DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF MACATAWA BANK CORP MANAGEMENT (Form 10-Q)

Macatawa Bank Corporation is a Michigan corporation and a registered bank
holding company. It wholly-owns Macatawa Bank.  Macatawa Bank is a Michigan
chartered bank with depository accounts insured by the FDIC. The Bank operates
twenty-six branch offices and a lending and operational service facility,
providing a full range of commercial and consumer banking and trust services in
Kent County, Ottawa County, and northern Allegan County, Michigan. For further
information regarding consolidation, see the Notes to Consolidated Financial
Statements.

At March 31, 2022, we had total assets of $2.93 billion, total loans of $1.10
billion, total deposits of $2.58 billion and shareholders' equity of $245.6
million.  For the three months ended March 31, 2022, we recognized net income of
$6.0 million compared to $7.8 million for the same period in 2021. The Bank was
categorized as "well capitalized" under regulatory capital standards at March
31, 2022.

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

In March 2020, guidance issued by the federal banking agencies in consultation
with FASB and the Coronavirus Aid, Relief and Economic Security ("CARES") Act
collectively specified that COVID-19 related modifications on loans that were
not more than 30 days past due as of December 31, 2019 are not TDRs. Through
March 31, 2022, the Bank had applied this guidance and modified 726 individual
loans with aggregate principal balances totaling $337.2 million.  As of March
31, 2022, all of these modifications had expired and the loans had returned to
their contractual payment terms.

The Bank was a participating lender in the Small Business Administration's
("SBA") Paycheck Protection Program ("PPP"). PPP loans are forgivable, in whole
or in part, if the proceeds are used for payroll and other permitted purposes in
accordance with the requirements of the PPP. These loans carry a fixed rate of
1.00% and a term of two years (loans made before June 5, 2020) or five years
(loans made on or after June 5, 2020), if not forgiven, in whole or in part.
Payments are deferred until either the date on which the SBA remits the amount
of forgiveness proceeds to the lender or the date that is 10 months after the
last day of the covered period if the borrower does not apply for forgiveness
within that 10 month period. Fees generated based on the origination of PPP
loans are deferred and amortized into interest income over the contractual
period of 24 months or 60 months, as applicable. Upon SBA forgiveness,
unamortized fees are then recognized into interest income.

2020:

• The Bank has issued a total of 1,738 PPP loans $346.7 million basically.

• Earned fees accumulated $10.0 million.

• A total of 765 PPP loans $113.5 million were awarded.

• Total net charges from $5.4 million were recognized.

2021:

• The Bank has issued a total of 1,000 PPP loans $128.1 million basically.

• Earned fees accumulated $5.6 million.

• A total of 1,722 PPP loans $318.4 million were awarded.

• Total net charges from $8.3 million were recognized.

In the three months ended March 31, 2022:

• A total of 175 PPP loans $35.5 million were awarded.

• Total net charges from $1.0 million were recognized.

away March 31, 202270 PPP loans total $7.7 million in principle pending and the total net charges of $281,000 remained unrecognized.

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RESULTS

Summary: Net income for the three months ended March 31, 2022 was $6.0 million,
compared to $7.8 million for the same period in 2021.  Net income per share on a
diluted basis for the three months ended March 31, 2022 was $0.18 compared to
$0.23 for the same period in 2021.

The decrease in earnings in the three months ended March 31, 2022 compared to
the same period in 2021 was due primarily to lower levels of net interest income
from lower PPP fee amortization and lower mortgage banking income, partially
offset by a larger provision for loan loss benefit.  Net interest income
decreased to $12.7 million in the three months ended March 31, 2022 compared to
$14.5 million in the same period in 2021.  Gains on sales of mortgage loans
decreased to $308,000 in the three months ended March 31, 2022 compared to $2.0
million in the same period in 2021.

The provision for loan losses was a benefit of $1.5 million for the three months
ended March 31, 2022, compared to $0 for the same period in 2021.  We were in a
net loan recovery position for the three months ended March 31, 2022, with
$227,000 in net loan recoveries, compared to $44,000 in net loan recoveries in
the same period in 2021.  The provision for loan losses in 2021 was also
impacted by higher levels of qualitative environmental factors to address
uncertainty and increased risk of loss attributable to the COVID-19 pandemic.
Several of these factors were reduced in the first quarter of 2022, reflecting
improvement in economic conditions and success at mitigating the effects of the
COVID-19 pandemic.

Net Interest Income: Net interest income totaled $12.7 million for the three
months ended March 31, 2022 compared to $14.5 million for the same period in
2021.

Net interest income for the first quarter of 2022 decreased $1.8 million
compared to the same period in 2021.  Of this decrease, $1.9 million was from
changes in the volume of average interest earning assets and interest bearing
liabilities, partially offset by a $69,000 increase from changes in rates earned
or paid.  The largest changes occurred in interest income on commercial loans
(excluding PPP loans) and in PPP loans which fluctuated significantly in the
first quarter of 2022 compared to the same period in 2021.  The net change in
interest income for commercial loans (excluding PPP loans) was a decrease of
$1.1 million with a decrease of $615,000 due to rate and a decrease of $492,000
due to portfolio contraction.  PPP loans caused a reduction of $1.5 million in
net interest income in the first quarter of 2022 primarily due to lower PPP fee
recognition and significant principal forgiveness between the first quarter of
2021 and the first quarter of 2022.  Additionally, residential mortgage loan
interest income decreased by $384,000 in the first quarter of 2022 compared to
the same period in 2021.  Of the $384,000 decrease in interest income on
residential mortgage loans, $282,000 was due to a decrease in average balances.
Partially offsetting the impact of the loss of interest income from PPP loans
was an increase in interest income from our investment portfolio as we deployed
some of our excess investable funds.  The average balance of our investment
portfolio grew by $258.7 million from $314.1 million in the first quarter of
2021 to $572.7 million in the first quarter of 2022.  This growth resulted in an
additional $1.1 million of interest income in the first quarter of 2022.  Rate
reductions in the deposit portfolio also served to partially offset the net
negative effects of the changes noted above in interest income.

