10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

OR

o 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

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller reporting company o
		(Do not check if smaller reporting company)

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

The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 33,803,823 shares of the Company's Common Stock (no par value) were outstanding as of October 23, 2014.

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 “may”, “should”, “will”, “is likely”, or is “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”, “going forward”, “focus”, “starting”, “initiative,” “trend”, “poised” 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, future levels of earning assets, statements related to stabilization of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, including the impact of Basel III, real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for loan losses, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future FDIC assessment levels, future net interest margin levels, building and improving our investment portfolio, diversifying our credit risk, the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, future balances of short-term investments, future loan demand and loan growth, future levels of mortgage banking revenue and the future level of other revenue sources. Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Our ability to sell other real estate owned at its carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, maintain our current levels of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, increase loan volume, originate high quality loans, maintain or improve mortgage banking income, realize the benefit of our deferred tax assets, and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

INDEX

		Page
		Number
Part I.	Financial Information:
	Item 1.
	Consolidated Financial Statements	4
	Notes to Consolidated Financial Statements	10
	Item 2.
	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	51
	Item 4.
	Controls and Procedures	52
Part II.	Other Information:
	Item 6.
	Exhibits	53
Signatures		54

Part I Financial Information

Item 1.

MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

As of September 30, 2014 (unaudited) and December 31, 2013

(Dollars in thousands, except per share data)

	September 30,			December 31,
	2014			2013
ASSETS
Cash and due from banks	$	24,731		$	38,714
Federal funds sold and other short-term investments		74,808			118,178
Cash and cash equivalents		99,539			156,892
Interest-bearing time deposits in other financial institutions		20,000			25,000
Securities available for sale, at fair value		162,101			139,659
Securities held to maturity (fair value 2014 - $31,771 and 2013 - $19,278)		31,744			19,248
Federal Home Loan Bank (FHLB) stock		11,236			11,236
Loans held for sale, at fair value		905			1,915
Total loans		1,054,788			1,042,377
Allowance for loan losses		(19,629	)		(20,798	)
Net loans		1,035,159			1,021,579
Premises and equipment – net		53,292			53,641
Accrued interest receivable		3,415			3,231
Bank-owned life insurance		28,021			27,517
Other real estate owned		28,763			36,796
Net deferred tax asset		12,387			16,200
Other assets		3,102			4,491
Total assets	$	1,489,664		$	1,517,405
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	385,182		$	344,550
Interest-bearing		830,907			905,184
Total deposits		1,216,089			1,249,734
Other borrowed funds		88,107			89,991
Long-term debt		41,238			41,238
Accrued expenses and other liabilities		3,761			3,920
Total liabilities		1,349,195			1,384,883
Commitments and contingent liabilities		---			---
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 33,803,823 shares issued and outstanding at September 30, 2014 and 33,801,097 shares issued and outstanding at December 31, 2013		216,394			216,263
Retained deficit		(75,659	)		(81,786	)
Accumulated other comprehensive income (loss)		(266	)		(1,955	)
Total shareholders' equity		140,469			132,522
Total liabilities and shareholders' equity	$	1,489,664		$	1,517,405

See accompanying notes to consolidated financial statements.

- 4 -

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three and Nine Month Periods Ended September 30, 2014 and 2013

(unaudited)

(Dollars in thousands, except per share data)

	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2014			2013			2014			2013
Interest income
Loans, including fees	$	10,639		$	10,995		$	32,129		$	34,156
Securities
Taxable		504			476			1,503			1,352
Tax-exempt		309			211			828			508
FHLB Stock		105			98			365			294
Federal funds sold and other short-term investments		117			139			347			349
Total interest income		11,674			11,919			35,172			36,659
Interest expense
Deposits		614			953			1,974			3,020
Other borrowings		756			842			2,263			2,568
Subordinated and long-term debt		---			---			---			---
Total interest expense		1,370			1,795			4,237			5,588
Net interest income		10,304			10,124			30,935			31,071
Provision for loan losses		(750	)		(1,500	)		(2,750	)		(3,250	)
Net interest income after provision for loan losses		11,054			11,624			33,685			34,321
Noninterest income
Service charges and fees		1,163			1,072			3,219			3,041
Net gains on mortgage loans		679			612			1,405			2,145
Trust fees		669			584			2,002			1,797
ATM and debit card fees		1,170			1,104			3,425			3,212
Gain on sales of securities		---			---			51			80
Other		622			579			1,779			1,850
Total noninterest income		4,303			3,951			11,881			12,125
Noninterest expense
Salaries and benefits		5,810			5,834			17,177			17,359
Occupancy of premises		897			908			2,837			2,759
Furniture and equipment		803			819			2,394			2,414
Legal and professional		196			192			639			565
Marketing and promotion		226			245			703			738
Data processing		635			570			1,807			1,704
FDIC assessment		287			317			934			1,133
Interchange and other card expense		288			315			825			967
Bond and D&O Insurance		166			187			493			555
Net losses on repossessed and foreclosed properties		449			1,059			634			1,412
Administration and disposition of problem assets		412			752			1,584			2,660
Other		1,220			1,164			3,770			3,552
Total noninterest expenses		11,389			12,362			33,797			35,818
Income before income tax		3,968			3,213			11,769			10,628
Income tax expense		1,206			975			3,614			3,313
Net income	$	2,762		$	2,238		$	8,155		$	7,315
Dividends declared on preferred shares		---			---			---			---
Net income available to common shares	$	2,762		$	2,238		$	8,155		$	7,315
Basic earnings per common share	$	0.08		$	0.08		$	0.24		$	0.27
Diluted earnings per common share	$	0.08		$	0.08		$	0.24		$	0.27
Cash dividends per common share	$	0.02		$	---		$	0.06		$	---

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and Nine Month Periods Ended September 30, 2014 and 2013

(unaudited)

(Dollars in thousands)

	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2014			2013			2014			2013
Net income	$	2,762		$	2,238		$	8,155		$	7,315
Other comprehensive income (loss):
Unrealized gains (losses):
Net change in unrealized gains (losses) on securities available for sale		316			(23	)		2,650			(3,626	)
Tax effect		(111	)		8			(928	)		1,269
Net change in unrealized gains (losses) on securities available for sale, net of tax		205			(15	)		1,722			(2,357	)
Less: reclassification adjustments:
Reclassification for gains included in net income		---			---			51			80
Tax effect		---			---			(18	)		(28	)
Reclassification for gains included in net income, net of tax		---			---			33			52
Other comprehensive income (loss), net of tax		205			(15	)		1,689			(2,409	)
Comprehensive income	$	2,967		$	2,223		$	9,844		$	4,906

See accompanying notes to consolidated financial statements.

- 6 -

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Nine Month Periods Ended September 30, 2014 and 2013

(unaudited)

(Dollars in thousands, except per share data)

												Accumulated
												Other			Total
	Preferred Stock					Common			Retained			Comprehensive			Shareholders'
	Series A		Series B			Stock			Deficit			Income (Loss)			Equity
Balance, January 1, 2013	$	30,604	$	2,560		$	187,718		$	(91,335	)	$	960		$	130,507
Net income for the nine months ended September 30, 2013										7,315						7,315
Conversion of 300 shares of Preferred Stock Series B to 50,000 shares of Common Stock				(300	)		300									---
Net change in unrealized gain (loss) on securities available for sale, net of tax													(2,409	)		(2,409	)
Stock compensation expense							94									94
Balance, September 30, 2013	$	30,604	$	2,260		$	188,112		$	(84,020	)	$	(1,449	)	$	135,507
Balance, January 1, 2014	$	---	$	---		$	216,263		$	(81,786	)	$	(1,955	)	$	132,522
Net income for the nine months ended September 30, 2014										8,155						8,155
Common stock issuance costs							(102	)								(102	)
Issuance of 392 shares of Common Stock on exercise of stock purchase warrants							4									4
Cash dividends at $.06 per share										(2,028	)					(2,028	)
Net change in unrealized gain (loss) on securities available for sale, net of tax													1,689			1,689
Stock compensation expense							229									229
Balance, September 30, 2014	$	---	$	---		$	216,394		$	(75,659	)	$	(266	)	$	140,469

See accompanying notes to consolidated financial statements.

- 7 -

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Month Periods Ended September 30, 2014 and 2013

(unaudited)

(Dollars in thousands)

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2014			2013
Cash flows from operating activities
Net income	$	8,155		$	7,315
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		2,438			2,261
Stock compensation expense		229			94
Provision for loan losses		(2,750	)		(3,250	)
Origination of loans for sale		(51,504	)		(91,117	)
Proceeds from sales of loans originated for sale		53,919			98,409
Net gains on mortgage loans		(1,405	)		(2,145	)
Gain on sales of securities		(51	)		(80	)
Write-down of other real estate		1,109			2,415
Net gain on sales of other real estate		(475	)		(1,004	)
Decrease in net deferred tax asset		2,903			3,218
Change in accrued interest receivable and other assets		1,205			109
Earnings in bank-owned life insurance		(504	)		(539	)
Change in accrued expenses and other liabilities		(159	)		289
Net cash from operating activities		13,110			15,975
Cash flows from investing activities
Loan originations and payments, net		(13,395	)		21,168
Change in interest-bearing deposits in other financial institutions		5,000			(25,000	)
Purchases of securities available for sale		(34,990	)		(34,450	)
Purchases of securities held to maturity		(25,225	)		(19,347	)
Proceeds from:
Maturities and calls of securities available for sale		19,535			12,417
Sales of securities available for sale		5,164			3,778
Principal paydowns on securities		2,664			5,199
Sales of other real estate		9,964			10,545
Additions to premises and equipment		(1,525	)		(1,087	)
Net cash from investing activities		(32,808	)		(26,777	)
Cash flows from financing activities
Change in in-market deposits		(33,645	)		1,780
Repayments of other borrowed funds		(1,884	)		(3,481	)
Proceeds from issuance of common stock		4			---
Cash dividends paid		(2,028	)		---
Common stock issuance costs		(102	)		---
Net cash from financing activities		(37,655	)		(1,701	)
Net change in cash and cash equivalents		(57,353	)		(12,503	)
Cash and cash equivalents at beginning of period		156,892			226,358
Cash and cash equivalents at end of period	$	99,539		$	213,855

See accompanying notes to consolidated financial statements.

- 8 -

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine Month Periods Ended September 30, 2014 and 2013

(unaudited)

(Dollars in thousands)

	Nine Months		Nine Months
	Ended		Ended
	September 30,		September 30,
	2014		2013
Supplemental cash flow information
Interest paid	$	4,254	$	7,542
Income taxes paid		90		95
Supplemental noncash disclosures:
Transfers from loans to other real estate		2,565		3,170
Security settlement		---		(1,626	)
Conversion of 300 shares of Preferred Series B to 50,000 shares of common stock		---		300

See accompanying notes to consolidated financial statements.

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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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.

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, 2014, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

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

- 10 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

Derivatives:  Certain of our commercial loan customers have entered into interest rate swap agreements directly with the Bank.  At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer.   This is known as a back-to-back swap agreement.  Under this arrangement the Bank has two freestanding interest rate swaps, both of which are carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At September 30, 2014 and December 31, 2013, the total notional amount of such agreements was $20.0 million and resulted in derivative assets with fair values of $89,000 and $94,000, respectively, which were included in other assets and derivative liabilities of $89,000 and $94,000, respectively, which were included in other liabilities.

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

Newly Issued Standards:

The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (ASU) No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized.  These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required.  The amendments are effective for  annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.

- 11 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  The amendments in this Update change the requirements for reporting discontinued operations.  A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  The amendments in this Update require an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position.  This Update also requires additional disclosures about discontinued operations including pretax profit or loss, and any ongoing involvement with the discontinued operation.   The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.

FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The amendments in this Update creates a new topic in the FASB Accounting Standards Codification® (ASC or Codification), Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue.  In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic.   The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016.  The impact of adoption of this ASU by the Company is not expected to be material.

FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists.  This update requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward.  However, to the extent that a net operating loss carryforward or tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit is to be presented in the statement of financial position as a liability.  No new recurring disclosures are required.  The amendments are effective for public business entities for annual periods beginning after December 15, 2013, and interim periods within those periods.  The amendments are to be applied on a prospective basis to all unrecognized tax benefits that exist at the effective date, although retrospective application is permitted.  The impact of prospective adoption of this ASU by the Company in the first quarter of 2014 was not material.

FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.  This update requires creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor.  The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  The impact of adoption of this ASU by the Company is not expected to be material.

- 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):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2014
Available for Sale:
U.S. Treasury and federal agency securities	$	67,769	$	62	$	(715	)	$	67,116
U.S. Agency MBS and CMOs		17,517		36		(289	)		17,264
Tax-exempt state and municipal bonds		36,286		333		(221	)		36,398
Taxable state and municipal bonds		26,131		433		(85	)		26,479
Corporate bonds and other debt securities		13,307		66		(19	)		13,354
Other equity securities		1,500		---		(10	)		1,490
	$	162,510	$	930	$	(1,339	)	$	162,101
Held to Maturity
Tax-exempt state and municipal bonds	$	31,744	$	102	$	(75	)	$	31,771
December 31, 2013
Available for Sale:
U.S. Treasury and federal agency securities	$	55,701	$	92	$	(1,354	)	$	54,439
U. S. Agency MBS and CMOs		20,029		9		(673	)		19,365
Tax-exempt state and municipal bonds		27,920		47		(1,118	)		26,849
Taxable state and municipal bonds		26,306		307		(285	)		26,328
Corporate bonds and other debt securities		11,211		64		(63	)		11,212
Other equity securities		1,500		---		(34	)		1,466
	$	142,667	$	519	$	(3,527	)	$	139,659
Held to Maturity:
Tax-exempt state and municipal bonds	$	19,248	$	46	$	(16	)	$	19,278

There were no sales of securities in the three month periods ended September 30, 2014 and 2013. Proceeds from sales of available for sale securities were $5.2 million in the nine month period ended September 30, 2014 resulting in net gains on sale of $51,000, as reported in the Consolidated Statements of Income.  This resulted in reclassifications of $51,000 ($33,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the nine month period ended September 30, 2014.   Proceeds from the sale of securities available for sale were $3.8 million in the nine month period ended September 30, 2013 resulting in net gains on sale of $80,000, as reported in the Consolidated Statements of Income.  This resulted in reclassifications of $80,000 ($52,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the nine month period ended September 30, 2013.

- 13 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (Continued)

Contractual maturities of debt securities at September 30, 2014 were as follows (dollars in thousands):

	Held–to-Maturity Securities				Available-for-Sale Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	19,075	$	19,035	$	4,424	$	4,450
Due from one to five years		745		746		92,569		92,577
Due from five to ten years		5,624		5,690		38,215		38,051
Due after ten years		6,300		6,300		25,802		25,533
	$	31,744	$	31,771	$	161,010	$	160,611

Securities with unrealized losses at September 30, 2014 and December 31, 2013, 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
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2014	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and federal agency securities	$	17,499	$	(48	)	$	40,350	$	(667	)	$	57,849	$	(715	)
U.S. Agency MBS and CMOs		1,497		(6	)		12,617		(283	)		14,114		(289	)
Tax-exempt state and municipal bonds		23,642		(107	)		8,726		(189	)		32,368		(296	)
Taxable state and municipal bonds		3,053		(12	)		4,173		(73	)		7,226		(85	)
Corporate bonds and other debt securities		2,702		(2	)		1,988		(17	)		4,690		(19	)
Other equity securities		---		---			1,490		(10	)		1,490		(10	)
Total temporarily impaired	$	48,393	$	(175	)	$	69,344	$	(1,239	)	$	117,737	$	(1,414	)

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2013	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and federal agency securities	$	43,212	$	(1,354	)	$	---	$	---		$	43,212	$	(1,354	)
U.S. Agency MBS and CMOs		18,494		(673	)		---		---			18,494		(673	)
Tax-exempt state and municipal bonds		21,359		(1,066	)		831		(68	)		22,190		(1,134	)
Taxable state and municipal bonds		9,599		(256	)		1,015		(29	)		10,614		(285	)
Corporate bonds and other debt securities		3,928		(63	)		---		---			3,928		(63	)
Other equity securities		1,466		(34	)		---		---			1,466		(34	)
Total temporarily impaired	$	98,058	$	(3,446	)	$	1,846	$	(97	)	$	99,904	$	(3,543	)

- 14 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (Continued)

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Management determined that no OTTI charges were necessary during the three and nine month periods ended September 30, 2014 and 2013.

Securities with a carrying value of approximately $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, 2014 and December 31, 2013.

NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

	September 30,			December 31,
	2014			2013
Commercial and industrial	$	285,833		$	274,099
Commercial real estate:
Residential developed		13,527			18,130
Unsecured to residential developers		7,126			7,315
Vacant and unimproved		48,407			42,988
Commercial development		4,362			2,434
Residential improved		70,228			76,294
Commercial improved		248,946			247,195
Manufacturing and industrial		75,321			77,984
Total commercial real estate		467,917			472,340
Consumer
Residential mortgage		192,386			188,648
Unsecured		1,048			1,337
Home equity		96,507			95,961
Other secured		11,097			9,992
Total consumer		301,038			295,938
Total loans		1,054,788			1,042,377
Allowance for loan losses		(19,629	)		(20,798	)
	$	1,035,159		$	1,021,579

- 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):

	Commercial and			Commercial
Three months ended September 30, 2014	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,721		$	9,341		$	3,933		$	54		$	20,049
Charge-offs		(4	)		---			(116	)		---			(120	)
Recoveries		75			336			39			---			450
Provision for loan losses		(394	)		(407	)		60			(9	)		(750	)
Ending Balance	$	6,398		$	9,270		$	3,916		$	45		$	19,629

	Commercial and			Commercial
Three months ended September 30, 2013	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	5,602		$	12,324		$	4,255		$	67		$	22,248
Charge-offs		(23	)		(202	)		(129	)		---			(354	)
Recoveries		585			253			40			---			878
Provision for loan losses		(446	)		(1,253	)		230			(31	)		(1,500	)
Ending Balance	$	5,718		$	11,122		$	4,396		$	36		$	21,272

	Commercial and			Commercial
Nine months ended September 30, 2014	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,174		$	10,868		$	3,703		$	53		$	20,798
Charge-offs		(43	)		(23	)		(228	)		---			(294	)
Recoveries		440			1,289			146			---			1,875
Provision for loan losses		(173	)		(2,864	)		295			(8	)		(2,750	)
Ending Balance	$	6,398		$	9,270		$	3,916		$	45		$	19,629

	Commercial and			Commercial
Nine months ended September 30, 2013	Industrial			Real Estate			Consumer			Unallocated		Total
Beginning balance	$	6,459		$	13,457		$	3,787		$	36	$	23,739
Charge-offs		(272	)		(661	)		(762	)		---		(1,695	)
Recoveries		1,011			1,248			219			---		2,478
Provision for loan losses		(1,480	)		(2,922	)		1,152			---		(3,250	)
Ending Balance	$	5,718		$	11,122		$	4,396		$	36	$	21,272

- 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 impairment method (dollars in thousands):

	Commercial and		Commercial
September 30, 2014	Industrial		Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	2,742	$	827	$	892	$	---	$	4,461
Collectively evaluated for impairment		3,656		8,443		3,024		45		15,168
Total ending allowance balance	$	6,398	$	9,270	$	3,916	$	45	$	19,629
Loans:
Individually reviewed for impairment	$	10,446	$	37,025	$	14,491	$	---	$	61,962
Collectively evaluated for impairment		275,387		430,892		286,547		---		992,826
Total ending loans balance	$	285,833	$	467,917	$	301,038	$	---	$	1,054,788

	Commercial and		Commercial
December 31, 2013	Industrial		Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	1,981	$	1,008	$	881	$	---	$	3,870
Collectively evaluated for impairment		4,193		9,860		2,822		53		16,928
Total ending allowance balance	$	6,174	$	10,868	$	3,703	$	53	$	20,798
Loans:
Individually reviewed for impairment	$	13,155	$	41,285	$	14,483	$	---	$	68,923
Collectively evaluated for impairment		260,944		431,055		281,455		---		973,454
Total ending loans balance	$	274,099	$	472,340	$	295,938	$	---	$	1,042,377

- 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, 2014 (dollars in thousands):

	Unpaid
	Principal		Recorded		Allowance
September 30, 2014	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial	$	3,159	$	3,159	$	---
Commercial real estate:
Residential developed		4,129		3,196		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		230		230		---
Residential improved		672		672		---
Commercial improved		331		331		---
Manufacturing and industrial		206		206		---
		5,568		4,635		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	8,727	$	7,794	$	---
With an allowance recorded:
Commercial and industrial	$	7,287	$	7,287	$	2,742
Commercial real estate:
Residential developed		587		587		35
Unsecured to residential developers		---		---		---
Vacant and unimproved		1,576		1,576		43
Commercial development		201		201		5
Residential improved		7,840		7,840		242
Commercial improved		17,315		17,315		441
Manufacturing and industrial		4,871		4,871		61
		32,390		32,390		827
Consumer:
Residential mortgage		9,551		9,551		588
Unsecured		---		---		---
Home equity		4,940		4,940		304
Other secured		---		---		---
		14,491		14,491		892
	$	54,168	$	54,168	$	4,461
Total	$	62,895	$	61,962	$	4,461

- 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, 2013 (dollars in thousands):

	Unpaid
	Principal		Recorded		Allowance
December 31, 2013	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial	$	3,287	$	3,284	$	---
Commercial real estate:
Residential developed		5,273		4,340		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		3		3		---
Commercial development		362		362		---
Residential improved		1,493		1,493		---
Commercial improved		2,797		2,272		---
Manufacturing and industrial		252		252		---
		10,180		8,722		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	13,467	$	12,006	$	---
With an allowance recorded:
Commercial and industrial	$	9,871	$	9,871	$	1,981
Commercial real estate:
Residential developed		618		618		33
Unsecured to residential developers		---		---		---
Vacant and unimproved		1,900		1,900		47
Commercial development		207		207		5
Residential improved		9,534		9,534		342
Commercial improved		14,450		14,450		479
Manufacturing and industrial		5,854		5,854		102
		32,563		32,563		1,008
Consumer:
Residential mortgage		9,454		9,454		575
Unsecured		---		---		---
Home equity		5,029		5,029		306
Other secured		---		---		---
		14,483		14,483		881
	$	56,917	$	56,917	$	3,870
Total	$	70,384	$	68,923	$	3,870

- 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, 2014 and 2013 (dollars in thousands):

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Average of impaired loans during the period:
Commercial and industrial	$	10,469	$	12,325	$	12,220	$	14,794
Commercial real estate:
Residential developed		3,801		5,898		4,139		6,526
Unsecured to residential developers		---		---		---		---
Vacant and unimproved		1,593		2,542		1,688		3,073
Commercial development		443		1,233		484		421
Residential improved		8,771		11,072		9,685		11,759
Commercial improved		17,876		19,449		18,100		20,809
Manufacturing and industrial		5,131		6,105		6,085		6,420
Consumer		14,544		14,984		14,453		14,599
Interest income recognized during impairment:
Commercial and industrial		359		186		970		915
Commercial real estate		401		478		1,309		1,656
Consumer		131		141		400		409
Cash-basis interest income recognized
Commercial and industrial		353		194		968		914
Commercial real estate		406		465		1,328		1,648
Consumer		133		141		404		402

- 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, 2014 and December 31, 2013:

			Over 90
			days
September 30, 2014	Nonaccrual		Accruing
Commercial and industrial	$	4,372	$	---
Commercial real estate:
Residential developed		2,245		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		29		---
Residential improved		918		---
Commercial improved		307		---
Manufacturing and industrial		---		---
		3,499		---
Consumer:
Residential mortgage		144		---
Unsecured		57		---
Home equity		353		---
Other secured		---		---
		554		---
Total	$	8,425	$	---

			Over 90
			days
December 31, 2013	Nonaccrual		Accruing
Commercial and industrial	$	5,625	$	---
Commercial real estate:
Residential developed		2,590		153
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		23		---
Residential improved		429		---
Commercial improved		2,511		---
Manufacturing and industrial		---		---
		5,553		153
Consumer:
Residential mortgage		639		---
Unsecured		33		---
Home equity		332		---
Other secured		---		---
		1,004		---
Total	$	12,182	$	153

- 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, 2014 and December 31, 2013 by class of loans (dollars in thousands):

	30-90		Greater Than		Total		Loans Not
September 30, 2014	Days		90 Days		Past Due		Past Due		Total
Commercial and industrial	$	179	$	123	$	302	$	285,531	$	285,833
Commercial real estate:
Residential developed		---		1,968		1,968		11,559		13,527
Unsecured to residential developers		---		---		---		7,126		7,126
Vacant and unimproved		---		---		---		48,407		48,407
Commercial development		---		29		29		4,333		4,362
Residential improved		67		819		886		69,342		70,228
Commercial improved		714		---		714		248,232		248,946
Manufacturing and industrial		7		---		7		75,314		75,321
		788		2,816		3,604		464,313		467,917
Consumer:
Residential mortgage		533		141		674		191,712		192,386
Unsecured		---		---		---		1,048		1,048
Home equity		473		31		504		96,003		96,507
Other secured		---		---		---		11,097		11,097
		1,006		172		1,178		299,860		301,038
Total	$	1,973	$	3,111	$	5,084	$	1,049,704	$	1,054,788

	30-90		Greater Than		Total		Loans Not
December 31, 2013	Days		90 Days		Past Due		Past Due		Total
Commercial and industrial	$	---	$	---	$	---	$	274,099	$	274,099
Commercial real estate:
Residential developed		143		2,296		2,439		15,691		18,130
Unsecured to residential developers		---		---		---		7,315		7,315
Vacant and unimproved		---		---		---		42,988		42,988
Commercial development		---		23		23		2,411		2,434
Residential improved		98		50		148		76,146		76,294
Commercial improved		438		2,056		2,494		244,701		247,195
Manufacturing and industrial		---		---		---		77,984		77,984
		679		4,425		5,104		467,236		472,340
Consumer:
Residential mortgage		78		---		78		188,570		188,648
Unsecured		9		---		9		1,328		1,337
Home equity		317		---		317		95,644		95,961
Other secured		12		---		12		9,980		9,992
		416		---		416		295,522		295,938
Total	$	1,095	$	4,425	$	5,520	$	1,036,857	$	1,042,377

- 22 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The Company had allocated $4,410,000 and $3,870,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of September 30, 2014 and December 31, 2013, respectively.  These loans involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure.  For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan.  In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt.  The second note is charged off immediately and collected only after the first note is paid in full.  This modification type is commonly referred to as an A-B note structure.  For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

Based upon recently issued regulatory guidance, the Company has determined that 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 designation may be removed.  This guidance was applied to loans outstanding at September 30, 2014.  In addition, the TDR designation may also be removed from loans modified under an A-B note structure.  If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms.  The market rate relative to the borrower’s credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model.  The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration differences in credit risk.  In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.

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

The following table presents information regarding troubled debt restructurings as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014				December 31, 2013
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		36	$	7,551		43	$	7,787
Commercial real estate		93		34,648		122		45,774
Consumer		111		14,566		106		14,531
		240	$	56,765		271	$	68,092

- 23 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The following tables present information regarding troubled debt restructurings executed during the three month periods ended September 30, 2014 and 2013 (dollars in thousands):

Three Months Ended September 30, 2014	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		---	$	---	$	---
Commercial real estate		---		---		---
Consumer		8		183		---
		8	$	183	$	---

Three Months Ended September 30, 2013	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		2	$	823	$	---
Commercial real estate		2		186		---
Consumer		3		137		---
		7	$	1,146	$	---

The following tables present information regarding troubled debt restructurings executed during the nine month periods ended September 30, 2014 and 2013 (dollars in thousands):

Nine Months Ended September 30, 2014	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		1	$	61	$	---
Commercial real estate		10		4,046		---
Consumer		10		257		---
		21	$	4,364	$	---

Nine Months Ended September 30, 2013	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		5	$	1,085	$	---
Commercial real estate		11		2,903		---
Consumer		33		5,606		1,770
		49	$	9,594	$	1,770

- 24 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

According to the accounting standards, not all loan modifications are TDRs.  TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress.  The Company reviews all modifications and renewals for determination of TDR status.  In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession.  These modifications are not considered TDRs.  In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress.  This could be the case if the Company is matching a competitor’s interest rate.  These modifications would also not be considered TDRs.  Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.  The following table presents information regarding modifications and renewals executed during the three month periods ended September 30, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Three Months Ended					Three Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		124		$	18,113		141		$	24,425
Commercial real estate		101			12,476		80			19,422
Consumer		2			45		10			271
		227		$	30,634		231		$	44,118

The following table presents information regarding modifications and renewals executed during the nine month periods ended September 30, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Nine Months Ended					Nine Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		322		$	57,936		351		$	72,878
Commercial real estate		202			37,389		277			95,058
Consumer		14			1,320		38			1,203
		538		$	96,645		666		$	169,139

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the three month periods ended September 30, 2014 and 2013 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

	Three Months Ended					Three Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		---		$	---		---		$	---
Commercial real estate		---			---		---			---
Consumer		---			---		---			---

- 25 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the nine month periods ended September 30, 2014 and 2013 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

	Nine Months Ended					Nine Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		---		$	---		---		$	---
Commercial real estate		1			131		---			---
Consumer		---			---		---			---

Credit Quality Indicators:The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Company analyzes commercial loans individually and classifies these relationships by credit risk grading.  The Company uses an eight point grading system, with grades 5 through 8 being considered classified, or watch, credits.  All commercial loans are assigned a grade at origination, at each renewal or any amendment.  When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by credit and the loan officer.  All watch credits have an ALR completed monthly which analyzes the collateral position and cash flow of the borrower and its guarantors.  The loan officer is required to complete both a short term and long term plan to rehabilitate or exit the credit and to give monthly comments on the progress to these plans.  Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled.  When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR.  Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process.  The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero balance.  The Company uses the following definitions for the risk grades:

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

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

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

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

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

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

- 26 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

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

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

As of September 30, 2014 and December 31, 2013, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

September 30, 2014	1		2		3		4		5		6		7		8
Commercial and industrial	$	77	$	9,775	$	98,564	$	163,897	$	7,775	$	1,373	$	4,372	$	---
Commercial real estate:
Residential developed		---		---		2,389		2,510		5,537		846		2,245		---
Unsecured to residential developers		---		---		---		7,124		2		---		---		---
Vacant and unimproved		---		---		10,480		30,172		7,372		383		---		---
Commercial development		---		---		---		3,914		218		201		29		---
Residential improved		---		104		16,220		43,979		5,847		3,160		918		---
Commercial improved		---		4,284		55,331		160,733		24,231		4,060		307		---
Manufacturing and industrial		---		704		27,235		42,354		4,690		338		---		---
	$	77	$	14,867	$	210,219	$	454,683	$	55,672	$	10,361	$	7,871	$	---

December 31, 2013	1		2		3		4		5		6		7		8
Commercial and industrial	$	509	$	15,836	$	81,577	$	155,680	$	13,513	$	1,359	$	5,625	$	---
Commercial real estate:
Residential developed		---		---		2,039		5,653		5,232		2,616		2,590		---
Unsecured to residential developers		---		---		---		7,309		6		---		---		---
Vacant and unimproved		---		---		11,191		24,638		6,761		398		---		---
Commercial development		---		---		---		1,673		532		207		23		---
Residential improved		---		109		15,121		45,018		9,391		6,226		429		---
Commercial improved		---		7,382		45,391		161,897		24,937		5,075		2,511		---
Manufacturing and industrial		---		311		24,546		42,133		10,402		593		---		---
	$	509	$	23,638	$	179,865	$	444,001	$	70,774	$	16,474	$	11,178	$	---

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

	September 30,		December 31,
	2014		2013
Not classified as impaired	$	4,035	$	7,400
Classified as impaired		14,197		20,252
Total commercial loans classified substandard or worse	$	18,232	$	27,652

- 27 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in consumer loans based on payment activity (dollars in thousands):

	Residential		Consumer		Home		Consumer
September 30, 2014	Mortgage		Unsecured		Equity		Other
Performing	$	192,245	$	1,048	$	96,476	$	11,097
Nonperforming		141		---		31		---
Total	$	192,386	$	1,048	$	96,507	$	11,097

	Residential		Consumer		Home		Consumer
December 31, 2013	Mortgage		Unsecured		Equity		Other
Performing	$	188,648	$	1,337	$	95,961	$	9,992
Nonperforming		---		---		---		---
Total	$	188,648	$	1,337	$	95,961	$	9,992

NOTE 4 – OTHER REAL ESTATE OWNED

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

	Nine			Year			Nine
	Months Ended			Ended			Months Ended
	September 30,			December 31,			September 30,
	2014			2013			2013
Beginning balance	$	53,501		$	69,743		$	69,743
Additions, transfers from loans		2,565			3,539			3,170
Proceeds from sales of other real estate owned		(9,964	)		(16,501	)		(10,545	)
Valuation allowance reversal upon sale		(3,409	)		(4,378	)		(2,794	)
Gain on sale of other real estate owned		475			1,098			1,004
		43,168			53,501			60,578
Less: valuation allowance		(14,405	)		(16,705	)		(17,782	)
Ending balance	$	28,763		$	36,796		$	42,796

Activity in the valuation allowance was as follows (dollars in thousands):

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2014			2013
Beginning balance	$	16,705		$	18,161
Additions charged to expense		1,109			2,415
Reversals upon sale		(3,409	)		(2,794	)
Ending balance	$	14,405		$	17,782

- 28 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE

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

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

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

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

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

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

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

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

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

- 29 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

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

	Fair			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable		Significant Unobservable Inputs
	Value			(Level 1)		Inputs (Level 2)		(Level 3)
September 30, 2014
U.S. Treasury and federal agency securities	$	67,116		$	---	$	67,116	$	---
U.S. Agency MBS and CMOs		17,264			---		17,264		---
Tax-exempt state and municipal bonds		36,398			---		36,398		---
Taxable state and municipal bonds		26,479			---		26,479		---
Corporate bonds and other debt securities		13,354			---		13,354		---
Other equity securities		1,490			---		1,490		---
Loans held for sale		905			---		905		---
Interest rate swaps		89			---		---		89
Interest rate swaps		(89	)		---		---		(89	)
December 31, 2013
U.S. Treasury and federal agency securities	$	54,439		$	---	$	54,439	$	---
U.S. Agency MBS and CMOs		19,365			---		19,365		---
Tax-exempt state and municipal bonds		26,849			---		26,849		---
Taxable state and municipal bonds		26,328			---		26,328		---
Corporate bonds and other debt securities		11,212			---		11,212		---
Other equity securities		1,466			---		1,466		---
Loans held for sale		1,915			---		1,915		---
Interest rate swaps		94			---		---		94
Interest rate swaps		(94	)		---		---		(94	)

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

	Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable		Significant Unobservable Inputs
	Value		(Level 1)		Inputs (Level 2)		(Level 3)
September 30, 2014
Impaired loans	$	17,709	$	---	$	---	$	17,709
Other real estate owned		23,442		---		---		23,442
December 31, 2013
Impaired loans	$	22,403	$	---	$	---	$	22,403
Other real estate owned		29,711		---		---		29,711

- 30 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at September 30, 2014 and December 31, 2013 (dollars in thousands).

