance
 
$
7,487
   
$
6,465
   
$
3,166
   
$
27
   
$
17,145
 

Three months ended September 30, 2018
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,149
   
$
6,876
   
$
3,651
   
$
19
   
$
16,695
 
Charge-offs
   
     
     
(30
)
   
     
(30
)
Recoveries
   
17
     
71
     
50
     
     
138
 
Provision for loan losses
   
(25
)
   
23
     
(10
)
   
12
     
 
Ending Balance
 
$
6,141
   
$
6,970
   
$
3,661
   
$
31
   
$
16,803
 


Nine months ended September 30, 2019
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,856
   
$
6,544
   
$
3,449
   
$
27
   
$
16,876
 
Charge-offs
   
     
(132
)
   
(114
)
   
     
(246
)
Recoveries
   
510
     
342
     
113
     
     
965
 
Provision for loan losses
   
121
     
(289
)
   
(282
)
   
     
(450
)
Ending Balance
 
$
7,487
   
$
6,465
   
$
3,166
   
$
27
   
$
17,145
 

Nine months ended September 30, 2018
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,478
   
$
6,590
   
$
3,494
   
$
38
   
$
16,600
 
Charge-offs
   
(66
)
   
     
(90
)
   
     
(156
)
Recoveries
   
106
     
530
     
123
     
     
759
 
Provision for loan losses
   
(377
)
   
(150
)
   
134
     
(7
)
   
(400
)
Ending Balance
 
$
6,141
   
$
6,970
   
$
3,661
   
$
31
   
$
16,803
 

-16-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 


NOTE 3 – LOANS (Continued)
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method (dollars in thousands):

September 30, 2019
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                             
Ending allowance attributable to loans:
                             
Individually reviewed for impairment
 
$
1,184
   
$
35
   
$
411
   
$
   
$
1,630
 
Collectively evaluated for impairment
   
6,303
     
6,430
     
2,755
     
27
     
15,515
 
Total ending allowance balance
 
$
7,487
   
$
6,465
   
$
3,166
   
$
27
   
$
17,145
 
Loans:
                                       
Individually reviewed for impairment
 
$
4,901
   
$
3,034
   
$
5,561
   
$
   
$
13,496
 
Collectively evaluated for impairment
   
487,184
     
577,434
     
299,113
     
     
1,363,731
 
Total ending loans balance
 
$
492,085
   
$
580,468
   
$
304,674
   
$
   
$
1,377,227
 

December 31, 2018
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                             
Ending allowance attributable to loans:
                             
Individually reviewed for impairment
 
$
449
   
$
181
   
$
468
   
$
   
$
1,098
 
Collectively evaluated for impairment
   
6,407
     
6,363
     
2,981
     
27
     
15,778
 
Total ending allowance balance
 
$
6,856
   
$
6,544
   
$
3,449
   
$
27
   
$
16,876
 
Loans:
                                       
Individually reviewed for impairment
 
$
7,375
   
$
3,499
   
$
6,347
   
$
   
$
17,221
 
Collectively evaluated for impairment
   
505,970
     
565,212
     
317,255
     
     
1,388,437
 
Total ending loans balance
 
$
513,345
   
$
568,711
   
$
323,602
   
$
   
$
1,405,658
 

-17-

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, 2019 (dollars in thousands):

September 30, 2019
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
Allocated
 
With no related allowance recorded:
                 
Commercial and industrial
 
$
1,230
   
$
1,230
   
$
 
Commercial real estate:
                       
Residential developed
   
     
     
 
Unsecured to residential developers
   
     
     
 
Vacant and unimproved
   
     
     
 
Commercial development
   
     
     
 
Residential improved
   
484
     
484
     
 
Commercial improved
   
1,467
     
1,467
     
 
Manufacturing and industrial
   
     
     
 
     
1,951
     
1,951
     
 
Consumer:
                       
Residential mortgage
   
     
     
 
Unsecured
   
     
     
 
Home equity
   
     
     
 
Other secured
   
     
     
 
     
     
     
 
Total with no related allowance recorded
 
$
3,181
   
$
3,181
   
$
 
With an allowance recorded:
                       
Commercial and industrial
 
$
3,671
   
$
3,671
   
$
1,184
 
Commercial real estate:
                       
Residential developed
   
79
     
79
     
3
 
Unsecured to residential developers
   
     
     
 
Vacant and unimproved
   
     
     
 
Commercial development
   
     
     
 
Residential improved
   
57
     
57
     
6
 
Commercial improved
   
584
     
584
     
15
 
Manufacturing and industrial
   
363
     
363
     
11
 
     
1,083
     
1,083
     
35
 
Consumer:
                       
Residential mortgage
   
4,408
     
4,408
     
326
 
Unsecured
   
217
     
217
     
16
 
Home equity
   
913
     
913
     
67
 
Other secured
   
23
     
23
     
2
 
     
5,561
     
5,561
     
411
 
Total with an allowance recorded
 
$
10,315
   
$
10,315
   
$
1,630
 
Total
 
$
13,496
   
$
13,496
   
$
1,630
 

-18-

MACATAWA BANK CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 


NOTE 3 – LOANS (Continued)
 
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018 (dollars in thousands):