As we are in an asset-sensitive position, reductions in market interest rates
have a negative impact on margin as our interest earning assets reprice faster
than its interest-bearing liabilities. Much of our asset-sensitivity is due to
commercial and consumer loans that have variable interest rates.  For both loan
types we established floor rates several years ago.  These floors provide
protection to net interest income when short-term interest rates decline.  This
asset sensitivity; however, will serve to enhance net interest income as the
Federal Reserve begins raising short-term interest rates.  The Federal Reserve's
first rate increase since 2018 of 25 basis points in March 2022 was too late in
the quarter to have a meaningful impact on our first quarter 2022 interest
income.

The cost of funds decreased to 0.11% in the first quarter of 2022 compared to
0.19% in the first quarter of 2021.  Decreases in the rates paid on our
interest-bearing checking, savings and money market accounts in response to the
federal funds rate decreases over the past year along with the impact of our
redemption of the remaining trust preferred securities in the third quarter of
2021 caused the decrease in our cost of funds.

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The table below shows an analysis of the Net Interest Margin for the three month periods ended March 31, 2022 and 2021 (dollars in thousands):

                                                 For the three months ended March 31,
                                          2022                                          2021
                                         Interest       Average                        Interest       Average
                          Average         Earned         Yield          Average         Earned         Yield
                          Balance        or Paid        or Cost         Balance        or Paid        or Cost
Assets
Taxable securities      $   402,863     $    1,434           1.43 %   $   190,019     $      787           1.66 %
Tax-exempt securities
(1)                         169,845            731           2.22         124,039            758           3.15
Commercial loans (2)        902,347          7,888           3.50         956,396          8,995           3.76
PPP loans (3)                20,364          1,052          20.66         240,545          2,552           4.24
Residential mortgage
loans                       116,504            939           3.22         150,701          1,323           3.51
Consumer loans               54,096            519           3.89          59,129            597           4.09
Federal Home Loan
Bank stock                   11,019             51           1.84          11,558             61           2.10
Federal funds sold
and other short-term
investments               1,111,216            529           0.19         804,913            201           0.10
Total interest
earning assets (1)        2,788,254         13,143           1.92       2,537,300         15,274           2.45
Noninterest earning
assets:
Cash and due from
banks                        32,505                                        31,156
Other                        96,703                                        98,346
Total assets            $ 2,917,462                                   $ 2,666,802
Liabilities
Deposits:
Interest bearing
demand                  $   706,872     $       40           0.02 %   $   626,664     $       35           0.02 %
Savings and money
market accounts             894,976             65           0.03         797,590             60           0.03
Time deposits                92,244             53           0.23         107,625            184           0.69
Borrowings:
Other borrowed funds         85,002            320           1.51          70,000            352           2.01
Long-term debt                    -              -              -          20,619            153           2.96
Total interest
bearing liabilities       1,779,094            478           0.11       1,622,498            784           0.19
Noninterest bearing
liabilities:
Noninterest bearing
demand accounts             875,223                                       789,133
Other noninterest
bearing liabilities          11,545                                        14,148
Shareholders' equity        251,600                                       241,023
Total liabilities and
shareholders' equity    $ 2,917,462                                   $ 2,666,802
Net interest income                     $   12,665                                    $   14,490
Net interest spread
(1)                                                          1.81 %                                        2.26 %
Net interest margin
(1)                                                          1.85 %                                        2.33 %
Ratio of average
interest earning
assets to average
interest bearing
liabilities                  156.72 %                                      156.38 %


(1) Returns are presented on a tax equivalent basis using an assumed tax rate of

21% at March 31, 2022 and 2021.

(2) Includes rental fees from $99,000 and $169,000 for the three months ended March

31, 2022 and 2021, respectively. Includes average non-accrual loans from

APPROX $90,000 and $528,000 for the past three months March 31, 2022

and 2021 respectively. Excluding PPP loans.

(3) Includes rental fees from $1.0 million and $2.0 million for the three months

    ended March 31, 2022 and 2021, respectively.



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

                                                           For the three months ended March 31,
                                                                       2022 vs 2021
                                                                Increase (Decrease) Due to
                                                         Volume              Rate            Total

Interest income
Taxable securities                                    $         771       $     (124 )     $     647
Tax-exempt securities                                           305             (332 )           (27 )
Commercial loans, excluding PPP loans                          (492 )           (615 )        (1,107 )
PPP loans                                                    (2,336 )            836          (1,500 )
Residential mortgage loans                                     (282 )           (102 )          (384 )
Consumer loans                                                  (49 )            (29 )           (78 )
Federal Home Loan Bank stock                                     (3 )             (7 )           (10 )
Federal funds sold and other short-term investments              95              233             328
Total interest income                                        (1,991 )           (140 )        (2,131 )
Interest expense
Interest bearing demand                               $           5       $        -       $       5
Savings and money market accounts                                 7               (2 )             5
Time deposits                                                   (23 )           (108 )          (131 )
Other borrowed funds                                             67              (99 )           (32 )
Long-term debt                                                 (153 )              -            (153 )
Total interest expense                                          (97 )           (209 )          (306 )
Net interest income                                   $      (1,894 )     $       69       $  (1,825 )



Provision for Loan Losses: The provision for loan losses for the three months
ended March 31, 2022 was a benefit of $1.5 million compared to $0 for the same
period in 2021.  When excluding PPP loans, which are 100% guaranteed by the SBA,
total loans increased by $27.5 million in the three months ended March 31,
2022.  Net loan recoveries were $227,000 in the three months ended March 31,
2022 compared to net loan recoveries of $44,000 in the same period in 2021.