	Level in	September 30, 2014						December 31, 2013
	Fair Value	Carrying			Fair			Carrying			Fair
	Hierarchy	Amount			Value			Amount			Value
Financial assets
Cash and due from banks	Level 1	$	24,731		$	24,731		$	38,714		$	38,714
Cash equivalents	Level 2		74,808			74,808			118,178			118,178
Interest-bearing time deposits in other financial institutions	Level 2		20,000			20,089			25,000			25,003
Securities held to maturity	Level 3		31,744			31,771			19,248			19,278
FHLB stock			11,236		NA				11,236		NA
Loans, net	Level 2		1,017,450			1,015,635			999,176			990,084
Bank owned life insurance	Level 3		28,021			28,021			27,517			27,517
Accrued interest receivable	Level 2		3,415			3,415			3,231			3,231
Financial liabilities
Deposits	Level 2		(1,216,089	)		(1,216,601	)		(1,249,734	)		(1,250,886	)
Other borrowed funds	Level 2		(88,107	)		(88,543	)		(89,991	)		(90,321	)
Long-term debt	Level 2		(41,238	)		(35,514	)		(41,238	)		(35,098	)
Subordinated debt	Level 2		---			---			---			---
Accrued interest payable	Level 2		(291	)		(291	)		(308	)		(308	)
Off-balance sheet credit-related items
Loan commitments			---			---			---			---

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

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

NOTE 6 – DEPOSITS

Deposits are summarized as follows (in thousands):

	September 30,		December 31,
	2014		2013
Noninterest-bearing demand	$	385,182	$	344,550
Interest bearing demand		278,302		287,417
Savings and money market accounts		425,877		469,542
Certificates of deposit		126,728		148,225
	$	1,216,089	$	1,249,734

Approximately $52.6 million and $56.7 million in certificates of deposit were in denominations of $100,000 or more at September 30, 2014 and December 31, 2013, respectively.

- 31 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 - OTHER BORROWED FUNDS

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

Federal Home Loan Bank Advances

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

				Weighted
	Advance			Average
Principal Terms	Amount		Range of Maturities	Interest Rate
September 30, 2014
Single maturity fixed rate advances	$	80,000	August 2016 to February 2019		1.69	%
Amortizable mortgage advances		8,107	March 2018 to July 2018		3.78	%
	$	88,107

				Weighted
	Advance			Average
Principal Terms	Amount		Range of Maturities	Interest Rate
December 31, 2013
Single maturity fixed rate advances	$	80,000	August 2016 to February 2019		1.69	%
Amortizable mortgage advances		9,991	March 2018 to July 2018		3.78	%
	$	89,991

Each advance is subject to a prepayment fee if paid prior to its maturity date.  Fixed rate advances are payable at maturity.   Amortizable mortgage advances are fixed rate advances with scheduled repayments based upon amortization to maturity.  These advances were collateralized by residential and commercial real estate loans totaling $447,484,000 and $411,715,000 under a blanket lien arrangement at September 30, 2014 and December 31, 2013, respectively.

Scheduled repayments of FHLB advances as of September 30, 2014 were as follows (in thousands):

2014	$	---
2015		1,938
2016		21,996
2017		2,055
2018		52,118
Thereafter		10,000
	$	88,107

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank.  There were no borrowings outstanding at September 30, 2014 and December 31, 2013, and the Company had approximately $24.4 million and $22.7 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $28.2 million and $26.6 million at September 30, 2014 and December 31, 2013, respectively.

- 32 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 - EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three and nine month periods ended September 30, 2014 and 2013 are as follows (dollars in thousands, except per share data):

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Net income	$	2,762	$	2,238	$	8,155	$	7,315
Dividends declared on preferred shares		---		---		---		---
Net income available to common shares	$	2,762	$	2,238	$	8,155	$	7,315
Weighted average shares outstanding, including participating stock awards - Basic		33,795,384		27,261,325		33,791,470		27,244,741
Dilutive potential common shares:
Stock options		---		---		---		---
Conversion of preferred stock		---		---		---		---
Stock warrants		---		---		---		---
Weighted average shares outstanding - Diluted		33,795,384		27,261,325		33,791,470		27,244,741
Basic earnings per common share	$	0.08	$	0.08	$	0.24	$	0.27
Diluted earnings per common share	$	0.08	$	0.08	$	0.24	$	0.27

Stock options for 351,195 shares of common stock for both the three and nine month periods ended September 30, 2014 were not considered in computing diluted earnings per share because they were antidilutive. Stock options for 445,392 shares of common stock for both the three and nine month periods ended September 30, 2013 were not considered in computing diluted earnings per share because they were antidilutive.  Potential common shares associated with convertible preferred stock (for the 2013 periods) and stock warrants were excluded from dilutive potential common shares as they were antidilutive.

NOTE 9 - FEDERAL INCOME TAXES

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

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Current	$	651	$	40	$	711	$	95
Deferred		555		935		2,903		3,218
	$	1,206	$	975	$	3,614	$	3,313

- 33 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9 - FEDERAL INCOME TAXES (Continued)

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

	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2014			2013			2014			2013
Statutory rate		35	%		35	%		35	%		35	%
Statutory rate applied to income before taxes	$	1,389		$	1,124		$	4,119		$	3,720
Add (deduct)
Tax-exempt interest income		(104	)		(70	)		(278	)		(166	)
Bank-owned life insurance		(62	)		(63	)		(177	)		(188	)
Other, net		(17	)		(16	)		(50	)		(53	)
	$	1,206		$	975		$	3,614		$	3,313

The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies.  No valuation allowance was necessary at September 30, 2014 or December 31, 2013.

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

	September 30,			December 31,
	2014			2013
Deferred tax assets
Allowance for loan losses	$	6,870		$	7,279
Nonaccrual loan interest		908			782
Valuation allowance on other real estate owned		5,000			5,847
Net operating loss carryforward		---			1,743
Unrealized loss on securities available for sale		143			1,053
Other		1,962			1,808
Gross deferred tax assets		14,883			18,512
Valuation allowance		---			---
Total net deferred tax assets		14,883			18,512
Deferred tax liabilities
Depreciation		(1,903	)		(1,620	)
Prepaid expenses		(204	)		(308	)
Other		(389	)		(384	)
Gross deferred tax liabilities		(2,496	)		(2,312	)
Net deferred tax asset	$	12,387		$	16,200

At September 30, 2014, we had no U.S. federal net operating loss carry forwards remaining.

There were no unrecognized tax benefits at September 30, 2014 or December 31, 2013 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2011.

- 34 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 – COMMITMENTS AND OFF BALANCE-SHEET RISK

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

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

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

	September 30,		December 31,
	2014		2013
Commitments to make loans	$	141,628	$	87,513
Letters of credit		10,827		10,774
Unused lines of credit		360,344		313,232

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $13.7 million and $14.7 million at September 30, 2014 and December 31, 2013, respectively.

At September 30, 2014, approximately 34% of the Bank’s commitments to make loans were at fixed rates, offered at current market rates.  The remainder of the commitments to make loans were at variable rates tied to prime and generally expire within 30 days.  The majority of the unused lines of credit were at variable rates tied to prime.

NOTE 11 – CONTINGENCIES

We and our subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business.  On January 27, 2014, our former Chairman and Chief Executive Officer, Mr. Benj. A. Smith III, commenced legal action against us claiming that we breached an alleged employment agreement pursuant to which he claims entitlement to $20,833 monthly for a period of six years from the date of his resignation in February 2009.  Mr. Smith’s complaint seeks damages in an unspecified amount in excess of $25,000.  We are vigorously contesting the action.  As of September 30, 2014, there were no other material pending legal proceedings to which we or any of our subsidiaries are a party or which any of our properties are the subject.

NOTE 12 – SHAREHOLDERS' EQUITY

Regulatory Capital

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

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

- 35 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – SHAREHOLDERS' EQUITY (Continued)

At September 30, 2014 and December 31, 2013, actual capital levels and minimum required levels were (in thousands):

											To Be Well
						Minimum Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount			Ratio
September 30, 2014
Total capital (to risk weighted assets)
Consolidated	$	186,618		16.3	%	$	91,659		8.0	%		N/	A		N/	A
Bank		183,675		16.0			91,812		8.0		$	114,765			10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		172,231		15.0			45,829		4.0			N/	A		N/	A
Bank		169,264		14.8			45,906		4.0			68,859			6.0
Tier 1 capital (to average assets)
Consolidated		172,231		11.6			59,571		4.0			N/	A		N/	A
Bank		169,264		11.4			59,500		4.0			74,376			5.0
December 31, 2013
Total capital (to risk weighted assets)
Consolidated	$	174,433		15.7	%	$	88,915		8.0	%		N/	A		N/	A
Bank		171,811		15.4			88,968		8.0		$	111,210			10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		160,455		14.4			44,457		4.0			N/	A		N/	A
Bank		157,825		14.2			44,484		4.0			66,726			6.0
Tier 1 capital (to average assets)
Consolidated		160,455		10.6			60,482		4.0			N/	A		N/	A
Bank		157,825		10.5			60,407		4.0			75,509			5.0

Approximately $40.0 million of trust preferred securities outstanding at September 30, 2014 and December 31, 2013, respectively, qualified as Tier 1 capital. Refer to our 2013 Form 10-K for more information on the trust preferred securities.

The Bank was categorized as "well capitalized" at September 30, 2014 and December 31, 2013.

On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III.  This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer.  It also revises the prompt corrective action thresholds and makes changes to risk weights for certain assets and off-balance-sheet exposures.  Banks are required to transition into the new rule beginning on January 1, 2015.  Based on our capital levels and balance sheet composition at September 30, 2014, we believe implementation of the new rule will have no material impact on our capital needs.

- 36 -

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

At September 30, 2014, we had total assets of $1.49 billion, total loans of $1.05 billion, total deposits of $1.22 billion and shareholders' equity of $140.5 million.  During the third quarter of 2014, we recognized net income of $2.8 million compared to net income of $2.2 million in the third quarter of 2013.  For the nine months ended September 30, 2014, net income was $8.2 million compared to $7.3 million for the same period in 2013.  As of September 30, 2014, the Company’s and the Bank’s risk-based regulatory capital ratios were among the highest in the Company’s history.  The Bank was categorized as “well capitalized” at September 30, 2014.

After a hiatus of over five years, we paid a dividend of $0.02 per share in each of the three quarters to date in 2014.

RESULTS OF OPERATIONS

Summary: Net income for the quarter ended September 30, 2014 was $2.8 million, compared to net income of $2.2 million in the third quarter of 2013. Net income per common share on a diluted basis was $0.08 for the third quarters of 2014 and 2013.  For the first nine months of 2014, net income was $8.2 million, compared to $7.3 million for the same period in 2013.  Net income per share on a diluted basis for the nine months ended September 30, 2014 was $0.24 compared to $0.27 for the same period in 2013.  The 2014 per share information includes the impact of the exchange of all of our outstanding shares of preferred stock for common stock and cash completed at the end of 2013.

The increase in earnings in the third quarter of 2014 compared to the third quarter of 2013, as well as for the nine month period ended September 30, 2014 compared to the same period in the prior year, was primarily due to continued reductions in our nonperforming asset expenses.  Nonperforming asset expenses (including administration costs and losses) were $861,000 for the third quarter of 2014 compared to $1.8 million for the third quarter of 2013.  For the nine months ended September 30, 2014, nonperforming asset expenses were $2.2 million compared to $4.1 million for the same period in 2013.  We recorded a negative provision for loan losses in the third quarters of 2014 and 2013 and the first nine months of 2014 and 2013.  The provision for loan losses was a negative $750,000 for the three month period ended September 30, 2014 compared to a negative $1.5 million for the same period in 2013 and a negative $2.75 million in the first nine months of 2014 compared to a negative $3.25 million for the same period in 2013.  We again were in a net loan recovery position for the third quarter of 2014, with $330,000 in net loan recoveries, compared to $524,000 in net loan recoveries in the third quarter of 2013.  For the nine months ended September 30, 2014 and 2013, net loan recoveries were $1.6 million and $783,000, respectively. Lost interest from elevated levels of nonperforming assets was approximately $429,000 and $1.5 million, respectively, for the three and nine months ended September 30, 2014 compared to $561,000 and $1.9 million, respectively, for the three and nine months ended September 30, 2013.

Net Interest Income: Net interest income totaled $10.3 million for the third quarter of 2014 compared to $10.1 million for the third quarter of 2013.  For the first nine months of 2014, net interest income was $30.9 million compared to $31.1 million for the same period in 2013.

Our average yield on earning assets for the third quarter of 2014 decreased 5 basis points compared to the same period in 2013 from 3.48% to 3.43%. Average interest earning assets totaled $1.36 billion for the third quarter of 2014 and 2013. The net interest margin was 3.04% for the third quarter of 2014 compared to 2.96% for the third quarter of 2013. Offsetting dynamics influenced the margin as follows.  An increase of $34.7 million in average securities between periods partially mitigated the impact of reduction in average loan yield from 4.25% in the third quarter of 2013 to 3.99% in the third quarter of 2014 thereby limiting the decrease in total yield of interest earning assets to only 5 basis points.  The primary factor causing the increase in net interest margin was the 14 basis point decrease in the total cost of interest-bearing liabilities.

- 37 -

Average interest earning assets were unchanged at $1.35 billion for the first nine months of 2014 and 2013.  Our average yield on earning assets decreased 13 basis points for the first nine months of 2014 in comparison to the same period in 2013.  Our net interest margin was 3.08% for the first nine months of 2014 and 2013.  Net interest income was positively impacted in the first nine months of 2014 due in part to a one-time recovery of interest of $337,000 on a previously charged off loan in the first quarter of 2014.

The yield on interest earning assets decreased for both the three and nine month periods ended September 30, 2014 as the yield on our loan portfolio decreased 26 basis points for the three month period and 28 basis points for the nine month period.  However, this was significantly offset by the effect of improvement in the mix of our average earning assets.  For the three month period ended September 30, 2014, we reduced average federal funds sold and other short-term investments by $68.5 million, while increasing average loans by $29.8 million and average securities by $34.5 million.  For the nine month period ended September 30, 2014, we reduced average federal funds sold and other short-term investments by $41.6 million, while increasing average loans by $5.1 million and average securities by $37.7 million.  Also impacting the nine month period ended September 30, 2014 was a one-time recovery of interest on a previously charged off loan which partially offset the decreases in the yield on our commercial, residential and consumer loan portfolios. Our margin has been negatively impacted by our decision to hold significant balances in liquid and short-term investments during the past three years. As we continue to deploy these balances in building our investment portfolio and booking high quality loans, we expect our margin to be positively impacted.

The cost of funds decreased 14 basis points to 0.55% in the third quarter of 2014 from 0.69% in the same period in 2013. The cost of funds decreased 15 basis points to 0.56% for the nine months ended September 30, 2014 compared to 0.71% for the same period in 2013.  For both the three and nine month periods ended September 30, 2014, decreases in the rates paid on our deposit accounts in response to declining market rates and the rollover other borrowings at lower rates within the current rate environment caused the reduction in our cost of funds. Also contributing to the reduction was a shift in our deposit mix from higher costing time deposits to lower costing demand and savings accounts.

- 38 -

The following table shows an analysis of net interest margin for the three month periods ended September 30, 2014 and 2013.

	For the three months ended September 30,
	2014								2013
				Interest		Average						Interest		Average
	Average			Earned		Yield			Average			Earned		Yield
	Balance			or paid		or cost			Balance			or paid		or cost
	(Dollars in thousands)
Assets
Taxable securities	$	123,182		$	504		1.64	%	$	110,927		$	476		1.72	%
Tax-exempt securities (1)		60,067			309		3.20	%		37,619			211		3.42	%
Loans (2)		1,045,794			10,639		3.99	%		1,016,008			10,995		4.25	%
Federal Home Loan Bank stock		11,236			105		3.66	%		11,236			98		3.41	%
Federal funds sold and other short-term investments		117,940			117		0.39	%		186,433			139		0.29	%
Total interest earning assets (1)		1,358,219			11,674		3.43	%		1,362,223			11,919		3.48	%
Noninterest earning assets:
Cash and due from banks		27,942								26,229
Other		111,225								126,103
Total assets	$	1,497,386							$	1,514,555
Liabilities
Deposits:
Interest bearing demand	$	266,881			81		0.12	%	$	271,084			91		0.14	%
Savings and money market accounts		439,218			204		0.19	%		465,470			479		0.41	%
Time deposits		134,391			329		0.97	%		164,785			384		0.93	%
Borrowings:
Other borrowed funds		88,209			426		1.89	%		90,864			465		2.01	%
Long-term debt		41,238			330		3.13	%		41,238			376		3.57	%
Total interest bearing liabilities		969,937			1,370		0.55	%		1,033,441			1,795		0.69	%
Noninterest bearing liabilities:
Noninterest bearing demand accounts		383,551								336,963
Other noninterest bearing liabilities		4,791								10,033
Shareholders' equity		139,107								134,118
Total liabilities and shareholders' equity	$	1,497,386							$	1,514,555
Net interest income				$	10,304							$	10,124
Net interest spread (1)							2.88	%							2.79	%
Net interest margin (1)							3.04	%							2.96	%
Ratio of average interest earning assets to average interest bearing liabilities		140.03	%							131.81	%

(1) Yield adjusted to fully tax equivalent using a tax rate of 35%.

(2) Includes average nonaccrual loans of approximately $7.9 million and $10.1 million for the three months ended September 30, 2014 and 2013.

- 39 -

The following table shows an analysis of net interest margin for the nine month periods ended September 30, 2014 and 2013.

	For the nine months ended September 30,
	2014								2013
				Interest		Average						Interest		Average
	Average			Earned		Yield			Average			Earned		Yield
	Balance			or paid		or cost			Balance			or paid		or cost
	(Dollars in thousands)
Assets
Taxable securities	$	120,470		$	1,503		1.66	%	$	106,402		$	1,352		1.69	%
Tax-exempt securities (1)		53,829			828		3.22	%		30,205			508		3.56	%
Loans (2)		1,042,036			32,129		4.08	%		1,036,974			34,156		4.36	%
Federal Home Loan Bank stock		11,236			365		4.28	%		11,236			294		3.45	%
Federal funds sold and other short-term investments		121,130			347		0.38	%		162,727			349		0.28	%
Total interest earning assets (1)		1,348,701			35,172		3.50	%		1,347,544			36,659		3.63	%
Noninterest earning assets:
Cash and due from banks		26,038								23,830
Other		114,510								132,376
Total assets	$	1,489,249							$	1,503,750
Liabilities
Deposits:
Interest bearing demand	$	272,620			226		0.11	%	$	269,196			268		0.13	%
Savings and money market accounts		453,929			737		0.22	%		468,506			1,497		0.43	%
Time deposits		141,879			1,010		0.95	%		176,001			1,256		0.96	%
Borrowings:
Other borrowed funds		88,918			1,283		1.90	%		92,132			1,450		2.07	%
Long-term debt		41,238			981		3.14	%		41,238			1,117		3.58	%
Total interest bearing liabilities		998,584			4,237		0.56	%		1,047,073			5,588		0.71	%
Noninterest bearing liabilities:
Noninterest bearing demand accounts		349,294								313,946
Other noninterest bearing liabilities		1,435								9,191
Shareholders' equity		139,936								133,540
Total liabilities and shareholders' equity	$	1,489,249							$	1,503,750
Net interest income				$	30,935							$	31,071
Net interest spread (1)							2.94	%							2.92	%
Net interest margin (1)							3.08	%							3.08	%
Ratio of average interest earning assets to average interest bearing liabilities		135.06	%							128.70	%

(1) Yield adjusted to fully tax equivalent using a tax rate of 35%.