December 31, 2018
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
Allocated
 
With no related allowance recorded:
                 
Commercial and industrial
 
$
2,515
   
$
1,375
   
$
 
Commercial real estate:
                       
Residential developed
   
     
     
 
Unsecured to residential developers
   
     
     
 
Vacant and unimproved
   
143
     
143
     
 
Commercial development
   
     
     
 
Residential improved
   
140
     
140
     
 
Commercial improved
   
1,675
     
1,675
     
 
Manufacturing and industrial
   
     
     
 
     
1,958
     
1,958
     
 
Consumer:
                       
Residential mortgage
   
     
     
 
Unsecured
   
     
     
 
Home equity
   
     
     
 
Other secured
   
     
     
 
     
     
     
 
Total with no related allowance recorded
 
$
4,473
   
$
3,333
   
$
 
With an allowance recorded:
                       
Commercial and industrial
 
$
6,000
   
$
6,000
   
$
449
 
Commercial real estate:
                       
Residential developed
   
172
     
172
     
2
 
Unsecured to residential developers
   
     
     
 
Vacant and unimproved
   
     
     
 
Commercial development
   
     
     
 
Residential improved
   
193
     
193
     
13
 
Commercial improved
   
794
     
794
     
155
 
Manufacturing and industrial
   
382
     
382
     
11
 
     
1,541
     
1,541
     
181
 
Consumer:
                       
Residential mortgage
   
5,029
     
5,029
     
371
 
Unsecured
   
     
     
 
Home equity
   
1,318
     
1,318
     
97
 
Other secured
   
     
     
 
     
6,347
     
6,347
     
468
 
Total with an allowance recorded
 
$
13,888
   
$
13,888
   
$
1,098
 
Total
 
$
18,361
   
$
17,221
   
$
1,098
 

-19-

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, 2019 and 2018 (dollars in thousands):

   
Three
Months
Ended
September 30,
2019
   
Three
Months
Ended
September 30,
2018
   
Nine
Months
Ended
September 30,
2019
   
Nine
Months
Ended
September 30,
2018
 
Average of impaired loans during the period:
                       
Commercial and industrial
 
$
3,781
   
$
4,089
   
$
5,304
   
$
4,968
 
Commercial real estate:
                               
Residential developed
   
146
     
174
     
161
     
176
 
Unsecured to residential developers
   
     
     
     
 
Vacant and unimproved
   
62
     
259
     
107
     
227
 
Commercial development
   
     
     
     
42
 
Residential improved
   
538
     
389
     
421
     
1,007
 
Commercial improved
   
2,071
     
3,273
     
2,187
     
3,444
 
Manufacturing and industrial
   
366
     
392
     
372
     
348
 
Consumer
   
5,599
     
6,701
     
5,900
     
7,418
 
Interest income recognized during impairment:
                               
Commercial and industrial
   
174
     
445
     
692
     
701
 
Commercial real estate
   
45
     
34
     
141
     
170
 
Consumer
   
70
     
72
     
210
     
227
 
Cash-basis interest income recognized
                               
Commercial and industrial
   
160
     
457
     
707
     
716
 
Commercial real estate
   
48
     
39
     
149
     
168
 
Consumer
   
71
     
71
     
210
     
223
 

-20-

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, 2019 and December 31, 2018:

September 30, 2019
 
Nonaccrual
   
Over 90
days
Accruing
 
Commercial and industrial
 
$
   
$
 
Commercial real estate:
               
Residential developed
   
     
 
Unsecured to residential developers
   
     
 
Vacant and unimproved
   
     
 
Commercial development
   
     
 
Residential improved
   
102
     
 
Commercial improved
   
     
 
Manufacturing and industrial
   
     
 
     
102
     
 
Consumer:
               
Residential mortgage
   
109
     
 
Unsecured
   
     
 
Home equity
   
     
 
Other secured
   
     
 
     
109
     
 
Total
 
$
211
   
$
 

December 31, 2018
 
Nonaccrual
   
Over 90 days
Accruing
 
Commercial and industrial
 
$
874
   
$
 
Commercial real estate:
               
Residential developed
   
     
 
Unsecured to residential developers
   
     
 
Vacant and unimproved
   
     
 
Commercial development
   
     
 
Residential improved
   
15
     
 
Commercial improved
   
303
     
 
Manufacturing and industrial
   
     
 
     
318
     
 
Consumer:
               
Residential mortgage
   
111
     
 
Unsecured
   
     
 
Home equity
   
     
1
 
Other secured
   
     
 
     
111
     
1
 
Total
 
$
1,303
   
$
1
 

-21-

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, 2019 and December 31, 2018 by class of loans (dollars in thousands):

September 30, 2019
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
Commercial and industrial
 
$
65
   
$
   
$
65
   
$
492,020
   
$
492,085
 
Commercial real estate:
                                       
Residential developed
   
     
     
     
15,516
     
15,516
 
Unsecured to residential developers
   
     
     
     
     
 
Vacant and unimproved
   
     
     
     
36,083
     
36,083
 
Commercial development
   
     
     
     
677
     
677
 
Residential improved
   
     
16
     
16
     
114,131
     
114,147
 
Commercial improved