Gross loan recoveries were $262,000 for the three months ended March 31, 2022
and $94,000 for the same period in 2021.  In the three months ended March 31,
2022, we had $35,000 in gross loan charge-offs, compared to $50,000 in the same
period in 2021.

The amounts of loan loss provision in both the most recent quarter and
comparable prior year period were the result of establishing our allowance for
loan losses at levels believed necessary based upon our methodology for
determining the adequacy of the allowance.  The provision for loan losses for
the three months ended March 31, 2022 was impacted by net reductions to certain
qualitative factors.  More information about our allowance for loan losses and
our methodology for establishing its level may be found under the heading
"Allowance for Loan Losses" below.

Noninterest Income: Noninterest income for the three month period ended March
31, 2022 was $5.0 million compared to $6.5 million for the same period in 2021.
The components of noninterest income are shown in the table below (in
thousands):

                                               Three Months      Three Months
                                                   Ended             Ended
                                                 March 31,         March 31,
                                                   2022              2021
Service charges and fees on deposit accounts   $       1,211     $         992
Net gains on mortgage loans                              308             2,015
Trust fees                                             1,088             1,005
ATM and debit card fees                                1,599             1,485
Bank owned life insurance ("BOLI") income                240               276
Investment services fees                                 313               477
Other income                                             206               289
Total noninterest income                       $       4,965     $       6,539



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Net gains on mortgage loans were down $1.7 million in the three months ended
March 31, 2022 compared to the same period in 2021 as a result of changes in the
volume of loans originated for sale.  In the past two years volumes had been
high due to a lower interest rate environment, spurring more refinancing of
fixed rate loans which we sell into the secondary market.  Mortgage rates
increased in the latter part of 2021 and the first quarter of 2022, causing a
sharp reduction in mortgage volume.  Mortgage loans originated for sale in the
three months ended March 31, 2022 were $10.1 million, compared to $47.3 million
in the same period in 2021.

Trust fees were up $83,000 in the three months ended March 31, 2022 compared to
the three months ended March 31, 2021. The increase for the three months ended
March 31, 2022 was largely due to the 2021 period reflecting lower market
valuations of trust assets resulting from the COVID-19 impact on the economy.
ATM and debit card fees were also up in the three months ended March 31, 2022 as
compared to the three months ended March 31, 2021 due to reduced volume of usage
by our customers related to COVID-19's impact on the economy in the 2021
period.  These volumes and resulting income have returned to more normal levels
in the 2022 period.  Service charges on deposit accounts increased in the three
months ended March 31, 2022 as compared to the same period in 2021 as customers
returned to more normal behaviors in 2022 after having curtailed spending in
2021 due to uncertainty related to the COVID-19 pandemic.  Additionally,
customers' account balances in 2021 were bolstered by economic impact payments,
thereby resulting in fewer overdrafts and related fees.

Noninterest Expense: Noninterest expense increased by $254,000 to $11.7 million
for the three month period ended March 31, 2022 as compared to the same period
in 2021.  The components of noninterest expense are shown in the table below (in
thousands):

                                      Three Months       Three Months
                                         Ended              Ended
                                       March 31,          March 31,
                                          2022               2021
Salaries and benefits                $        6,289     $        6,412
Occupancy of premises                         1,172              1,037
Furniture and equipment                       1,016                937
Legal and professional                          194                222
Marketing and promotion                         195                175
Data processing                                 884                908
FDIC assessment                                 180                170
Interchange and other card expense              373                358
Bond and D&O insurance                          130                111
Outside services                                494                434
Other noninterest expense                       812                721
Total noninterest expense            $       11,739     $       11,485



Most categories of noninterest expense were relatively unchanged compared to the
three months ended March 31, 2021 due to our ongoing efforts to manage expenses
and scale our operations. Our largest component of noninterest expense, salaries
and benefits, decreased by $123,000 in the three months ended March 31, 2022
from the same period in 2021. This decrease is primarily due to a decrease in
variable-based compensation due to lower mortgage origination volume, offset by
an increase in 401k matching contributions. The table below identifies the
primary components of salaries and benefits (in thousands):

                                                    Three Months      Three Months
                                                        Ended             Ended
                                                      March 31,         March 31,
                                                        2022              2021
Salaries and other compensation                     $       5,627     $     

5,759

Salary deferral from commercial loan originations            (215 )            (352 )
Bonus accrual                                                 221           

182

Mortgage production - variable comp                           144               334
401k matching contributions                                   212               127
Medical insurance costs                                       300               362
Total salaries and benefits                         $       6,289     $       6,412



Occupancy expenses were up $135,000 in the three months ended March 31, 2022
compared to the same period in 2021 due to fluctuations in maintenance costs
incurred.  Furniture and equipment expenses were up $79,000 in the three months
ended March 31, 2022 compared to the same period in 2021 due to costs associated
with equipment and service contracts primarily to improve information security.

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Federal Income Tax Expense: We recorded $1.4 million in federal income tax
expense for the three month period ended March 31, 2022 compared to $1.8 million
for the same period in 2021.  Our effective tax rate for the three month period
ended March 31, 2022 was 18.82%  compared to 18.50% for the same period in 2021.

FINANCIAL SITUATION

Total assets were $2.93 billion at March 31, 2022, an increase of $1.1 million
from December 31, 2021. This change reflected increases of $117.6 million in
debt securities held to maturity, $2.2 million in other assets and $252,000 in
bank-owned life insurance, partially offset by a decrease of $69.9 million in
debt securities available for sale, $40.8 million in cash and cash equivalents,
$7.1 million in our loan portfolio,  and $1.4 million in FHLB stock. Total
deposits increased by $4.3 million at March 31, 2022 compared to December 31,
2021.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal
funds sold and short-term investments, were $1.11 billion at March 31, 2022
compared to $1.15 billion at December 31, 2021.  The decrease in these balances
primarily related to an increase in our investment portfolio.