(2) Includes average nonaccrual loans of approximately $10.7 million and $12.3 million for the nine months ended September 30, 2014 and 2013.

- 40 -

Provision for Loan Losses: The provision for loan losses for the third quarter of 2014 was a negative $750,000 compared to a negative $1.5 million for the third quarter of 2013.  The negative provision for loan losses for both periods was caused by stabilizing real estate values on problem credits, continued improvement in credit quality metrics and low chargeoff levels.  At September 30, 2014, we had experienced net loan recoveries in six of the past seven quarters.  The provision for loan losses for the first nine months of 2014 was a negative $2.75 million compared to a negative $3.25 million for the same period in 2013.

Net loan recoveries were $330,000 in the third quarter of 2014 compared to net loan recoveries of $524,000 for the third quarter of 2013. In the third quarter of 2014, we had $120,000 in charge-offs, compared to $354,000 in the third quarter of 2013.  The charge-offs for each period were largely driven by declines in the value of real estate securing our loans. Real estate values, however, have been recovering, translating into a decline in charge-offs. We are also experiencing positive results from our collection efforts with loan recoveries increasing as evidenced by our net loan recovery positions in six of the past seven quarters, including the third quarter of 2014.  Loan recoveries were $450,000 for the third quarter of 2014 and $878,000 for the same period in 2013.  Loan recoveries for the nine months ended September 30, 2014 were $1.9 million compared to $2.5 million for the same period in 2013.  For the nine months ended September 30, 2014, we experienced net recoveries of $1.6 million compared to net recoveries of $783,000  for the same period in 2013.  While we expect our collection efforts to produce further recoveries, they may not continue at the same level we have experienced the past several quarters.

We have also experienced a decline in the pace of commercial loans migrating to a worse loan grade, which receive higher allocations in our loan loss reserve, as more fully discussed under the heading "Allowance for Loan Losses" below. In addition to experiencing fewer downgrades of credits, we continue to see an increase in the quality of some credits resulting in an improved loan grade. Over the past two years, we have experienced improvements in our weighted average loan grade. We believe efforts that began in late 2009 and in early 2010 to improve loan administration and loan risk management practices have had a significant impact, ultimately allowing for the reduction in the level of the allowance for loan losses since then.

The amounts of loan loss provision in both the most recent quarter and comparable prior year period and for the nine month periods ended September 30, 2014 and 2013 were the result of establishing our allowance for loan losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The sustained lower level of quarterly net charge-offs over the past several quarters had a significant effect on the historical loss component of our methodology. More information about our allowance for loan losses and our methodology for establishing its level may be found under the heading "Allowance for Loan Losses" below.

Noninterest Income: Noninterest income for the three and nine month periods ended September 30, 2014 increased to $4.3 million from $4.0 million and decreased to $11.9 million from $12.1 million, respectively, for the same periods in 2013.  The components of noninterest income are shown in the table below (in thousands):

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Service charges and fees on deposit accounts	$	1,163	$	1,072	$	3,219	$	3,041
Net gains on mortgage loans		679		612		1,405		2,145
Trust fees		669		584		2,002		1,797
Gain as sales of securities		---		---		51		80
ATM and debit card fees		1,170		1,104		3,425		3,212
Bank owned life insurance (“BOLI”) income		176		180		505		539
Investment services fees		233		198		723		670
Other income		213		201		551		641
Total noninterest income	$	4,303	$	3,951	$	11,881	$	12,125

Service charges on deposit accounts increased for the three and nine month periods ended September 30, 2014 due to changes in our pricing of certain deposit related services.  Trust fees were also up due to investment market improvement and growth in the number of trust customers.  ATM and debit card fees increased over 2013 due to higher level of usage from our customers in 2014, partially due to our rollout of the uChoose Rewards incentive program in late 2013.  For the nine month period ended September 30, 2014, these increases were offset by a reduction in gains on sales of mortgage loans due to a decrease in our residential mortgage loan origination volume in early 2014.  Volume decreased industry-wide as a result of market increases in mortgage loan rates beginning late in the second quarter of 2013, but has rebounded more recently due to an uptick in residential real estate activity in the second and third quarters of 2014.  We also recognized a reduction in other income in the nine month period ended September 30, 2014 due to lower level of rental income on other real estate owned, as we continued to reduce our holdings of such properties.

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Noninterest Expense: Noninterest expense decreased to $11.4 million and $33.8 million for the three and nine month periods ended September 30, 2014, from $12.4 million and $35.8 million, respectively, for the same periods in 2013. The components of noninterest expense are shown in the table below (in thousands):

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Salaries and benefits	$	5,810	$	5,834	$	17,177	$	17,359
Occupancy of premises		897		908		2,837		2,759
Furniture and equipment		803		819		2,394		2,414
Legal and professional		196		192		639		565
Marketing and promotion		226		245		703		738
Data processing		635		570		1,807		1,704
FDIC assessment		287		317		934		1,133
Interchange and other card expense		288		315		825		967
Bond and D&O insurance		166		187		493		555
Administration and disposition of problem assets		861		1,811		2,218		4,072
Outside services		471		383		1,261		1,106
Other noninterest expense		749		781		2,509		2,446
Total noninterest expense	$	11,389	$	12,362	$	33,797	$	35,818

Several components of noninterest expense experienced a decline due to our ongoing efforts to manage expenses and improve efficiency in our operations. Our largest component of noninterest expense, salaries and benefits, decreased slightly in the third quarter of 2014 from the third quarter of 2013. We had 352 full-time equivalent employees at September 30, 2014 compared to 363 at September 30, 2013. In addition, reduced medical insurance costs driven by lower claims experience and lower commissions paid from reduced mortgage origination activity also contributed to the decline in salaries and benefits. Salaries and benefits decreased by $182,000 from $17.4 million for the first nine months of 2013 to $17.2 million for the same period in 2014.

Over the past several years, the next largest noninterest expense has been our cost related to administration and disposition of problem assets. Costs associated with administration and disposition of problem assets include legal costs, repossessed and foreclosed property administration expense and losses on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. Losses on repossessed and foreclosed properties include both net gains and losses on the sale of properties and unrealized losses from value declines for outstanding properties.  We experienced significant decreases in each of these expense categories in the third quarter of 2014 compared to the same period in the prior year, as well as in the nine month period ended September 30, 2014 compared to the same period in the prior year.

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

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Legal and professional – nonperforming assets	$	62	$	161	$	257	$	662
Repossessed and foreclosed property administration		350		591		1,327		1,998
Net losses on repossessed and foreclosed properties		449		1,059		634		1,412
Total	$	861	$	1,811	$	2,218	$	4,072

Net losses on repossessed assets and foreclosed properties decreased by $610,000 from the third quarter of 2013 to the third quarter of 2014.  For the first nine months of 2014, net losses on repossessed assets and foreclosed properties were down $778,000 from the same period in 2013.  The writedowns for each period have largely been driven by declines in the value of real estate. Real estate values, however, have been recovering, translating into a downward trend in writedowns. For the nine months ended September 30, 2014, we realized net gains of $475,000 on sales of foreclosed properties, significantly offsetting the $1.1 million in valuation writedowns for the period.

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Costs associated with administration and disposition of problem assets decreased due to the decrease in the level of other real estate owned. Other real estate owned decreased from $42.8 million at September 30, 2013 to $28.8 million at September 30, 2014.  As our level of problem loans and other real estate owned decreases, we believe we will experience more reductions in these costs going forward.

FDIC assessments decreased by $199,000 for the nine months ended September 30, 2014 compared to the same period in the prior year as a result of the 2014 period including the full effect of the change in our assessment category resulting from the termination of our previous regulatory orders.  For the nine months ended September 30, 2014, our FDIC assessments were $934,000 compared to $1.1 million for the same period in 2013.

Federal Income Tax Expense: Werecorded $1.2 million and $3.6 million in federal income tax expense for the three and nine month periods ended September 30, 2014 compared to $975,000 and $3.3 million, respectively, in the same periods in 2013.  At December 31, 2012 and since that time, we have concluded that a valuation allowance on our deferred tax asset was not required.  As a result, the financial results for each period reflect federal income tax expense, at an effective tax rate of 30.39% and 30.71% for the three and nine month periods ended September 30, 2014, compared to 30.35% and 31.17%, respectively, for the same periods in 2013.

FINANCIAL CONDITION

Summary:  We have been focused on improving our loan portfolio, reducing exposure in higher loan concentration types, and improving our financial condition through diversification of credit risk, improved capital ratios, and reduced reliance on non-core funding.   We have experienced positive results in each of these areas over the past four years.

Total assets were $1.49 billion at September 30, 2014, a decrease of $27.7 million from $1.52 billion at December 31, 2013. This change reflected increases of $22.4 million in securities available for sale, $12.5 million in securities held to maturity, and $12.4 million in our loan portfolio, offset by declines of $5.0 million of interest-bearing time deposits in other financial institutions, $14.0 million in cash and equivalents and $43.4 million in federal funds sold and other short-term investments. Total deposits declined by $33.6 million due to normal seasonal deposit usage and other borrowed funds were down by $1.9 million at September 30, 2014 compared to December 31, 2013.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short term investments, were $99.5 million at September 30, 2014 compared to $156.9 million at December 31, 2013. The $57.4 million decrease was partially the result of normal outflow of the seasonal build-up in deposits that takes place at the end of the year and partially the result of growth we experienced in investment securities and in our loan portfolio. We expect further declines in our balances of short term investments as loan demand continues to increase.

Interest-bearing Time Deposits with Other Financial Institutions: We opened two time deposit accounts with our primary correspondent bank in the first quarter of 2013, each in equal amounts totaling $25.0 million.  One of these deposits matured in March 2014 and the other matured in September 2014.  We opened another time deposit of $20.0 million in the first quarter of 2014 which matures in February 2016.  These time deposits provide a higher interest rate than federal funds sold or other short-term investments.

Securities Available for Sale: Securities available for sale were $162.1 million at September 30, 2014 compared to $139.7 million at December 31, 2013. The balance at September 30, 2014 primarily consisted of U.S. agency securities, agency mortgage backed securities and various taxable and non-taxable municipal investments. We expect to continue to reinvest excess liquidity and selectively rebuild our investment portfolio.

Portfolio Loans and Asset Quality: During the first nine months of 2014, total portfolio loans increased by $12.4 million to $1.05 billion.  During the first nine months of 2014, our commercial portfolio increased by $7.3 million, while our consumer portfolio increased by $1.4 million and our residential mortgage portfolio increased by $3.7 million. We have been focusing efforts to increase the non-real estate portion of our commercial portfolio as well as our consumer and residential mortgage portfolio segments to further diversify our credit risk.

Our commercial loan portfolio balances declined in recent years prior to 2014 reflecting the economic conditions in West Michigan and our interest in improving the quality of our loan portfolio through reducing our exposure to these generally higher credit risk assets. We have focused our efforts on reducing our exposure to residential land development loans, diversifying our commercial loan portfolio and improving asset quality. We believe our loan portfolio has stabilized.  During the fourth quarter of 2012, we achieved growth in our commercial loan portfolio for the first time since the fourth quarter of 2008 and balances held relatively steady since, with reduction in balances of problem credits.  We experienced growth in our commercial loan portfolio again in the second and third quarters of 2014 and based on our current commercial loan pipeline believe we are poised for further high quality loan portfolio growth through the remainder of 2014.

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Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 71% of the total loan portfolio at September 30, 2014 and December 31, 2013. Residential mortgage and consumer loans comprised approximately 29% of total loans at September 30, 2014 and December 31, 2013.

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

	September 30, 2014					December 31, 2013
			Percent of					Percent of
	Balance		Total Loans			Balance		Total Loans
Commercial real estate: (1)
Residential developed	$	13,527		1.3	%	$	18,130		1.8	%
Unsecured to residential developers		7,126		0.7			7,315		0.7
Vacant and unimproved		48,407		4.6			42,988		4.1
Commercial development		4,362		0.4			2,434		0.2
Residential improved		70,228		6.7			76,294		7.3
Commercial improved		248,946		23.6			247,195		23.7
Manufacturing and industrial		75,321		7.1			77,984		7.5
Total commercial real estate		467,917		44.4			472,340		45.3
Commercial and industrial		285,833		27.1	%		274,099		26.3	%
Total commercial		753,750		71.5			746,439		71.6
Consumer
Residential mortgage		192,386		18.2			188,648		18.1
Unsecured		1,048		0.1			1,337		0.1
Home equity		96,507		9.1			95,961		9.2
Other secured		11,097		1.1			9,992		1.0
Total consumer		301,038		28.5			295,938		28.4
Total loans	$	1,054,788		100.0	%	$	1,042,377		100.0	%

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

Commercial real estate loans accounted for 44.4% of the total loan portfolio at September 30, 2014 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.

Total commercial real estate loans declined $4.4 million in the nine month period since December 31, 2013. Our commercial and industrial loan portfolio increased by $11.7 million to $285.8 million at September 30, 2014 and represented 27.1% of our commercial portfolio.

Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, grew by $3.7 million from December 31, 2013 to September 30, 2014 as we continue to execute our strategy to diversify our credit risk from commercial real estate.  A large portion of our residential mortgage loan production continues to be sold on the secondary market with servicing released.

We have not yet had to repurchase any residential mortgage loans sold; however, due to market conditions many banks are being required to repurchase loans resulting from actual or alleged failure to strictly conform to the investor’s purchase criteria.  During 2014, we expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan to value loans with variable interest rates) 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. These types of loans increased by $1.4 million to $108.7 million at September 30, 2014 from $107.3 million at December 31, 2013.  Consumer loans comprised approximately 10.3% of our portfolio loans at September 30, 2014 and 10.3% at December 31, 2013.

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The following table shows our loan origination activity for portfolio loans during the first nine months of 2014, broken out by loan type and also shows average originated loan size (dollars in thousands):

			Percent of
	Portfolio		Total			Average
	Originations		Originations			Loan Size
Commercial real estate:
Residential developed	$	5,620		1.3	%	$	624
Unsecured to residential developers		---		---			---
Vacant and unimproved		24,283		5.5			1,735
Commercial development		2,359		0.5			2,359
Residential improved		37,798		8.6			215
Commercial improved		69,598		15.8			916
Manufacturing and industrial		18,157		4.1			757
Total commercial real estate		157,815		35.8			526
Commercial and industrial		209,206		47.5			34
Total commercial		367,021		83.3			58
Consumer
Residential mortgage		38,094		8.6			200
Unsecured		187		---			8
Home equity		29,740		6.8			67
Other secured		5,608		1.3			21
Total consumer		73,629		16.7			79
Total loans	$	440,650		100.0	%		60

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 monthly to manage our internal watch list and proactively manage high risk loans.

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

Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At September 30, 2014, nonperforming assets totaled $37.2 million compared to $49.2 million at December 31, 2013. Additions to foreclosed properties owned in the first nine months of 2014 were $2.6 million.  Proceeds from sales of foreclosed properties were $10.0 million in the first nine months of 2014 which included a net gain of $475,000. This is a similar volume of sales as compared to the first nine months of 2013, when we experienced proceeds of $10.5 million and realized a net gain of $1.0 million.  We expect the monthly level of sales of foreclosed properties for the remainder of 2014 to be similar to the levels experienced in the first nine months of 2014.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of September 30, 2014, nonperforming loans totaled $8.4 million, or 0.80% of total portfolio loans, compared to $12.3 million, or 1.18% of total portfolio loans, at December 31, 2013.

Loans for development or sale of 1-4 family residential properties comprised approximately $2.2 million, or 26.7% of total nonperforming loans, at September 30, 2014 compared to $2.6 million, or 21.0% of total nonperforming loans, at December 31, 2013. The remaining balance of nonperforming loans at September 30, 2014 consisted of $1.3 million of commercial real estate loans secured by various types of non-residential real estate, $4.4 million of commercial and industrial loans, and $554,000 of consumer and residential mortgage loans.

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $28.8 million at September 30, 2014 and $36.8 million at December 31, 2013. Of the balance at September 30, 2014, there were 64 commercial real estate properties totaling approximately $27.4 million. The remaining balance was comprised of 12 residential properties totaling approximately $1.3 million.  Three commercial real estate properties comprised $11.9 million, or 41%, of total other real estate owned at September 30, 2014.  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.

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At September 30, 2014, our foreclosed asset portfolio had a weighted average age held in portfolio of 3.59 years. Below is a breakout of our foreclosed asset portfolio at September 30, 2014 by property type and the percentages by which the property has been written down since taken into our possession and the combined writedown percentage, including losses taken when the property was loan collateral (dollars in thousands):

						Combined
	Carrying					Writedown
	Value at		Foreclosed			(Loan and
	September 30,		Asset			Foreclosed
Foreclosed Asset Property Type	2014		Writedown			Asset)
Single Family	$	905		---	%		22.8	%
Residential Lot		420		31.7			50.0
Multi-Family		---		---			---
Vacant Land		4,800		36.2			50.3
Residential Development		7,773		38.3			80.7
Commercial Office		1,747		31.4			56.1
Commercial Industrial		---		---			---
Commercial Improved		13,118		29.1			41.8
	$	28,763		32.6			63.0

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

	September 30,			December 31,
	2014			2013
Nonaccrual loans	$	8,425		$	12,182
Loans 90 days past due and still accruing		---			153
Total nonperforming loans (NPLs)		8,425			12,335
Foreclosed assets		28,763			36,796
Repossessed assets		38			40
Total nonperforming assets (NPAs)		37,226			49,171
Accruing restructured loans (ARLs) (1)		48,742			57,790
Total NPAs and ARLs	$	85,968		$	106,961
NPLs to total loans		0.80	%		1.18	%
NPAs to total assets		2.50	%		3.24	%

(1) Comprised of approximately $34.5 million and $43.6 million of commercial loans and $14.2 million and $14.2 million of consumer loans whose terms have been restructured at September 30, 2014 and December 31, 2013, respectively. Interest is being accrued on these loans under their restructured terms as they are less than 90 days past due.

Allowance for loan losses: The allowance for loan losses at September 30, 2014 was $19.6 million, a decrease of $1.2 million, compared to $20.8 million at December 31, 2013. The balance of the allowance for loan losses represented 1.86% of total portfolio loans at September 30, 2014 compared to 2.00% of total portfolio loans at December 31, 2013.  The allowance for loan losses to nonperforming loan coverage ratio increased from 168.61% at December 31, 2013 to 232.99% at September 30, 2014.

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The table below shows the changes in these metrics over the past five quarters:

	Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
(in millions)	2014			2014			2014			2013			2013
Commercial loans	$	753.8		$	748.7		$	735.1		$	746.4		$	735.1
Nonperforming loans		8.4			8.1			15.5			12.3			10.2
Other real estate owned and repo assets		28.8			31.6			34.1			36.8			42.8
Total nonperforming assets		37.2			39.6			49.6			49.2			53.0
Net charge-offs (recoveries)		(0.3	)		(0.7	)		(0.6	)		(0.5	)		(0.5	)
Total delinquencies		5.1			5.2			6.6			5.5			7.8

Nonperforming loans continually declined since the first quarter of 2010 to $10.2 million at September 30, 2013.  These balances increased $2.1 million in the fourth quarter of 2013 and $3.2 million in the first quarter of 2014, due to seasonal draws on one nonperforming loan.  As expected, these balances paid down in the second quarter of 2014.  As discussed earlier, we have had net loan recoveries in several quarters over the last two years and in six of the last seven quarters.  Our total delinquencies have continued to stabilize and were down to $5.1 million at September 30, 2014.

These factors all provide for a reduction in our allowance for loan losses, and thus impacts our provision for loan losses. The allowance for loan losses decreased $1.2 million in the first nine months of 2014 due to a negative provision for loan losses of $2.75 million for the nine months ended September 30, 2014 compared to a negative $3.25 million for the same period of 2013.  Net loan recoveries were $1.6 million for the nine months ended September 30, 2014, compared to net recoveries of $783,000 for the same period in 2013. The ratio of net charge-offs to average loans was -0.20% on an annualized basis for the first nine months of 2014, compared to -0.10% for the first nine months of 2013.

We are encouraged by the reduced level of charge-offs over recent quarters. We do, however, recognize that future charge-offs and resulting provisions for loan losses are expected to be impacted by the timing and extent of changes in the overall economy and the real estate markets. We believe we have seen some improvement in economic conditions and real estate markets. However, we expect it to take additional time for us to reduce our nonperforming and impaired loans to acceptable levels.

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.

Impaired loans decreased $6.9 million to $62.0 million at September 30, 2014 compared to $68.9 million at December 31, 2013.  The specific allowance for impaired loans increased $591,000 to $4.5 million at September 30, 2014, compared to $3.9 million at December 31, 2013 due primarily to increased allocations on one large impaired loan.  The specific allowance for impaired loans represented 7.2% of total impaired loans at September 30, 2014 and 5.6% at December 31, 2013.  The overall balance of impaired loans remained elevated partially due to an accounting rule (ASU 2011-02) adopted in 2011 that requires us to identify classified loans that renew at existing contractual rates as troubled debt restructurings (“TDRs”) if the contractual rate is less than market rates for similar loans at the time of renewal.

The general allowance allocated to commercial loans that were not considered to be impaired was based upon the internal risk grade of such loans.  We use a loan rating method based upon an eight point system.  Loans are stratified between real estate secured and non real 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 chargeoff history as the base for our computation.  Over the past two years, the 18 month period computations have reflected sizeable decreases in net chargeoff experience.  We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. Adjustments to the qualitative factors also involved consideration of different loss periods for the Bank, including 12, 24, 36 and 48 month periods. Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans decreased to $12.1 million at September 30, 2014 compared to $14.1 million at December 31, 2013.  This resulted in a general reserve percentage allocated at September 30, 2014 of 1.71% of commercial loans, a slight decrease from 2.03% at December 31, 2013.  The qualitative component of our general allowance allocated to commercial loans decreased from $13.9 million at December 31, 2013 to $12.1 million at September 30, 2014.

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Groups of homogeneous loans, such as residential real estate and open- and closed-end consumer loans, receive allowance allocations based on loan type.  A rolling 12 month (four quarter) historical loss experience period was applied to residential mortgage and consumer loan portfolios.  As with commercial loans that are not considered impaired, the determination of the allowance allocation percentage is based principally on our historical loss experience.  These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans.  The homogeneous loan allowance was $3.1 million at September 30, 2014 and $2.9 million at December 31, 2013.

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

Premises and Equipment:  Premises and equipment totaled $53.3 million at September 30, 2014 as compared to $53.6 million at December 31, 2013.  There was limited change as capital additions were largely offset by depreciation of current facilities during the first nine months of 2014.

Deposits and Other Borrowings: Total deposits decreased $33.6million to $1.22billion at September 30, 2014, as compared to $1.25 billion at December 31, 2013.  Non-interest checking account balances increased $40.6 million during the first nine months of 2014.  Interest bearing demand account balances decreased $9.1 million and savings and money market account balances decreased $43.7 million in the first nine months of 2014.  We decreased higher costing certificates of deposits by $21.5 million in the first nine months of 2014.  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 maturing branch network and the breadth and depth of our sophisticated product line.

Noninterest bearing demand accounts comprised 32% of total deposits at September 30, 2014 and 28% at December 31, 2013.  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 account types.  Interest bearing demand, including money market and savings accounts, comprised 58% of total deposits at September 30, 2014 and 60% at December 31, 2013. Time accounts as a percentage of total deposits were 10% at September 30, 2014 and 12% at December 31, 2013.

Borrowed funds totaled $129.3 million at September 30, 2014, including $88.1 million of Federal Home Loan Bank advances and $41.2 million in long-term debt associated with trust preferred securities.  Borrowed funds totaled $131.2 million at December 31, 2013, including $90.0 million of Federal Home Loan Bank advances and $41.2 million in long-term debt associated with trust preferred securities.  Borrowed funds decreased by $1.9 million in the first nine months of 2014 as a result of an annual payment on an amortizing Federal Home Loan Bank advance.

CAPITAL RESOURCES

Total shareholders' equity of $140.5 million at September 30, 2014 increased $7.9 million from $132.5 million at December 31, 2013. The increase was primarily a result of net income of $8.2 million earned in the first nine months of 2014 and a decrease of $1.7 million in accumulated other comprehensive loss, partially offset by the payment of $2.0 million in cash dividends to shareholders.

At the end of the third quarter 2014, our regulatory capital ratios were at levels among the highest in the Company’s history.  The Bank was categorized as “well capitalized” at September 30, 2014. The following table shows our regulatory capital ratios (on a consolidated basis) for the past several quarters:

	Sept 30,			June 30,			March 31,			Dec 31,			Sept 30,
	2014			2014			2014			2013			2013
Total capital to risk weighted assets		16.3	%		16.3	%		16.1	%		15.7	%		16.0	%
Tier 1 capital to average assets		11.6			11.4			11.1			10.6			10.9

The entire balance of trust preferred securities outstanding at September 30, 2014 qualified as Tier 1 capital.

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LIQUIDITY

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

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

In the wake of the recession in 2008 and 2009, the Bank 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 also reduced other borrowed funds by $56.8 million in 2012, by $1.8 million in 2013, and by another $1.9 million in the first nine months of 2014.  We continue to maintain significant on-balance sheet liquidity.  At September 30, 2014, the Bank held $99.5 million of federal funds sold and other short-term investments and $20.0 million in time deposits with other financial institutions with maturities of less than 24 months.  In addition, the Bank’s borrowing capacity from correspondent banks has been improved and was approximately $225.4 million as of September 30, 2014.

In the normal course of business, we enter into certain contractual obligations, including obligations which are considered in our overall liquidity management.  The table below summarizes our significant contractual obligations at September 30, 2014.

	Less than						More than
(Dollars in thousands)	1 year		1-3 years		3-5 years		5 years
Long term debt	$	---	$	---	$	---	$	41,238
Time deposit maturities		90,016		30,264		6,448		---
Other borrowed funds		---		25,989		62,118		---
Total	$	90,016	$	56,253	$	68,566	$	41,238

In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan commitments and standby letters of credit.  The level and fluctuation of these commitments is also considered in our overall liquidity management.  At September 30, 2014, we had a total of $360.3 million in unused lines of credit, $141.6 million in unfunded loan commitments and $10.8 million in standby letters of credit.

Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and 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 December 2013, the Bank paid a dividend of $5.0 million to the Company in anticipation of the preferred stock exchange, in which the Company paid a total of $4.8 million in cash as a part of the transaction, retaining the remaining balance for general corporate purposes.  In 2014, the Company resumed payment of quarterly cash dividends to Company shareholders.  In the nine months ended September 30, 2014, the Bank paid dividends to the Company totaling $2.9 million.  In the same period, the Company paid dividends to its shareholders totaling $2.0 million.  The Company retained the remaining balance for general corporate purposes.  At September 30, 2014, the Bank had a retained earnings balance of $15.7 million.

During the first quarter of 2014, the Company also received a payment from the Bank totaling $1.9 million, representing the Bank’s intercompany tax liability for the 2013 tax year in accordance with the Company’s tax allocation agreement.

- 49 -

The Company has the right to defer interest payments for 20 consecutive quarters on its trust preferred securities if necessary for liquidity purposes.  During the deferral period, the Company may not declare or pay any dividends on its common stock or make any payment on any outstanding debt obligations that rank equally with or junior to the trust preferred securities.

The Company’s cash balance at September 30, 2014 was $2.5 million.  The Company believes that it has sufficient liquidity to meet its cash flow obligations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and future results could differ.  The allowance for loan losses, other real estate owned valuation, loss contingencies 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 three and nine months ended September 30, 2014.

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.

Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes.  At September 30, 2014, we had gross deferred tax assets of $14.9 million, gross deferred tax liabilities of $2.5 million resulting in a net deferred tax asset of $12.4 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.  From mid 2009 through the end of 2012, we had maintained a full valuation allowance on our net deferred tax asset.  At December 31, 2012, we considered all reasonably available positive and negative evidence and determined that, with completion of our eleventh consecutive profitable quarter, continued significant improvement in asset quality measures for the third straight year, the termination of our previous regulatory orders and our moving to a cumulative income position in the most recent three year period, it was “more likely than not” that we would be able to realize our deferred tax assets and, as such, the full $18.9 million valuation allowance was reversed as of December 31, 2012.  With the positive results in the first nine months of 2014, we again concluded at September 30, 2014 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.

- 50 -

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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

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

The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of September 30, 2014 (dollars in thousands).

	Economic
	Value of		Percent			Net Interest		Percent
Interest Rate Scenario	Equity		Change			Income		Change
Interest rates up 200 basis points	$	176,229		(0.81	)%	$	41,831		3.00	%
Interest rates up 100 basis points		178,257		0.33			41,254		1.58
No change		177,671		---			40,614		---
Interest rates down 100 basis points		161,006		(9.38	)		40,272		(0.84	)
Interest rates down 200 basis points		159,287		(10.35	)		39,997		(1.52	)

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

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

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

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

- 51 -

Item 4: CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of September 30, 2014, the end of the period covered by this report.

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

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

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

- 52 -

PART II – OTHER INFORMATION

Item 6. Exhibits.

3.1	Restated Articles of Incorporation. Previously filed with the Commission on April 28, 2011 in Macatawa Bank Corporation’s Quarterly Report on Form 10-Q, Exhibit 3.1. Here incorporated by reference.
3.2	Bylaws. Previously filed with the Commission on November 24, 2009 in Macatawa Bank Corporation's Current Report on Form 8-K, Exhibit 3.1. Here incorporated by reference.
4.1	Restated Articles of Incorporation. Exhibit 3.1 is here incorporated by reference.
4.2	Bylaws. Exhibit 3.2 is here incorporated by reference.
4.3	First Amended Settlement and Release and Warrant Issuance Agreement dated January 30, 2009.  Previously filed with the Commission on April 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.3. Here incorporated by reference.
4.4	Second Amendment to Settlement and Release and Warrant Issuance Agreement dated April 30, 2009. Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.4.  Here incorporated by reference.
4.5	Warrant Agreement between Macatawa Bank Corporation and Registrar and Transfer Company dated June 16, 2009.  Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.5.  Here incorporated by reference.
4.6	Warrant Agreement Addendum between Macatawa Bank Corporation and Registrar and Transfer Company dated July 27, 2009.   Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.6.  Here incorporated by reference.
4.7	Form of Warrant Certificate (first series).  Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.7.  Here incorporated by reference.
4.8	Form of Warrant Certificate (second series). Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.8.  Here incorporated by reference.
4.9	Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the SEC upon request.
31.1	Certification of Chief Executive Officer.
31.2	Certification of Chief Financial Officer.
32.1	Certification pursuant to 18 U.S.C. Section 1350.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

- 53 -

SIGNATURES

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

	MACATAWA BANK CORPORATION
	/s/ Ronald L. Haan
	Ronald L. Haan
	Chief Executive Officer
	(Principal Executive Officer)
	/s/ Jon W. Swets
	Jon W. Swets
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)
Dated: October 23, 2014

- 54 -

EX-31.1

EXHIBIT 31.1

I, Ronald L. Haan, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2014 of Macatawa Bank Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated:  October 23, 2014

/s/ Ronald L. Haan

Ronald L. Haan

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

I, Jon W. Swets, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2014 of Macatawa Bank Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: October 23, 2014

/s/ Jon W. Swets

Jon W. Swets

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

EX-32.1

EXHIBIT 32.1

Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his capacity as an officer of Macatawa Bank Corporation (the "Company") that the Quarterly Report of the Company on Form 10-Q for the quarter ended September 30, 2014 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

	/s/ Ronald L. Haan
	Ronald L. Haan
	Chief Executive Officer
	(Principal Executive Officer)
	/s/ Jon W. Swets
	Jon W. Swets
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)
Dated: October 23, 2014

XML

LOANS, Past Due Loans (Details) (USD $)	9 Months Ended
	Sep. 30, 2014 Payment	Dec. 31, 2013
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	$ 8,425,000	$ 12,182,000
Over 90 days Accruing	0	153,000
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	1,973,000	1,095,000
Greater Than 90 Days	3,111,000	4,425,000
Total Past Due	5,084,000	5,520,000
Loans Not Past Due	1,049,704,000	1,036,857,000
Total ending loans balance	1,054,788,000	1,042,377,000
Specific reserves allocated to customers with modified term loans in troubled debt restructurings	4,410,000	3,870,000
Number of consecutive payment before nonaccrual restructured loan is upgraded	6
Number of months of performance before a loan is removed from TDR	6 months
Commercial and Industrial [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	4,372,000	5,625,000
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	179,000	0
Greater Than 90 Days	123,000	0
Total Past Due	302,000	0
Loans Not Past Due	285,531,000	274,099,000
Total ending loans balance	285,833,000	274,099,000
Commercial Real Estate [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	3,499,000	5,553,000
Over 90 days Accruing	0	153,000
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	788,000	679,000
Greater Than 90 Days	2,816,000	4,425,000
Total Past Due	3,604,000	5,104,000
Loans Not Past Due	464,313,000	467,236,000
Total ending loans balance	467,917,000	472,340,000
Residential Developed [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	2,245,000	2,590,000
Over 90 days Accruing	0	153,000
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	0	143,000
Greater Than 90 Days	1,968,000	2,296,000
Total Past Due	1,968,000	2,439,000
Loans Not Past Due	11,559,000	15,691,000
Total ending loans balance	13,527,000	18,130,000
Unsecured to Residential Developers [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	0	0
Greater Than 90 Days	0	0
Total Past Due	0	0
Loans Not Past Due	7,126,000	7,315,000
Total ending loans balance	7,126,000	7,315,000
Vacant and Unimproved [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	0	0
Greater Than 90 Days	0	0
Total Past Due	0	0
Loans Not Past Due	48,407,000	42,988,000
Total ending loans balance	48,407,000	42,988,000
Commercial Development [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	29,000	23,000
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	0	0
Greater Than 90 Days	29,000	23,000
Total Past Due	29,000	23,000
Loans Not Past Due	4,333,000	2,411,000
Total ending loans balance	4,362,000	2,434,000
Residential Improved [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	918,000	429,000
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	67,000	98,000
Greater Than 90 Days	819,000	50,000
Total Past Due	886,000	148,000
Loans Not Past Due	69,342,000	76,146,000
Total ending loans balance	70,228,000	76,294,000
Commercial Improved [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	307,000	2,511,000
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	714,000	438,000
Greater Than 90 Days	0	2,056,000
Total Past Due	714,000	2,494,000
Loans Not Past Due	248,232,000	244,701,000
Total ending loans balance	248,946,000	247,195,000
Manufacturing and Industrial [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	7,000	0
Greater Than 90 Days	0	0
Total Past Due	7,000	0
Loans Not Past Due	75,314,000	77,984,000
Total ending loans balance	75,321,000	77,984,000
Consumer Loan [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	554,000	1,004,000
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	1,006,000	416,000
Greater Than 90 Days	172,000	0
Total Past Due	1,178,000	416,000
Loans Not Past Due	299,860,000	295,522,000
Total ending loans balance	301,038,000	295,938,000
Residential Mortgage [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	144,000	639,000
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	533,000	78,000
Greater Than 90 Days	141,000	0
Total Past Due	674,000	78,000
Loans Not Past Due	191,712,000	188,570,000
Total ending loans balance	192,386,000	188,648,000
Unsecured [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	57,000	33,000
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	0	9,000
Greater Than 90 Days	0	0
Total Past Due	0	9,000
Loans Not Past Due	1,048,000	1,328,000
Total ending loans balance	1,048,000	1,337,000
Home Equity [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	353,000	332,000
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	473,000	317,000
Greater Than 90 Days	31,000	0
Total Past Due	504,000	317,000
Loans Not Past Due	96,003,000	95,644,000
Total ending loans balance	96,507,000	95,961,000
Other Secured [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
30-90 Days	0	12,000
Greater Than 90 Days	0	0
Total Past Due	0	12,000
Loans Not Past Due	11,097,000	9,980,000
Total ending loans balance	$ 11,097,000	$ 9,992,000