Securities: Debt securities available for sale were $346.1 million at March 31,
2022 compared to $416.1 million at December 31, 2021. The balance at March 31,
2022 primarily consisted of U.S. agency securities, agency mortgage backed
securities and various municipal investments. Our held to maturity portfolio was
$254.6 million at March 31, 2022 compared to $137.0 million at December 31,
2021.  Our held to maturity portfolio is comprised of U.S. Treasury securities
and state, municipal and privately placed commercial bonds.

On January 1, 2022, we reclassified ten U.S. Treasury securities with an
amortized cost of $123.5 million from available for sale to held to maturity, as
we have the intent and ability to hold these securities to maturity.  All ten of
these U.S. Treasury securities were purchased within the fourth quarter of
2021.  Subsequently and upon further analysis of these purchases, management
decided to reclassify them to held to maturity given their short-term nature.
These securities had net unrealized gains of $113,000 at the date of transfer,
which will continue to be reported in accumulated other comprehensive income,
and will be amortized over the remaining life of the securities as an adjustment
of yield.  The effect on interest income of the amortization of net unrealized
gains is offset by the amortization of the premium on the securities
transferred.  Total securities increased $47.6 million from $553.1 million at
December 31, 2021 to $600.7 million at March 31, 2022 as we continued to deploy
excess liquidity into higher yielding assets.  We plan further growth of our
investment portfolio in the second quarter of 2022.

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

Portfolio Loans and Asset Quality: Total portfolio loans decreased by $7.1
million in the first three months of 2022 and were $1.10 billion at March 31,
2022 compared to $1.11 billion at December 31, 2021. During the first three
months of 2022, our commercial portfolio decreased by $3.8 million.  We received
forgiveness proceeds on 175 PPP loans totaling $35.5 million in the three months
ended March 31, 2022.  Excluding the PPP loans, our commercial loans increased
by $30.7 million in the first three months of 2022.  Our consumer portfolio
increased by $223,000 and our residential mortgage portfolio decreased by $3.5
million in the first three months of 2022.

Mortgage loans originated for portfolio are typically adjustable rate loans as
well as fixed rate loans that conform to secondary market requirements and have
a term of fifteen years or less.  Mortgage loans originated for portfolio in the
first three months of 2022 increased $5 million compared to the same period in
2021, from $9.8 million in the first three months of 2021 to $14.8 million in
the same period in 2022.  However, this increase in volume was not enough to
offset paydowns on mortgage portfolio loans.

The volume of residential mortgage loans originated for sale in the first three
months of 2022 decreased $37.2 million compared to the same period in 2021.
Residential mortgage loans originated for sale were $10.1 million in the first
three months of 2022 compared to $47.3 million in the first three months of
2021.

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

                                    Three months ended March 31, 2022                       Three months ended March 31, 2021
                                                  Percent of                                              Percent of
                             Portfolio              Total            Average         Portfolio              Total            Average
                            Originations         Originations       Loan
Size       Originations         Originations       Loan Size
Commercial real estate:
Residential developed      $        4,322                  2.7 %   $     1,080     $        5,086                  2.7 %   $       636
Unsecured to residential
developers                              -                    -               -                  -                    -               -
Vacant and unimproved               1,570                  1.0             523                433                  0.2             217
Commercial development                  -                    -               -                  -                    -               -
Residential improved               23,944                 15.1             684             36,580                 19.4             778
Commercial improved                22,907                 14.5           1,909              3,656                  1.9             609
Manufacturing and
industrial                         44,128                 27.8           4,413              8,553                  4.5           1,222
Total commercial real
estate                             96,871                 61.1           1,514             54,308                 28.7             776
Commercial and
industrial, excluding
PPP                                32,371                 20.4             549             15,652                  8.3             423
PPP loans                               -                    -               -             96,958                 51.2             129
Total commercial and
commercial real estate            129,242                 81.5           1,051            166,918                 88.2           1,560
Consumer
Residential mortgage               14,829                  9.4             362              9,803                  5.2             338
Unsecured                               -                    -               -                  -                    -               -
Home equity                        13,372                  8.4             131             12,105                  6.4             114
Other secured                       1,080                  0.7             154                375                  0.2              20
Total consumer                     29,281                 18.5             195             22,283                 11.8             145
Total loans                $      158,523                100.0 %   $       581     $      189,201                100.0 %           725


The following table provides a breakdown of our commercial lending activity for the first three months of 2022 and 2021 (in thousands of dollars):

                                                     Three Months       Three Months
                                                        Ended              Ended
                                                      March 31,          March 31,
                                                         2022               2021
Commercial loans originated                         $      129,242     $      166,918
Repayments of commercial loans                             (96,582 )         (154,807 )
Change in undistributed - available credit                 (36,458 )          (43,073 )
Net increase (decrease) in total commercial loans   $       (3,798 )   $    

(30,962 )



Overall, the commercial loan portfolio decreased $3.8 million in the first three
months of 2022.  Our commercial and industrial portfolio decreased by $10.0
million while our commercial real estate loans increased by $6.2 million.
Included in the commercial production for the first three months of 2021 is
$97.0 million in PPP loans, while there were no such loans originated in the
first three months of 2022.  Our overall production of commercial loans
decreased by $37.7 million from $166.9 million in the first three months of 2021
to $129.2 million in the same period of 2022 mostly due to the significantly
lower production of PPP loans (down $97.0 million).  Excluding PPP production,
our commercial loan originations in the first three months of 2022 were $59.3
million higher than in the first three months of 2021.  This growth came largely
from commercial real estate originations, which were up $42.5 million in the
first quarter of 2022, primarily in the manufacturing and industrial category,
which were up $35.6 million, and commercial improved, which were up $19.3
million, as these businesses expand following the pandemic slowdown.