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FEDERAL INCOME TAXES (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Income tax expense (benefit) [Abstract]
Current	$ 651,000	$ 40,000	$ 711,000	$ 95,000
Deferred	555,000	935,000	2,903,000	3,218,000
Income tax expense	1,206,000	975,000	3,614,000	3,313,000
Reconciliation of financial statement tax expense and amount computed by applying statutory federal tax rate to pretax income [Abstract]
Statutory rate (in hundredths)	35.00%	35.00%	35.00%	35.00%
Statutory rate applied to income before taxes	1,389,000	1,124,000	4,119,000	3,720,000
Add (deduct) [Abstract]
Tax-exempt interest income	(104,000)	(70,000)	(278,000)	(166,000)
Bank-owned life insurance	(62,000)	(63,000)	(177,000)	(188,000)
Other, net	(17,000)	(16,000)	(50,000)	(53,000)
Income tax expense	1,206,000	975,000	3,614,000	3,313,000
Deferred tax assets [Abstract]
Allowance for loan losses	6,870,000		6,870,000		7,279,000
Nonaccrual loan interest	908,000		908,000		782,000
Valuation allowance on other real estate owned	5,000,000		5,000,000		5,847,000
Net operating loss carryforward	0		0		1,743,000
Unrealized loss on securities available for sale	143,000		143,000		1,053,000
Other	1,962,000		1,962,000		1,808,000
Gross deferred tax assets	14,883,000		14,883,000		18,512,000
Valuation allowance	0		0		0
Total net deferred tax assets	14,883,000		14,883,000		18,512,000
Deferred tax liabilities [Abstract]
Depreciation	(1,903,000)		(1,903,000)		(1,620,000)
Prepaid expenses	(204,000)		(204,000)		(308,000)
Other	(389,000)		(389,000)		(384,000)
Gross deferred tax liabilities	(2,496,000)		(2,496,000)		(2,312,000)
Net deferred tax asset	12,387,000		12,387,000		16,200,000
Federal net operating loss carry forwards	0		0
Unrecognized tax benefits	$ 0		$ 0		$ 0
Period when unrecognized tax benefits is not expected to significantly increase or decrease			12 months

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OTHER BORROWED FUNDS (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Advances from Federal Home Loan Bank [Abstract]
Advance amount	$ 88,107,000	$ 89,991,000
Residential and commercial real estate loans pledged as collateral for Federal Home Loan Bank advances	447,484,000	411,715,000
Scheduled repayments of FHLB advances [Abstract]
2014	0
2015	1,938,000
2016	21,996,000
2017	2,055,000
2018	52,118,000
Thereafter	10,000,000
Total	88,107,000	89,991,000
Federal Reserve Bank borrowings [Abstract]
Unused borrowing capacity to Federal Reserve Bank	24,400,000	22,700,000
Commercial and mortgage loans pledged to the Federal Reserve Bank	28,200,000	26,600,000
Single Maturity Fixed Rate Advances [Member]
Advances from Federal Home Loan Bank [Abstract]
Advance amount	80,000,000	80,000,000
Weighted average interest rate (in hundredths)	1.69%	1.69%
Single Maturity Fixed Rate Advances [Member] | Minimum [Member]
Advances from Federal Home Loan Bank [Abstract]
Maturity date	Aug. 01, 2016	Aug. 01, 2016
Single Maturity Fixed Rate Advances [Member] | Maximum [Member]
Advances from Federal Home Loan Bank [Abstract]
Maturity date	Feb. 01, 2019	Feb. 01, 2019
Amortizable Mortgage Advances [Member]
Advances from Federal Home Loan Bank [Abstract]
Advance amount	$ 8,107,000	$ 9,991,000
Weighted average interest rate (in hundredths)	3.78%	3.78%
Amortizable Mortgage Advances [Member] | Minimum [Member]
Advances from Federal Home Loan Bank [Abstract]
Maturity date	Mar. 01, 2018	Mar. 01, 2018
Amortizable Mortgage Advances [Member] | Maximum [Member]
Advances from Federal Home Loan Bank [Abstract]
Maturity date	Jul. 01, 2018	Jul. 01, 2018

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	9 Months Ended
	Sep. 30, 2014 InterestRateSwap Grade Branch	Dec. 31, 2013
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]
Number of full service branch offices	26
Allowance for Loan Losses [Abstract]
Period for annualized historical loss experience used for commercial loans	18 months
Period of historical loss experience applied to residential mortgage and consumer loan portfolios	12 months
Threshold for commercial and commercial real estate loans evaluated for impairment	$ 500,000
Minimum internal risk grading of commercial and commercial real estate loans evaluated for impairment	6
Income Taxes [Abstract]
Percentage of more likely than not tax position that would be sustained in a tax examination (in hundredths)	50.00%
Derivatives [Abstract]
Number of freestanding interest rate swaps	2
Notional amount of agreements	20,000,000	20,000,000
Derivative asset fair value	89,000	94,000
Trading liability fair value	$ 89,000	$ 94,000

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OTHER REAL ESTATE OWNED (Tables)

9 Months Ended

Sep. 30, 2014

OTHER REAL ESTATE OWNED [Abstract]

Period-end other real estate owned

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

	Nine			Year			Nine
	Months Ended			Ended			Months Ended
	September 30,			December 31,			September 30,
	2014			2013			2013
Beginning balance	$	53,501		$	69,743		$	69,743
Additions, transfers from loans		2,565			3,539			3,170
Proceeds from sales of other real estate owned		(9,964	)		(16,501	)		(10,545	)
Valuation allowance reversal upon sale		(3,409	)		(4,378	)		(2,794	)
Gain on sale of other real estate owned		475			1,098			1,004
		43,168			53,501			60,578
Less: valuation allowance		(14,405	)		(16,705	)		(17,782	)
Ending balance	$	28,763		$	36,796		$	42,796

Activity in valuation allowance

Activity in the valuation allowance was as follows (dollars in thousands):

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2014			2013
Beginning balance	$	16,705		$	18,161
Additions charged to expense		1,109			2,415
Reversals upon sale		(3,409	)		(2,794	)
Ending balance	$	14,405		$	17,782

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CONTINGENCIES (Details) (Employment Agreement Litigation, Benj. A. Smith III [Member], USD $)	9 Months Ended
	Sep. 30, 2014
Employment Agreement Litigation, Benj. A. Smith III [Member]
Contingencies [Line Items]
Name of Plaintiff	Mr. Benj. A. Smith III
Monthly entitlement claimed by plaintiff	$ 20,833
Period of monthly damage claims sought for employment agreement	P6Y
Minimum damages sought in claim	$ 25,000

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OTHER REAL ESTATE OWNED (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Period-end other real estate owned [Roll Forward]
Beginning balance	$ 53,501	$ 69,743	$ 69,743
Additions, transfers from loans	2,565	3,170	3,539
Proceeds from sales of other real estate owned	(9,964)	(10,545)	(16,501)
Valuation allowance reversal upon sale	(3,409)	(2,794)	(4,378)
Gain on sale of other real estate owned	475	1,004	1,098
Other real estate owned, gross	43,168	60,578	53,501
Less: valuation allowance	(14,405)	(17,782)	(16,705)
Ending balance	28,763	42,796	36,796
Activity in valuation allowance [Roll Forward]
Beginning balance	16,705	18,161	18,161
Additions charged to expense	1,109	2,415
Reversals upon sale	(3,409)	(2,794)
Ending balance	$ 14,405	$ 17,782	$ 16,705

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LOANS, Allowance for Loans Losses (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Jun. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	$ 4,461		$ 3,870
Collectively evaluated for impairment	15,168		16,928
Total ending allowance balance	19,629	20,049	20,798	21,272	22,248	23,739
Loans [Abstract]
Individually reviewed for impairment	61,962		68,923
Collectively evaluated for impairment	992,826		973,454
Total ending loans balance	1,054,788		1,042,377
Commercial and Industrial [Member]
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	2,742		1,981
Collectively evaluated for impairment	3,656		4,193
Total ending allowance balance	6,398	6,721	6,174	5,718	5,602	6,459
Loans [Abstract]
Individually reviewed for impairment	10,446		13,155
Collectively evaluated for impairment	275,387		260,944
Total ending loans balance	285,833		274,099
Commercial Real Estate [Member]
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	827		1,008
Collectively evaluated for impairment	8,443		9,860
Total ending allowance balance	9,270	9,341	10,868	11,122	12,324	13,457
Loans [Abstract]
Individually reviewed for impairment	37,025		41,285
Collectively evaluated for impairment	430,892		431,055
Total ending loans balance	467,917		472,340
Consumer [Member]
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	892		881
Collectively evaluated for impairment	3,024		2,822
Total ending allowance balance	3,916	3,933	3,703	4,396	4,255	3,787
Loans [Abstract]
Individually reviewed for impairment	14,491		14,483
Collectively evaluated for impairment	286,547		281,455
Total ending loans balance	301,038		295,938
Unallocated [Member]
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	0		0
Collectively evaluated for impairment	45		53
Total ending allowance balance	45	54	53	36	67	36
Loans [Abstract]
Individually reviewed for impairment	0		0
Collectively evaluated for impairment	0		0
Total ending loans balance	$ 0		$ 0

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EARNINGS PER COMMON SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Reconciliation of numerators and denominators of basic and diluted earnings per common share [Abstract]
Net income	$ 2,762	$ 2,238	$ 8,155	$ 7,315
Dividends declared on preferred shares	0	0	0	0
Net income available to common shares	$ 2,762	$ 2,238	$ 8,155	$ 7,315
Weighted average shares outstanding, including participating stock awards - Basic (in shares)	33,795,384	27,261,325	33,791,470	27,244,741
Dilutive potential common shares [Abstract]
Stock options (in shares)	0	0	0	0
Conversion of preferred stock (in shares)	0	0	0	0
Stock warrants (in shares)	0	0	0	0
Weighted average shares outstanding - Diluted (in shares)	33,795,384	27,261,325	33,791,470	27,244,741
Basic earnings per common share (in dollars per share)	$ 0.08	$ 0.08	$ 0.24	$ 0.27
Diluted earnings per common share (in dollars per share)	$ 0.08	$ 0.08	$ 0.24	$ 0.27
Stock Options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount (in shares)	351,195	445,392	351,195	445,392

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Parenthetical)	9 Months Ended
	Sep. 30, 2013
Preferred Stock [Member] | Series B Preferred Stock [Member]
Supplemental noncash disclosures:
Number of shares converted in conversion of Preferred Stock Series B to Common Stock (in shares)	300
Common Stock [Member]
Supplemental noncash disclosures:
Number of shares issued in conversion of Preferred Stock Series B to Common Stock (in shares)	50,000

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FAIR VALUE (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014 Level	Sep. 30, 2014 Recurring Basis [Member] Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]	Dec. 31, 2013 Recurring Basis [Member] Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]	Sep. 30, 2014 Recurring Basis [Member] Significant Other Observable Inputs (Level 2) [Member]	Dec. 31, 2013 Recurring Basis [Member] Significant Other Observable Inputs (Level 2) [Member]	Sep. 30, 2014 Recurring Basis [Member] Significant Unobservable Inputs (Level 3) [Member]	Dec. 31, 2013 Recurring Basis [Member] Significant Unobservable Inputs (Level 3) [Member]	Sep. 30, 2014 Recurring Basis [Member] Fair Value [Member]	Dec. 31, 2013 Recurring Basis [Member] Fair Value [Member]	Sep. 30, 2014 Nonrecurring Basis [Member] Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]	Dec. 31, 2013 Nonrecurring Basis [Member] Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]	Sep. 30, 2014 Nonrecurring Basis [Member] Significant Other Observable Inputs (Level 2) [Member]	Dec. 31, 2013 Nonrecurring Basis [Member] Significant Other Observable Inputs (Level 2) [Member]	Sep. 30, 2014 Nonrecurring Basis [Member] Significant Unobservable Inputs (Level 3) [Member]	Dec. 31, 2013 Nonrecurring Basis [Member] Significant Unobservable Inputs (Level 3) [Member]	Sep. 30, 2014 Nonrecurring Basis [Member] Fair Value [Member]	Dec. 31, 2013 Nonrecurring Basis [Member] Fair Value [Member]
FAIR VALUE [Abstract]
Number of levels of input	3
Asset measured at fair value on recurring basis [Abstract]
U.S. Treasury and federal agency securities		$ 0	$ 0	$ 67,116	$ 54,439	$ 0	$ 0	$ 67,116	$ 54,439
U.S. Agency MBS and CMOs		0	0	17,264	19,365	0	0	17,264	19,365
Tax-exempt state and municipal bonds		0	0	36,398	26,849	0	0	36,398	26,849
Taxable state and municipal bonds		0	0	26,479	26,328	0	0	26,479	26,328
Corporate bonds and other debt securities		0	0	13,354	11,212	0	0	13,354	11,212
Other equity securities		0	0	1,490	1,466	0	0	1,490	1,466
Loans held for sale		0	0	905	1,915	0	0	905	1,915
Interest rate swaps		0	0	0	0	89	94	89	94
Interest rate swaps		0	0	0	0	(89)	(94)	(89)	(94)
Asset measured at fair value on non-recurring basis [Abstract]
Impaired loans										0	0	0	0	17,709	22,403	17,709	22,403
Other real estate owned										$ 0	$ 0	$ 0	$ 0	$ 23,442	$ 29,711	$ 23,442	$ 29,711

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EARNINGS PER COMMON SHARE (Tables)

9 Months Ended

Sep. 30, 2014

EARNINGS PER COMMON SHARE [Abstract]

Reconciliation of numerators and denominators of basic and diluted earnings per common share

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three and nine month periods ended September 30, 2014 and 2013 are as follows (dollars in thousands, except per share data):

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Net income	$	2,762	$	2,238	$	8,155	$	7,315
Dividends declared on preferred shares		---		---		---		---
Net income available to common shares	$	2,762	$	2,238	$	8,155	$	7,315
Weighted average shares outstanding, including participating stock awards - Basic		33,795,384		27,261,325		33,791,470		27,244,741
Dilutive potential common shares:
Stock options		---		---		---		---
Conversion of preferred stock		---		---		---		---
Stock warrants		---		---		---		---
Weighted average shares outstanding - Diluted		33,795,384		27,261,325		33,791,470		27,244,741
Basic earnings per common share	$	0.08	$	0.08	$	0.24	$	0.27
Diluted earnings per common share	$	0.08	$	0.08	$	0.24	$	0.27

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OTHER BORROWED FUNDS (Tables)

9 Months Ended

Sep. 30, 2014

OTHER BORROWED FUNDS [Abstract]

Advances from Federal Home Loan Bank

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

				Weighted
	Advance			Average
Principal Terms	Amount		Range of Maturities	Interest Rate
September 30, 2014
Single maturity fixed rate advances	$	80,000	August 2016 to February 2019		1.69	%
Amortizable mortgage advances		8,107	March 2018 to July 2018		3.78	%
	$	88,107

				Weighted
	Advance			Average
Principal Terms	Amount		Range of Maturities	Interest Rate
December 31, 2013
Single maturity fixed rate advances	$	80,000	August 2016 to February 2019		1.69	%
Amortizable mortgage advances		9,991	March 2018 to July 2018		3.78	%
	$	89,991

Scheduled repayments of FHLB advances

Scheduled repayments of FHLB advances as of September 30, 2014 were as follows (in thousands):

2014	$	---
2015		1,938
2016		21,996
2017		2,055
2018		52,118
Thereafter		10,000
	$	88,107

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FAIR VALUE, Balance Sheet Grouping (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Financial assets [Abstract]
Cash and due from banks	$ 24,731	$ 38,714
Securities held to maturity	31,771	19,278
Bank-owned life insurance	28,021	27,517
Carrying Amount [Member]
Financial assets [Abstract]
FHLB stock	11,236	11,236
Carrying Amount [Member] | Commitments to Make Loans [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Off-balance sheet credit-related items	0	0
Fair Value [Member] | Commitments to Make Loans [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Off-balance sheet credit-related items	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Carrying Amount [Member]
Financial assets [Abstract]
Cash and due from banks	24,731	38,714
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Fair Value [Member]
Financial assets [Abstract]
Cash and due from banks	24,731	38,714
Significant Other Observable Inputs (Level 2) [Member] | Carrying Amount [Member]
Financial assets [Abstract]
Cash equivalents	74,808	118,178
Interest-bearing time deposits in other financial institutions	20,000	25,000
Loans, net	1,017,450	999,176
Accrued interest receivable	3,415	3,231
Financial liabilities [Abstract]
Deposits	(1,216,089)	(1,249,734)
Other borrowed funds	(88,107)	(89,991)
Long-term debt	(41,238)	(41,238)
Subordinated debt	0	0
Accrued interest payable	(291)	(308)
Significant Other Observable Inputs (Level 2) [Member] | Fair Value [Member]
Financial assets [Abstract]
Cash equivalents	74,808	118,178
Interest-bearing time deposits in other financial institutions	20,089	25,003
Loans, net	1,015,635	990,084
Accrued interest receivable	3,415	3,231
Financial liabilities [Abstract]
Deposits	(1,216,601)	(1,250,886)
Other borrowed funds	(88,543)	(90,321)
Long-term debt	(35,514)	(35,098)
Subordinated debt	0	0
Accrued interest payable	(291)	(308)
Significant Unobservable Inputs (Level 3) [Member] | Carrying Amount [Member]
Financial assets [Abstract]
Securities held to maturity	31,744	19,248
Bank-owned life insurance	28,021	27,517
Significant Unobservable Inputs (Level 3) [Member] | Fair Value [Member]
Financial assets [Abstract]
Securities held to maturity	31,771	19,278
Bank-owned life insurance	$ 28,021	$ 27,517