Commercial and commercial real estate loans remained our largest loan segment
and accounted for approximately 84.6% and 84.4% of the total loan portfolio at
March 31, 2022 and December 31, 2021, respectively. Residential mortgage and
consumer loans comprised approximately 15.4% and 15.6% of total loans at March
31, 2022 and December 31, 2021, respectively.

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

                                                     March 31, 2022                   December 31, 2021
                                                               Percent of                        Percent of
                                                Balance        Total Loans        Balance        Total Loans
Commercial real estate: (1)
Residential developed                         $     3,758               0.3 %   $     4,862               0.4 %
Unsecured to residential developers                 5,000               0.5           5,000                 -
Vacant and unimproved                              37,749               3.4          36,240               3.3
Commercial development                                117                 -             171                 -
Residential improved                              100,145               9.1         100,077               9.0
Commercial improved                               258,537              23.5         259,039              23.4
Manufacturing and industrial                      117,007              10.6         110,712              10.0
Total commercial real estate                      522,313              47.4         516,101              46.5
Commercial and industrial, excluding PPP          402,854              36.5         379,318              34.1
PPP loans                                           7,393               0.7          41,939               3.8
Total commercial and commercial real estate       932,560              84.6         937,358              84.4
Consumer
Residential mortgage                              114,284              10.4         117,800              10.7
Unsecured                                             201                 -             210                 -
Home equity                                        50,831               4.6          51,269               4.6
Other secured                                       4,026               0.4           3,356               0.3
Total consumer                                    169,342              15.4         172,635              15.6
Total loans                                   $ 1,101,902             100.0 %   $ 1,109,993             100.0 %


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



Commercial real estate loans accounted for 47.4% and 46.5% of the total loan
portfolio at March 31, 2022 and December 31, 2021, respectively, and consisted
primarily of loans to business owners and developers of owner and non-owner
occupied commercial properties and loans to developers of single and
multi-family residential properties. In the table above, we show our commercial
real estate portfolio by loans secured by residential and commercial real
estate, and by stage of development. Improved loans are generally secured by
properties that are under construction or completed and placed in use.
Development loans are secured by properties that are in the process of
development or fully developed. Vacant and unimproved loans are secured by raw
land for which development has not yet begun and agricultural land.

Our consumer residential mortgage loan portfolio, which also includes
residential construction loans made to individual homeowners, comprised 10.4% of
portfolio loans at March 31, 2022 and 10.7% at December 31, 2021.  We expect to
continue to retain in our loan portfolio certain types of residential mortgage
loans (primarily high quality, low loan-to-value loans) in an effort to continue
to diversify our credit risk and deploy our excess liquidity.

Our portfolio of other consumer loans includes loans secured by personal
property and home equity fixed term and line of credit loans. This portfolio
increased by $223,000 to $55.1 million at March 31, 2022 from $54.8 million at
December 31, 2021.  These other consumer loans comprised 5.0% of our portfolio
loans at March 31, 2022 and 4.9% at December 31, 2021.

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

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

Nonperforming assets are comprised of nonperforming loans, foreclosed assets and
repossessed assets. At March 31, 2022, nonperforming assets totaled $2.4
million, unchanged from $2.4 million at December 31, 2021. There were no
additions to other real estate owned in the first three months of 2022 or in the
first three months of 2021.  At March 31, 2022, there were no loans in
foreclosure, so we expect there to be few, if any, additions to other real
estate owned in the remainder of 2022.  Proceeds from sales of foreclosed
properties were $0 in the first three months of 2022, resulting in net realized
loss on sales of $0.  Proceeds from sales of foreclosed properties were $148,000
in the first three months of 2021, resulting in net realized loss on sales of
$14,000.

Nonperforming loans include loans on nonaccrual status and loans delinquent more
than 90 days but still accruing.  Nonperforming loans at March 31, 2022
consisted of $5,000 of commercial real estate loans and $85,000 of consumer and
residential mortgage loans.  As of March 31, 2022, nonperforming loans totaled
$90,000, or 0.01% of total portfolio loans, compared to $92,000, or 0.01% of
total portfolio loans, at December 31, 2021.

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Foreclosed and repossessed assets include assets acquired in settlement of
loans. Foreclosed assets totaled $2.3 million at March 31, 2022 and $2.3 million
at December 31, 2021. The entire balance at March 31, 2022 was comprised of one
commercial real estate property. All properties acquired through or in lieu of
foreclosure are initially transferred at their fair value less estimated costs
to sell and then evaluated monthly for impairment after transfer using a lower
of cost or market approach. Updated property valuations are obtained at least
annually on all foreclosed assets.

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

                                                       March 31,      December 31,
                                                         2022             2021
Nonaccrual loans                                      $        90     $          91
Loans 90 days or more delinquent and still accruing             -           

1

Total nonperforming loans (NPLs)                               90                92
Foreclosed assets                                           2,343             2,343
Repossessed assets                                              -                 -
Total nonperforming assets (NPAs)                     $     2,433     $       2,435
NPLs to total loans                                          0.01 %            0.01 %
NPAs to total assets                                         0.08 %            0.08 %


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

                                      March 31, 2022                        

December 31, 2021

                          Commercial       Consumer        Total        Commercial       Consumer        Total
Performing TDRs          $      5,362     $    2,796     $   8,158     $      4,497     $    3,024     $   7,521
Nonperforming TDRs (1)              5              -             5                5              -             5
Total TDRs               $      5,367     $    2,796     $   8,163     $      4,502     $    3,024     $   7,526


(1) Included in the non-performing assets table above



We had a total of $8.2 million and $7.5 million of loans whose terms have been
modified in TDRs as of March 31, 2022 and December 31, 2021, respectively.
These loans may have involved the restructuring of terms to allow customers to
mitigate the risk of foreclosure by meeting a lower loan payment requirement
based upon their current cash flow.  These may also include loans that renewed
at existing contractual rates, but below market rates for comparable credit.
For each restructuring, a comprehensive credit underwriting analysis of the
borrower's financial condition and prospects of repayment under the revised
terms is performed to assess whether the structure can be successful and whether
cash flows will be sufficient to support the restructured debt.  An analysis is
also performed to determine whether the restructured loan should be on accrual
status.  Generally, if the loan is on accrual at the time of restructure, it
will remain on accrual after the restructuring.  In some cases, a nonaccrual
loan may be placed on accrual at restructuring if the loan's actual payment
history demonstrates it would have cash flowed under the restructured terms.
After six consecutive payments under the restructured terms, a nonaccrual
restructured loan is reviewed for possible upgrade to accruing status.  In
situations where there is a subsequent modification or renewal and the loan is
brought to market terms, including a contractual interest rate not less than a
market interest rate for new debt with similar credit risk characteristics, the
TDR and impaired designations may be removed.  Total TDRs increased by $637,000
from December 31, 2021 to March 31, 2022 due to advances on one commercial TDR
more than offsetting payoffs and paydowns on other existing TDRs.  There were 47
loans identified as TDRs at March 31, 2022 compared to 54 loans at December 31,
2021.

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: The allowance for loan losses at March 31, 2022 was
$14.6 million, a decrease of $1.3 million from December 31, 2021.  The allowance
for loan losses represented 1.33% of total portfolio loans at March 31, 2022 and
1.43% at December 31, 2021.  The ratios at March 31, 2022 and December 31, 2021
are impacted by $7.4 million and $41.9 million of remaining PPP loans,
respectively, which are fully guaranteed and receive no allowance allocation.
The ratios excluding these loans were 1.34% and 1.49% at March 31, 2022 and
December 31, 2021, respectively.  The allowance for loan losses to nonperforming
loan coverage ratio increased from 17270.7% at December 31, 2021 to 16240.0% at
March 31, 2022.

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The following table shows the changes in certain credit metrics over the last five quarters (in thousands of dollars):

                                   Quarter Ended       Quarter Ended       Quarter Ended       Quarter Ended       Quarter Ended
                                     March 31,         December 31,        September 30,         June 30,            March 31,
                                       2022                2021                2021                2021                2021
Nonperforming loans               $            90     $            92     $           420     $           433     $           525
Other real estate owned and
repo assets                                 2,343               2,343               2,343               2,343               2,371
Total nonperforming assets                  2,433               2,435               2,763               2,776               2,896
Net charge-offs (recoveries)                 (227 )              (107 )              (276 )              (104 )               (44 )
Total delinquencies                           171                 129                 437                 126                 217



At March 31, 2022, we had net loan recoveries in twenty-seven of the past
twenty-nine quarters.  Our total delinquencies were $171,000 at March 31, 2022
and $129,000 at December 31, 2021.  Our delinquency percentage at March 31, 2022
was 0.02%.

These factors all impact our necessary level of allowance for loan losses and
our provision for loan losses. The allowance for loan losses decreased $1.3
million in the first three months of 2022.  We recorded a provision for loan
loss benefit of $1.5 million for the three months ended March 31, 2022 compared
to $0 for the same period of 2021.  Net loan recoveries were $227,000 for the
three months ended March 31, 2022, compared to net loan recoveries of $44,000
for the same period in 2021. The ratio of net charge-offs (recoveries) to
average loans was -0.08% on an annualized basis for the first three months of
2022 and -0.01% for the first three months of 2021.

While we have experienced low levels of gross charge-offs over recent quarters,
we recognize that future charge-offs and resulting provisions for loan losses
are expected to be impacted by the timing and extent of changes in the overall
economy and the real estate markets.

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

Overall, impaired loans increased by $637,000 to $8.2 million at March 31, 2022
compared to $7.5 million at December 31, 2021.  The specific allowance for
impaired loans decreased $25,000 to $540,000 at March 31, 2022, compared to
$565,000 at December 31, 2021.  The specific allowance for impaired loans
represented 6.6% of total impaired loans at March 31, 2022 and 7.5% at December
31, 2021.

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

The determination of our loss factors is based upon our actual loss history by
loan grade and adjusted for significant factors that, in management's judgment,
affect the collectability of the portfolio as of the analysis date.  We use a
rolling 18 month actual net charge-off history as the base for our computation.
Over the past few years, the 18 month period computations have reflected
sizeable decreases in net charge-off experience.  We addressed this volatility
in the qualitative factor considerations applied in our allowance for loan
losses computation. We also considered the extended period of strong asset
quality in assessing the overall qualitative component.

We also have considered the effect of COVID-19 on our loan borrowers and our
local economy.  With the widespread vaccination efforts, coupled with
significant reduction in infection rates in the first quarter 2022, we
determined that adjustments to certain qualitative factors were appropriate in
the first quarter of 2022.  We also considered the improving economic
conditions, including sharp reductions in unemployment and actions taken by the
Federal Reserve in response to employment and inflation.  As a result, we
reduced the economic qualitative factor by 3 basis points in the first quarter
of 2022.  In the second quarter 2021, we added 20 basis points to our consumer
loan portfolio qualitative factors to address the risk that economic impact
payments may be masking consumer delinquency and default.  We removed this 20
basis point allocation in the first quarter of 2022 as we did not experience
losses or increased delinquency in these portfolios.  We also reduced the
qualitative factor for changes in lending personnel by 4 basis points in the
first quarter of 2022.  Slightly offsetting this was the addition of 2 basis
points for our qualitative factor related to the effect of rising interest rates
in the first quarter of 2022.  One additional change to the allowance
calculation in the first quarter of 2022 was the removal of a loan pool we had
maintained for loans receiving three modifications during the pandemic.  These
loans have all returned to contractual payment terms over an extended period of
time and have returned to their normal loan pools.