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FEDERAL INCOME TAXES (Tables)

9 Months Ended

Sep. 30, 2014

FEDERAL INCOME TAXES [Abstract]

Income tax expense

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

	Three Months Ended September 30, 2014		Three Months Ended September 30, 2013		Nine Months Ended September 30, 2014		Nine Months Ended September 30, 2013
Current	$	651	$	40	$	711	$	95
Deferred		555		935		2,903		3,218
	$	1,206	$	975	$	3,614	$	3,313

Difference between financial statement tax expense and amount computed by applying statutory federal tax rate to pretax income

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

	Three Months Ended September 30, 2014			Three Months Ended September 30, 2013			Nine Months Ended September 30, 2014			Nine Months Ended September 30, 2013
Statutory rate		35	%		35	%		35	%		35	%
Statutory rate applied to income before taxes	$	1,389		$	1,124		$	4,119		$	3,720
Add (deduct)
Tax-exempt interest income		(104	)		(70	)		(278	)		(166	)
Bank-owned life insurance		(62	)		(63	)		(177	)		(188	)
Other, net		(17	)		(16	)		(50	)		(53	)
	$	1,206		$	975		$	3,614		$	3,313

Deferred tax assets and liabilities

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

	September 30,			December 31,
	2014			2013
Deferred tax assets
Allowance for loan losses	$	6,870		$	7,279
Nonaccrual loan interest		908			782
Valuation allowance on other real estate owned		5,000			5,847
Net operating loss carryforward		---			1,743
Unrealized loss on securities available for sale		143			1,053
Other		1,962			1,808
Gross deferred tax assets		14,883			18,512
Valuation allowance		---			---
Total net deferred tax assets		14,883			18,512
Deferred tax liabilities
Depreciation		(1,903	)		(1,620	)
Prepaid expenses		(204	)		(308	)
Other		(389	)		(384	)
Gross deferred tax liabilities		(2,496	)		(2,312	)
Net deferred tax asset	$	12,387		$	16,200

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COMMITMENTS AND OFF BALANCE-SHEET RISK (Tables)

9 Months Ended

Sep. 30, 2014

COMMITMENTS AND OFF BALANCE-SHEET RISK [Abstract]

Summary of contractual amounts of financial instruments with off-balance-sheet risk

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

	September 30,		December 31,
	2014		2013
Commitments to make loans	$	141,628		$	87,513
Letters of credit		10,827			10,774
Unused lines of credit		360,344			313,232

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash flows from operating activities
Net income	$ 8,155	$ 7,315
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	2,438	2,261
Stock compensation expense	229	94
Provision for loan losses	(2,750)	(3,250)
Origination of loans for sale	(51,504)	(91,117)
Proceeds from sales of loans originated for sale	53,919	98,409
Net gains on mortgage loans	(1,405)	(2,145)
Gain on sales of securities	(51)	(80)
Write-down of other real estate	1,109	2,415
Net gain on sales of other real estate	(475)	(1,004)
Decrease in net deferred tax asset	2,903	3,218
Change in accrued interest receivable and other assets	1,205	109
Earnings in bank-owned life insurance	(504)	(539)
Change in accrued expenses and other liabilities	(159)	289
Net cash from operating activities	13,110	15,975
Cash flows from investing activities
Loan originations and payments, net	(13,395)	21,168
Change in interest-bearing deposits in other financial institutions	5,000	(25,000)
Purchases of securities available for sale	(34,990)	(34,450)
Purchases of securities held to maturity	(25,225)	(19,347)
Proceeds from:
Maturities and calls of securities available for sale	19,535	12,417
Sales of securities available for sale	5,164	3,778
Principal paydowns on securities	2,664	5,199
Sales of other real estate	9,964	10,545
Additions to premises and equipment	(1,525)	(1,087)
Net cash from investing activities	(32,808)	(26,777)
Cash flows from financing activities
Change in in-market deposits	(33,645)	1,780
Repayments of other borrowed funds	(1,884)	(3,481)
Proceeds from issuance of common stock	4	0
Cash dividends paid	(2,028)	0
Common stock issuance costs	(102)	0
Net cash from financing activities	(37,655)	(1,701)
Net change in cash and cash equivalents	(57,353)	(12,503)
Cash and cash equivalents at beginning of period	156,892	226,358
Cash and cash equivalents at end of period	99,539	213,855
Supplemental cash flow information
Interest paid	4,254	7,542
Income taxes paid	90	95
Supplemental noncash disclosures:
Transfers from loans to other real estate	2,565	3,170
Securities settlement	0	(1,626)
Conversion of 300 shares of Preferred Stock Series B to 50,000 shares of common stock	$ 0	$ 300

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SHAREHOLDERS' EQUITY (Tables)

9 Months Ended

Sep. 30, 2014

SHAREHOLDERS' EQUITY [Abstract]

Actual capital levels and minimum required levels

At September 30, 2014 and December 31, 2013, actual capital levels and minimum required levels were (in thousands):

											To Be Well
						Minimum Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount			Ratio
September 30, 2014
Total capital (to risk weighted assets)
Consolidated	$	186,618		16.3	%	$	91,659		8.0	%		N/	A		N/	A
Bank		183,675		16.0			91,812		8.0		$	114,765			10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		172,231		15.0			45,829		4.0			N/	A		N/	A
Bank		169,264		14.8			45,906		4.0			68,859			6.0
Tier 1 capital (to average assets)
Consolidated		172,231		11.6			59,571		4.0			N/	A		N/	A
Bank		169,264		11.4			59,500		4.0			74,376			5.0
December 31, 2013
Total capital (to risk weighted assets)
Consolidated	$	174,433		15.7	%	$	88,915		8.0	%		N/	A		N/	A
Bank		171,811		15.4			88,968		8.0		$	111,210			10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		160,455		14.4			44,457		4.0			N/	A		N/	A
Bank		157,825		14.2			44,484		4.0			66,726			6.0
Tier 1 capital (to average assets)
Consolidated		160,455		10.6			60,482		4.0			N/	A		N/	A
Bank		157,825		10.5			60,407		4.0			75,509			5.0

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LOANS, Troubled Debt Restructuring (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014 Loan	Sep. 30, 2013 Loan	Sep. 30, 2014 Loan	Sep. 30, 2013 Loan	Dec. 31, 2013 Loan
Troubled debt restructurings [Abstract]
Number of Loans	240		240		271
Outstanding Recorded Balance	$ 56,765		$ 56,765		$ 68,092
Troubled debt restructurings executed during current period [Abstract]
Number of Loans	8	7	21	49
Pre-Modification Outstanding Recorded Balance	183	1,146	4,364	9,594
Principal Write-down upon Modification	0	0	0	1,770
Modifications and Renewals that are not Troubled debt restructurings [Abstract]
Number of Loans - not considered TDRs	227	231	538	666
Outstanding Recorded Balance - not considered TDRs	30,634	44,118	96,645	169,139
Commercial and Industrial [Member]
Troubled debt restructurings [Abstract]
Number of Loans	36		36		43
Outstanding Recorded Balance	7,551		7,551		7,787
Troubled debt restructurings executed during current period [Abstract]
Number of Loans	0	2	1	5
Pre-Modification Outstanding Recorded Balance	0	823	61	1,085
Principal Write-down upon Modification	0	0	0	0
Modifications and Renewals that are not Troubled debt restructurings [Abstract]
Number of Loans - not considered TDRs	124	141	322	351
Outstanding Recorded Balance - not considered TDRs	18,113	24,425	57,936	72,878
Loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring [Abstract]
Number of Loans	0	0	0	0
Outstanding Recorded Balance	0	0	0	0
Commercial Real Estate [Member]
Troubled debt restructurings [Abstract]
Number of Loans	93		93		122
Outstanding Recorded Balance	34,648		34,648		45,774
Troubled debt restructurings executed during current period [Abstract]
Number of Loans	0	2	10	11
Pre-Modification Outstanding Recorded Balance	0	186	4,046	2,903
Principal Write-down upon Modification	0	0	0	0
Modifications and Renewals that are not Troubled debt restructurings [Abstract]
Number of Loans - not considered TDRs	101	80	202	277
Outstanding Recorded Balance - not considered TDRs	12,476	19,422	37,389	95,058
Loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring [Abstract]
Number of Loans	0	0	1	0
Outstanding Recorded Balance	0	0	131	0
Consumer [Member]
Troubled debt restructurings [Abstract]
Number of Loans	111		111		106
Outstanding Recorded Balance	14,566		14,566		14,531
Troubled debt restructurings executed during current period [Abstract]
Number of Loans	8	3	10	33
Pre-Modification Outstanding Recorded Balance	183	137	257	5,606
Principal Write-down upon Modification	0	0	0	1,770
Modifications and Renewals that are not Troubled debt restructurings [Abstract]
Number of Loans - not considered TDRs	2	10	14	38
Outstanding Recorded Balance - not considered TDRs	45	271	1,320	1,203
Loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring [Abstract]
Number of Loans	0	0	0	0
Outstanding Recorded Balance	$ 0	$ 0	$ 0	$ 0

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CONSOLIDATED BALANCE SHEETS (unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
ASSETS
Cash and due from banks	$ 24,731	$ 38,714
Federal funds sold and other short -term investments	74,808	118,178
Cash and cash equivalents	99,539	156,892
Interest-bearing time deposits in other financial institutions	20,000	25,000
Securities available for sale, at fair value	162,101	139,659
Securities held to maturity (fair value 2014 - $31,771 and 2013 - $19,278)	31,744	19,248
Federal Home Loan Bank (FHLB) stock	11,236	11,236
Loans held for sale, at fair value	905	1,915
Total loans	1,054,788	1,042,377
Allowance for loan losses	(19,629)	(20,798)
Net loans	1,035,159	1,021,579
Premises and equipment - net	53,292	53,641
Accrued interest receivable	3,415	3,231
Bank-owned life insurance	28,021	27,517
Other real estate owned	28,763	36,796
Net deferred tax asset	12,387	16,200
Other assets	3,102	4,491
Total assets	1,489,664	1,517,405
Deposits
Noninterest-bearing	385,182	344,550
Interest-bearing	830,907	905,184
Total deposits	1,216,089	1,249,734
Other borrowed funds	88,107	89,991
Long-term debt	41,238	41,238
Accrued expenses and other liabilities	3,761	3,920
Total liabilities	1,349,195	1,384,883
Commitments and contingent liabilities
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 33,803,823 shares issued and outstanding at September 30, 2014 and 33,801,097 shares issued and outstanding at December 31, 2013	216,394	216,263
Retained deficit	(75,659)	(81,786)
Accumulated other comprehensive income (loss)	(266)	(1,955)
Total shareholders' equity	140,469	132,522
Total liabilities and shareholders' equity	$ 1,489,664	$ 1,517,405

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DEPOSITS (Details) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Summary of deposit [Abstract]
Noninterest-bearing demand	$ 385,182,000	$ 344,550,000
Interest bearing demand	278,302,000	287,417,000
Savings and money market accounts	425,877,000	469,542,000
Certificates of deposit	126,728,000	148,225,000
Total deposits	1,216,089,000	1,249,734,000
Certificate of deposits, $100,000 or more denominations	52,600,000	56,700,000
Denominations amount of certificates of deposit	$ 100,000	$ 100,000

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (USD $) In Thousands	Preferred Stock [Member] Series A Preferred Stock [Member]	Preferred Stock [Member] Series B Preferred Stock [Member]	Common Stock [Member]	Retained Deficit [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance at Dec. 31, 2012	$ 30,604	$ 2,560	$ 187,718	$ (91,335)	$ 960	$ 130,507
Net income				7,315		7,315
Conversion of 300 shares of Preferred Stock Series B to 50,000 shares of Common Stock		(300)	300			0
Common stock issuance costs						0
Net change in unrealized gain (loss) on securities available for sale, net of tax					(2,409)	(2,409)
Stock compensation expense			94			94
Balance at Sep. 30, 2013	30,604	2,260	188,112	(84,020)	(1,449)	135,507
Balance at Dec. 31, 2013	0	0	216,263	(81,786)	(1,955)	132,522
Net income				8,155		8,155
Common stock issuance costs			(102)			(102)
Issuance of 392 shares of Common Stock on exercise of stock purchase warrants			4			4
Cash dividends at $.06 per share				(2,028)		(2,028)
Net change in unrealized gain (loss) on securities available for sale, net of tax					1,689	1,689
Stock compensation expense			229			229
Balance at Sep. 30, 2014	$ 0	$ 0	$ 216,394	$ (75,659)	$ (266)	$ 140,469

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LOANS (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Portfolio loans [Abstract]
Total loans	$ 1,054,788	$ 1,042,377
Allowance for loan losses	(19,629)	(20,798)
Net loans	1,035,159	1,021,579
Commercial and Industrial [Member]
Portfolio loans [Abstract]
Total loans	285,833	274,099
Commercial Real Estate [Member]
Portfolio loans [Abstract]
Total loans	467,917	472,340
Residential Developed [Member]
Portfolio loans [Abstract]
Total loans	13,527	18,130
Unsecured to Residential Developers [Member]
Portfolio loans [Abstract]
Total loans	7,126	7,315
Vacant and Unimproved [Member]
Portfolio loans [Abstract]
Total loans	48,407	42,988
Commercial Development [Member]
Portfolio loans [Abstract]
Total loans	4,362	2,434
Residential Improved [Member]
Portfolio loans [Abstract]
Total loans	70,228	76,294
Commercial Improved [Member]
Portfolio loans [Abstract]
Total loans	248,946	247,195
Manufacturing and Industrial [Member]
Portfolio loans [Abstract]
Total loans	75,321	77,984
Consumer [Member]
Portfolio loans [Abstract]
Total loans	301,038	295,938
Residential Mortgage [Member]
Portfolio loans [Abstract]
Total loans	192,386	188,648
Unsecured [Member]
Portfolio loans [Abstract]
Total loans	1,048	1,337
Home Equity [Member]
Portfolio loans [Abstract]
Total loans	96,507	95,961
Other Secured [Member]
Portfolio loans [Abstract]
Total loans	$ 11,097	$ 9,992

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Principles of Consolidation

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

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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.

Use of Estimates

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

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, 2014, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

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

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

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

Foreclosed Assets

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

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

Derivatives

Derivatives:  Certain of our commercial loan customers have entered into interest rate swap agreements directly with the Bank.  At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer.   This is known as a back-to-back swap agreement.  Under this arrangement the Bank has two freestanding interest rate swaps, both of which are carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At September 30, 2014 and December 31, 2013, the total notional amount of such agreements was $20.0 million and resulted in derivative assets with fair values of $89,000 and $94,000, respectively, which were included in other assets and derivative liabilities of $89,000 and $94,000, respectively, which were included in other liabilities.

Reclassifications

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

Newly Issued Standards

Newly Issued Standards:

The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (ASU) No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized.  These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required.  The amendments are effective for  annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.

FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  The amendments in this Update change the requirements for reporting discontinued operations.  A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  The amendments in this Update require an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position.  This Update also requires additional disclosures about discontinued operations including pretax profit or loss, and any ongoing involvement with the discontinued operation.   The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.

FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The amendments in this Update creates a new topic in the FASB Accounting Standards Codification® (ASC or Codification), Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue.  In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic.   The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016.  The impact of adoption of this ASU by the Company is not expected to be material.

FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists.  This update requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward.  However, to the extent that a net operating loss carryforward or tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit is to be presented in the statement of financial position as a liability.  No new recurring disclosures are required.  The amendments are effective for public business entities for annual periods beginning after December 15, 2013, and interim periods within those periods.  The amendments are to be applied on a prospective basis to all unrecognized tax benefits that exist at the effective date, although retrospective application is permitted.  The impact of prospective adoption of this ASU by the Company in the first quarter of 2014 was not material.

FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.  This update requires creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor.  The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.