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Certain industry sectors have been more negatively impacted by the economic
effects of COVID-19 than others such as hospitality, restaurants and sporting
events.  We believe our commercial portfolio is adequately diversified, with our
largest commercial concentrations in Real Estate, Rental and Leasing (31.3%),
followed by Manufacturing (13.8%) and Retail Trade (10.3%).

The table below breaks down our commercial loan portfolio by industry type at
March 31, 2022 and identifies the percentage of loans in each type that have a
pass rating within our grading system (4 or better) and criticized rating (5 or
worse) (dollars in thousands):

                                                                    March 31, 2022
                                                                           Percent of        Percent Grade       Percent Grade
                         Excluding PPP       PPP Loans        Total        Total Loans        4 or Better         5 or Worse
Industry:
Agricultural Products   $        44,211     $        21     $  44,232              4.74 %             90.09 %              9.91 %
Mining and Oil
Extraction                        1,317               -         1,317              0.14 %             94.91 %              5.09 %
Construction                     69,737             495        70,232              7.53 %             97.76 %              2.24 %
Manufacturing                   127,534           1,100       128,634             13.79 %             97.86 %              2.14 %
Wholesale Trade                  72,098             147        72,245              7.75 %            100.00 %              0.00 %
Retail Trade                     95,930             964        96,894             10.39 %             99.92 %              0.08 %
Transportation and
Warehousing                      45,953             594        46,547              4.99 %             98.20 %              1.80 %
Information                         677               -           677              0.07 %              6.94 %             93.06 %
Finance and Insurance            36,369               -        36,369              3.90 %            100.00 %              0.00 %
Real Estate and
Rental and Leasing              291,357             554       291,911             31.30 %             99.92 %              0.08 %
Professional,
Scientific and
Technical Services                4,874             569         5,443              0.58 %             96.05 %              3.95 %
Management of
Companies and
Enterprises                       4,725               -         4,725              0.51 %            100.00 %              0.00 %
Administrative and
Support Services                 15,644              99        15,743              1.69 %             99.36 %              0.64 %
Education Services                2,842               7         2,849              0.31 %             97.12 %              2.88 %
Health Care and
Social Assistance                35,007              40        35,047              3.76 %            100.00 %              0.00 %
Arts, Entertainment
and Recreation                    4,325             311         4,636              0.50 %             93.14 %              6.86 %
Accommodations and
Food Services                    39,976           2,023        41,999              4.50 %             85.03 %             14.97 %
Other Services                   32,591             469        33,060              3.55 %             99.49 %              0.51 %
Total commercial
loans                   $       925,167     $     7,393     $ 932,560            100.00 %             98.10 %              1.90 %



Considering the change in our qualitative factors and our commercial loan
portfolio balances, the general allowance allocated to commercial loans was
$12.0 million at March 31, 2022 and $12.9 million at December 31, 2021.  The
qualitative component of our allowance allocated to commercial loans was $12.0
million at March 31, 2022, down $878,000 from $12.9 million at December 31,
2021.

Groups of homogeneous loans, such as residential real estate and open- and
closed-end consumer loans, receive allowance allocations based on loan type.  A
rolling 12 month (four quarter) historical loss experience period was applied to
residential mortgage and consumer loan portfolios.  As with commercial loans
that are not considered impaired, the determination of the allowance allocation
percentage is based principally on our historical loss experience.  These
allocations are adjusted for consideration of general economic and business
conditions, credit quality and delinquency trends, collateral values, and recent
loss experience for these similar pools of loans.  The homogeneous loan
allowance was $1.9 million at March 31, 2022 and $2.4 million at December 31,
2021.

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

Bank’s own life insurance: The bank’s own life insurance has been increased $252,000 out of
December 31, 2021 to March 31, 2022 due to income from the underlying policies.

Premises and equipment: Premises and equipment added together $41.4 million at the March 31, 2022Low $360,000 out of $41.8 million at the December 31, 2021.

Deposits and Other Borrowings: Total deposits increased $4.3 million to $2.58
billion at March 31, 2022, as compared to $2.58 billion at December 31, 2021.
Non-interest checking account balances increased $32.8 million during the first
three months of 2022.  Interest bearing demand account balances decreased $58.1
million and savings and money market account balances increased $33.7 million in
the first three months of 2022 as municipal and business customers have held
higher balances during the COVID-19 pandemic.  Certificates of deposits
decreased by $4.0 million in the first three months of 2022 reflecting the
continued low market interest rates.  We believe our success in maintaining the
balances of personal and business checking and savings accounts was primarily
attributable to our focus on quality customer service, the desire of customers
to deal with a local bank, the convenience of our branch network and the breadth
and depth of our sophisticated product line.

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Noninterest bearing demand accounts comprised 36% of total deposits at March 31,
2022 and 34% of total deposits at December 31, 2021.  These balances typically
increase at year end for many of our commercial customers, then decline in the
first half of the next year.  This didn't happen in 2021 due to customers of all
types holding higher balances during the COVID-19 pandemic.  In addition,
because of the generally low rates paid on interest bearing account
alternatives, many of our business customers chose to keep their balances in
these more liquid noninterest bearing demand account types.  Interest bearing
demand, including money market and savings accounts, comprised 61% of total
deposits at March 31, 2022 and 62% at December 31, 2021. Time accounts as a
percentage of total deposits were 3% at March 31, 2022 and 3% at December 31,
2021.

Borrowed funds at March 31, 2022 consisted of $85.0 million of Federal Home Loan
Bank ("FHLB") advances.  Borrowed funds at December 31, 2021 consisted of $85.0
million of FHLB advances.  On January 21, 2022, the FHLB exercised its option to
put an advance totaling $25.0 million to the Company.  This advance carried an
interest rate of 0.01% and had a maturity date of July 21, 2031.  The Company
paid off this advance as required on January 21, 2022.  On January 21, 2022, the
Company executed a new $25.0 million advance with the FHLB with similar terms.
This advance carried an interest rate of 0.05% and a maturity date of January
21, 2032.  The first put date for this advance was April 21, 2022.  The FHLB
exercised its put option on this advance and it was paid off by the Company as
required on April 21, 2022.

CAPITAL RESOURCES

Total shareholders' equity of $245.6 million at March 31, 2022 reflected a
decrease of $8.4 million from $254.0 million at December 31, 2021. The decrease
was primarily a result of a negative swing of $11.9 million in accumulated other
comprehensive income ("AOCI") and a payment of $2.7 million in cash dividends to
shareholders more than offsetting our net income of $6.0 million earned in the
first three months of 2022.    The negative swing in AOCI was attributable to a
sharp increase in market interest rates on bonds during the first quarter 2022
causing a devaluation in market value on our investment securities available for
sale.  The Bank was categorized as "well capitalized" at March 31, 2022.

Capital guidelines for U.S. banks are commonly known as Basel III guidelines.
The rules include a common equity Tier 1 capital to risk-weighted assets ratio
(CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted
assets, effectively resulting in a minimum CET1 ratio of 7.0%. The Basel III
minimum ratio of Tier 1 capital to risk-weighted assets is 6.0% (which, with the
capital conservation buffer, effectively results in a minimum Tier 1 capital
ratio of 8.5%), and the minimum total capital to risk-weighted assets ratio is
10.5% (with the capital conservation buffer), and Basel III requires a minimum
leverage ratio of 4.0%. The capital ratios for the Company and the Bank under
Basel III have continued to exceed the well capitalized minimum capital
requirements.

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

                                                   December
                                   March 31,         31,          Sept 30,       June 30,       March 31,
Macatawa Bank Corporation            2022            2021           2021           2021           2021
Total capital to risk weighted
assets                                   17.9 %         18.3 %         18.6 %         19.7 %          19.3 %
Common Equity Tier 1 to risk
weighted assets                          16.9           17.2           17.4           17.1            16.7
Tier 1 capital to risk weighted
assets                                   16.9           17.2           17.4           18.5            18.1
Tier 1 capital to average
assets                                    8.8            8.7            8.5            9.5             9.8


on July 7, 2021the Company has repurchased all of the remaining outstanding Trust Preferred Securities.

LIQUIDITY

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

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

We have actively pursued initiatives to maintain a strong liquidity position.
The Bank has reduced its reliance on non-core funding sources, including
brokered deposits, and focused on achieving a non-core funding dependency ratio
below its peer group average.  We have had no brokered deposits on our balance
sheet since December 2011.  We continue to maintain significant on-balance sheet
liquidity.  At March 31, 2022, the Bank held $1.08 billion of federal funds sold
and other short-term investments.  In addition, the Bank had available borrowing
capacity from correspondent banks of approximately $201.4 million as of March
31, 2022.

In addition to normal loan funding, we also maintain liquidity to meet customer
financing needs through unused lines of credit, unfunded loan commitments and
standby letters of credit.  The level and fluctuation of these commitments is
also considered in our overall liquidity management.  At March 31, 2022, we had
a total of $727.2 million in unused lines of credit, $89.7 million in unfunded
loan commitments and $10.1 million in standby letters of credit.

Liquidity of Holding Company: The primary sources of liquidity for the Company
are dividends from the Bank, existing cash resources and the capital markets if
the need to raise additional capital arises.  Banking regulations and the laws
of the State of Michigan in which our Bank is chartered limit the amount of
dividends the Bank may declare and pay to the Company in any calendar year.
Under the state law limitations, the Bank is restricted from paying dividends to
the Company in excess of retained earnings.  In 2021, the Bank paid dividends to
the Company totaling $33.1 million.  In the same period, the Company paid $10.9
million in dividends to its shareholders and $20.6 million to redeem outstanding
trust preferred securities.  On February 23, 2022, the Bank paid a dividend
totaling $2.9 million to the Company in anticipation of the common share cash
dividend of $0.08 per share paid on February 24, 2022 to shareholders of record
on February 10, 2022.  The cash distributed for this cash dividend payment
totaled $2.7 million.  The Company retained the remaining balance in each period
for general corporate purposes.  At March 31, 2022, the Bank had a retained
earnings balance of $86.4 million.

The company’s cash on hand March 31, 2022 was $7.8 million. The company believes it has sufficient liquidity to meet its cash flow obligations.

CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES:

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

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

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

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.

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Interest-free income is recognized as required by the contract and when we fulfill our contractual obligations. Most of our noninterest revenue derives from transaction-based services, and such revenue is recognized when 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 March 31, 2022, we had gross deferred tax assets of $6.7 million and gross
deferred tax liabilities of $1.9 million resulting in a net deferred tax asset
of $4.9 million.  Accounting standards require that companies assess whether a
valuation allowance should be established against their deferred tax assets
based on the consideration of all available evidence using a "more likely than
not" standard.  We concluded at March 31, 2022 that no valuation allowance on
our net deferred tax asset was required.  Changes in tax laws, changes in tax
rates, changes in ownership and our future level of earnings can impact the
ultimate realization of our net deferred tax asset.

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