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LOANS, Allowance for Loans Losses by Portfolio (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	$ 20,049	$ 22,248	$ 20,798	$ 23,739
Charge-offs	(120)	(354)	(294)	(1,695)
Recoveries	450	878	1,875	2,478
Provision for loan losses	(750)	(1,500)	2,750	3,250
Ending balance	19,629	21,272	19,629	21,272
Commercial and Industrial [Member]
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	6,721	5,602	6,174	6,459
Charge-offs	(4)	(23)	(43)	(272)
Recoveries	75	585	440	1,011
Provision for loan losses	(394)	(446)	173	1,480
Ending balance	6,398	5,718	6,398	5,718
Commercial Real Estate [Member]
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	9,341	12,324	10,868	13,457
Charge-offs	0	(202)	(23)	(661)
Recoveries	336	253	1,289	1,248
Provision for loan losses	(407)	(1,253)	2,864	2,922
Ending balance	9,270	11,122	9,270	11,122
Consumer [Member]
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	3,933	4,255	3,703	3,787
Charge-offs	(116)	(129)	(228)	(762)
Recoveries	39	40	146	219
Provision for loan losses	60	230	(295)	(1,152)
Ending balance	3,916	4,396	3,916	4,396
Unallocated [Member]
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	54	67	53	36
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision for loan losses	(9)	(31)	8	0
Ending balance	$ 45	$ 36	$ 45	$ 36

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LOANS (Tables)

9 Months Ended

Sep. 30, 2014

LOANS [Abstract]

Portfolio loans

Portfolio loans were as follows (dollars in thousands):  

	September 30,			December 31,
	2014			2013
Commercial and industrial	$	285,833		$	274,099
Commercial real estate:
Residential developed		13,527			18,130
Unsecured to residential developers		7,126			7,315
Vacant and unimproved		48,407			42,988
Commercial development		4,362			2,434
Residential improved		70,228			76,294
Commercial improved		248,946			247,195
Manufacturing and industrial		75,321			77,984
Total commercial real estate		467,917			472,340
Consumer
Residential mortgage		192,386			188,648
Unsecured		1,048			1,337
Home equity		96,507			95,961
Other secured		11,097			9,992
Total consumer		301,038			295,938
Total loans		1,054,788			1,042,377
Allowance for loan losses		(19,629	)		(20,798	)
	$	1,035,159		$	1,021,579

Activity in allowance for loan losses by portfolio segment

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

	Commercial and			Commercial
Three months ended September 30, 2014	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,721		$	9,341		$	3,933		$	54		$	20,049
Charge-offs		(4	)		---			(116	)		---			(120	)
Recoveries		75			336			39			---			450
Provision for loan losses		(394	)		(407	)		60			(9	)		(750	)
Ending Balance	$	6,398		$	9,270		$	3,916		$	45		$	19,629

	Commercial and			Commercial
Three months ended September 30, 2013	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	5,602		$	12,324		$	4,255		$	67		$	22,248
Charge-offs		(23	)		(202	)		(129	)		---			(354	)
Recoveries		585			253			40			---			878
Provision for loan losses		(446	)		(1,253	)		230			(31	)		(1,500	)
Ending Balance	$	5,718		$	11,122		$	4,396		$	36		$	21,272

	Commercial and			Commercial
Nine months ended September 30, 2014	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,174		$	10,868		$	3,703		$	53		$	20,798
Charge-offs		(43	)		(23	)		(228	)		---			(294	)
Recoveries		440			1,289			146			---			1,875
Provision for loan losses		(173	)		(2,864	)		295			(8	)		(2,750	)
Ending Balance	$	6,398		$	9,270		$	3,916		$	45		$	19,629

	Commercial and			Commercial
Nine months ended September 30, 2013	Industrial			Real Estate			Consumer			Unallocated		Total
Beginning balance	$	6,459		$	13,457		$	3,787		$	36	$	23,739
Charge-offs		(272	)		(661	)		(762	)		---		(1,695	)
Recoveries		1,011			1,248			219			---		2,478
Provision for loan losses		(1,480	)		(2,922	)		1,152			---		(3,250	)
Ending Balance	$	5,718		$	11,122		$	4,396		$	36	$	21,272

Allowance for loan losses and recorded investment in loans by portfolio segment based on impairment method

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

	Commercial and		Commercial
September 30, 2014	Industrial		Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	2,742	$	827	$	892	$	---	$	4,461
Collectively evaluated for impairment		3,656		8,443		3,024		45		15,168
Total ending allowance balance	$	6,398	$	9,270	$	3,916	$	45	$	19,629
Loans:
Individually reviewed for impairment	$	10,446	$	37,025	$	14,491	$	---	$	61,962
Collectively evaluated for impairment		275,387		430,892		286,547		---		992,826
Total ending loans balance	$	285,833	$	467,917	$	301,038	$	---	$	1,054,788

	Commercial and		Commercial
December 31, 2013	Industrial		Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	1,981	$	1,008	$	881	$	---	$	3,870
Collectively evaluated for impairment		4,193		9,860		2,822		53		16,928
Total ending allowance balance	$	6,174	$	10,868	$	3,703	$	53	$	20,798
Loans:
Individually reviewed for impairment	$	13,155	$	41,285	$	14,483	$	---	$	68,923
Collectively evaluated for impairment		260,944		431,055		281,455		---		973,454
Total ending loans balance	$	274,099	$	472,340	$	295,938	$	---	$	1,042,377

Loans individually evaluated for impairment by class of loans

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2014 (dollars in thousands):

	Unpaid
	Principal		Recorded		Allowance
September 30, 2014	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial	$	3,159	$	3,159	$	---
Commercial real estate:
Residential developed		4,129		3,196		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		230		230		---
Residential improved		672		672		---
Commercial improved		331		331		---
Manufacturing and industrial		206		206		---
		5,568		4,635		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	8,727	$	7,794	$	---
With an allowance recorded:
Commercial and industrial	$	7,287	$	7,287	$	2,742
Commercial real estate:
Residential developed		587		587		35
Unsecured to residential developers		---		---		---
Vacant and unimproved		1,576		1,576		43
Commercial development		201		201		5
Residential improved		7,840		7,840		242
Commercial improved		17,315		17,315		441
Manufacturing and industrial		4,871		4,871		61
		32,390		32,390		827
Consumer:
Residential mortgage		9,551		9,551		588
Unsecured		---		---		---
Home equity		4,940		4,940		304
Other secured		---		---		---
		14,491		14,491		892
	$	54,168	$	54,168	$	4,461
Total	$	62,895	$	61,962	$	4,461

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013 (dollars in thousands):

	Unpaid
	Principal		Recorded		Allowance
December 31, 2013	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial	$	3,287	$	3,284	$	---
Commercial real estate:
Residential developed		5,273		4,340		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		3		3		---
Commercial development		362		362		---
Residential improved		1,493		1,493		---
Commercial improved		2,797		2,272		---
Manufacturing and industrial		252		252		---
		10,180		8,722		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	13,467	$	12,006	$	---
With an allowance recorded:
Commercial and industrial	$	9,871	$	9,871	$	1,981
Commercial real estate:
Residential developed		618		618		33
Unsecured to residential developers		---		---		---
Vacant and unimproved		1,900		1,900		47
Commercial development		207		207		5
Residential improved		9,534		9,534		342
Commercial improved		14,450		14,450		479
Manufacturing and industrial		5,854		5,854		102
		32,563		32,563		1,008
Consumer:
Residential mortgage		9,454		9,454		575
Unsecured		---		---		---
Home equity		5,029		5,029		306
Other secured		---		---		---
		14,483		14,483		881
	$	56,917	$	56,917	$	3,870
Total	$	70,384	$	68,923	$	3,870

Average balances of impaired loans and interest recognized on impaired loans

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, 2014 and 2013 (dollars in thousands):

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Average of impaired loans during the period:
Commercial and industrial	$	10,469	$	12,325	$	12,220	$	14,794
Commercial real estate:
Residential developed		3,801		5,898		4,139		6,526
Unsecured to residential developers		---		---		---		---
Vacant and unimproved		1,593		2,542		1,688		3,073
Commercial development		443		1,233		484		421
Residential improved		8,771		11,072		9,685		11,759
Commercial improved		17,876		19,449		18,100		20,809
Manufacturing and industrial		5,131		6,105		6,085		6,420
Consumer		14,544		14,984		14,453		14,599
Interest income recognized during impairment:
Commercial and industrial		359		186		970		915
Commercial real estate		401		478		1,309		1,656
Consumer		131		141		400		409
Cash-basis interest income recognized
Commercial and industrial		353		194		968		914
Commercial real estate		406		465		1,328		1,648
Consumer		133		141		404		402

Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of 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, 2014 and December 31, 2013:

			Over 90
			days
September 30, 2014	Nonaccrual		Accruing
Commercial and industrial	$	4,372	$	---
Commercial real estate:
Residential developed		2,245		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		29		---
Residential improved		918		---
Commercial improved		307		---
Manufacturing and industrial		---		---
		3,499		---
Consumer:
Residential mortgage		144		---
Unsecured		57		---
Home equity		353		---
Other secured		---		---
		554		---
Total	$	8,425	$	---

			Over 90
			days
December 31, 2013	Nonaccrual		Accruing
Commercial and industrial	$	5,625	$	---
Commercial real estate:
Residential developed		2,590		153
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		23		---
Residential improved		429		---
Commercial improved		2,511		---
Manufacturing and industrial		---		---
		5,553		153
Consumer:
Residential mortgage		639		---
Unsecured		33		---
Home equity		332		---
Other secured		---		---
		1,004		---
Total	$	12,182	$	153

Aging of recorded investment in past due loans by class of loans

The following table presents the aging of the recorded investment in past due loans as of September 30, 2014 and December 31, 2013 by class of loans (dollars in thousands):

	30-90		Greater Than		Total		Loans Not
September 30, 2014	Days		90 Days		Past Due		Past Due		Total
Commercial and industrial	$	179	$	123	$	302	$	285,531	$	285,833
Commercial real estate:
Residential developed		---		1,968		1,968		11,559		13,527
Unsecured to residential developers		---		---		---		7,126		7,126
Vacant and unimproved		---		---		---		48,407		48,407
Commercial development		---		29		29		4,333		4,362
Residential improved		67		819		886		69,342		70,228
Commercial improved		714		---		714		248,232		248,946
Manufacturing and industrial		7		---		7		75,314		75,321
		788		2,816		3,604		464,313		467,917
Consumer:
Residential mortgage		533		141		674		191,712		192,386
Unsecured		---		---		---		1,048		1,048
Home equity		473		31		504		96,003		96,507
Other secured		---		---		---		11,097		11,097
		1,006		172		1,178		299,860		301,038
Total	$	1,973	$	3,111	$	5,084	$	1,049,704	$	1,054,788

	30-90		Greater Than		Total		Loans Not
December 31, 2013	Days		90 Days		Past Due		Past Due		Total
Commercial and industrial	$	---	$	---	$	---	$	274,099	$	274,099
Commercial real estate:
Residential developed		143		2,296		2,439		15,691		18,130
Unsecured to residential developers		---		---		---		7,315		7,315
Vacant and unimproved		---		---		---		42,988		42,988
Commercial development		---		23		23		2,411		2,434
Residential improved		98		50		148		76,146		76,294
Commercial improved		438		2,056		2,494		244,701		247,195
Manufacturing and industrial		---		---		---		77,984		77,984
		679		4,425		5,104		467,236		472,340
Consumer:
Residential mortgage		78		---		78		188,570		188,648
Unsecured		9		---		9		1,328		1,337
Home equity		317		---		317		95,644		95,961
Other secured		12		---		12		9,980		9,992
		416		---		416		295,522		295,938
Total	$	1,095	$	4,425	$	5,520	$	1,036,857	$	1,042,377

Troubled debt restructurings

The following table presents information regarding troubled debt restructurings as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014				December 31, 2013
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		36	$	7,551		43	$	7,787
Commercial real estate		93		34,648		122		45,774
Consumer		111		14,566		106		14,531
		240	$	56,765		271	$	68,092

The following tables present information regarding troubled debt restructurings executed during the three month periods ended September 30, 2014 and 2013 (dollars in thousands):

Three Months Ended September 30, 2014	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		---	$	---	$	---
Commercial real estate		---		---		---
Consumer		8		183		---
		8	$	183	$	---

Three Months Ended September 30, 2013	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		2	$	823	$	---
Commercial real estate		2		186		---
Consumer		3		137		---
		7	$	1,146	$	---

The following tables present information regarding troubled debt restructurings executed during the nine month periods ended September 30, 2014 and 2013 (dollars in thousands):

Nine Months Ended September 30, 2014	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		1	$	61	$	---
Commercial real estate		10		4,046		---
Consumer		10		257		---
		21	$	4,364	$	---

Nine Months Ended September 30, 2013	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		5	$	1,085	$	---
Commercial real estate		11		2,903		---
Consumer		33		5,606		1,770
		49	$	9,594	$	1,770

Modifications and renewal during period that are not considered TDRs

The following table presents information regarding modifications and renewals executed during the three month periods ended September 30, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Three Months Ended					Three Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		124		$	18,113		141		$	24,425
Commercial real estate		101			12,476		80			19,422
Consumer		2			45		10			271
		227		$	30,634		231		$	44,118

The following table presents information regarding modifications and renewals executed during the nine month periods ended September 30, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Nine Months Ended					Nine Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		322		$	57,936		351		$	72,878
Commercial real estate		202			37,389		277			95,058
Consumer		14			1,320		38			1,203
		538		$	96,645		666		$	169,139

Troubled debt restructured loans that defaulted during the period

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the three month periods ended September 30, 2014 and 2013 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

	Three Months Ended					Three Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		---		$	---		---		$	---
Commercial real estate		---			---		---			---
Consumer		---			---		---			---

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the nine month periods ended September 30, 2014 and 2013 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

	Nine Months Ended					Nine Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		---		$	---		---		$	---
Commercial real estate		1			131		---			---
Consumer		---			---		---			---

Risk grade category of loans by class of loans

As of September 30, 2014 and December 31, 2013, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

September 30, 2014	1		2		3		4		5		6		7		8
Commercial and industrial	$	77	$	9,775	$	98,564	$	163,897	$	7,775	$	1,373	$	4,372	$	---
Commercial real estate:
Residential developed		---		---		2,389		2,510		5,537		846		2,245		---
Unsecured to residential developers		---		---		---		7,124		2		---		---		---
Vacant and unimproved		---		---		10,480		30,172		7,372		383		---		---
Commercial development		---		---		---		3,914		218		201		29		---
Residential improved		---		104		16,220		43,979		5,847		3,160		918		---
Commercial improved		---		4,284		55,331		160,733		24,231		4,060		307		---
Manufacturing and industrial		---		704		27,235		42,354		4,690		338		---		---
	$	77	$	14,867	$	210,219	$	454,683	$	55,672	$	10,361	$	7,871	$	---

December 31, 2013	1		2		3		4		5		6		7		8
Commercial and industrial	$	509	$	15,836	$	81,577	$	155,680	$	13,513	$	1,359	$	5,625	$	---
Commercial real estate:
Residential developed		---		---		2,039		5,653		5,232		2,616		2,590		---
Unsecured to residential developers		---		---		---		7,309		6		---		---		---
Vacant and unimproved		---		---		11,191		24,638		6,761		398		---		---
Commercial development		---		---		---		1,673		532		207		23		---
Residential improved		---		109		15,121		45,018		9,391		6,226		429		---
Commercial improved		---		7,382		45,391		161,897		24,937		5,075		2,511		---
Manufacturing and industrial		---		311		24,546		42,133		10,402		593		---		---
	$	509	$	23,638	$	179,865	$	444,001	$	70,774	$	16,474	$	11,178	$	---

Commercial loans classified as substandard or worse

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

	September 30,		December 31,
	2014		2013
Not classified as impaired	$	4,035		$	7,400
Classified as impaired		14,197			20,252
Total commercial loans classified substandard or worse	$	18,232		$	27,652

Recorded investment in consumer loans based on payment activity

The following table presents the recorded investment in consumer loans based on payment activity (dollars in thousands):

	Residential		Consumer		Home		Consumer
September 30, 2014	Mortgage		Unsecured		Equity		Other
Performing	$	192,245	$	1,048	$	96,476	$	11,097
Nonperforming		141		---		31		---
Total	$	192,386	$	1,048	$	96,507	$	11,097

	Residential		Consumer		Home		Consumer
December 31, 2013	Mortgage		Unsecured		Equity		Other
Performing	$	188,648	$	1,337	$	95,961	$	9,992
Nonperforming		---		---		---		---
Total	$	188,648	$	1,337	$	95,961	$	9,992

XML

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (Parenthetical) (USD $)	9 Months Ended
	Sep. 30, 2014
Issuance of Common Stock on exercise of stock purchase warrants (in shares)	392
Cash dividend (in dollars per share)	$ 0.06

XML

CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
ASSETS
Securities held to maturity fair value	$ 31,771	$ 19,278
Shareholders' equity
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	200,000,000	200,000,000
Common stock, shares issued (in shares)	33,803,823	33,801,097
Common stock, shares outstanding (in shares)	33,803,823	33,801,097

XML

EARNINGS PER COMMON SHARE

9 Months Ended

Sep. 30, 2014

EARNINGS PER COMMON SHARE [Abstract]

EARNINGS PER COMMON SHARE

NOTE 8 - EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three and nine month periods ended September 30, 2014 and 2013 are as follows (dollars in thousands, except per share data):

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Net income	$	2,762	$	2,238	$	8,155	$	7,315
Dividends declared on preferred shares		---		---		---		---
Net income available to common shares	$	2,762	$	2,238	$	8,155	$	7,315
Weighted average shares outstanding, including participating stock awards - Basic		33,795,384		27,261,325		33,791,470		27,244,741
Dilutive potential common shares:
Stock options		---		---		---		---
Conversion of preferred stock		---		---		---		---
Stock warrants		---		---		---		---
Weighted average shares outstanding - Diluted		33,795,384		27,261,325		33,791,470		27,244,741
Basic earnings per common share	$	0.08	$	0.08	$	0.24	$	0.27
Diluted earnings per common share	$	0.08	$	0.08	$	0.24	$	0.27

Stock options for 351,195 shares of common stock for both the three and nine month periods ended September 30, 2014 were not considered in computing diluted earnings per share because they were antidilutive. Stock options for 445,392 shares of common stock for both the three and nine month periods ended September 30, 2013 were not considered in computing diluted earnings per share because they were antidilutive.  Potential common shares associated with convertible preferred stock (for the 2013 periods) and stock warrants were excluded from dilutive potential common shares as they were antidilutive.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2014	Oct. 23, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	MACATAWA BANK CORP
Entity Central Index Key	0001053584
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		33,803,823
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2014

XML

FEDERAL INCOME TAXES

9 Months Ended

Sep. 30, 2014

FEDERAL INCOME TAXES [Abstract]

FEDERAL INCOME TAXES

NOTE 9 - FEDERAL INCOME TAXES

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

	Three Months Ended September 30, 2014		Three Months Ended September 30, 2013		Nine Months Ended September 30, 2014		Nine Months Ended September 30, 2013
Current	$	651	$	40	$	711	$	95
Deferred		555		935		2,903		3,218
	$	1,206	$	975	$	3,614	$	3,313

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

	Three Months Ended September 30, 2014			Three Months Ended September 30, 2013			Nine Months Ended September 30, 2014			Nine Months Ended September 30, 2013
Statutory rate		35	%		35	%		35	%		35	%
Statutory rate applied to income before taxes	$	1,389		$	1,124		$	4,119		$	3,720
Add (deduct)
Tax-exempt interest income		(104	)		(70	)		(278	)		(166	)
Bank-owned life insurance		(62	)		(63	)		(177	)		(188	)
Other, net		(17	)		(16	)		(50	)		(53	)
	$	1,206		$	975		$	3,614		$	3,313

The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies.  No valuation allowance was necessary at September 30, 2014 or December 31, 2013.

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

	September 30,			December 31,
	2014			2013
Deferred tax assets
Allowance for loan losses	$	6,870		$	7,279
Nonaccrual loan interest		908			782
Valuation allowance on other real estate owned		5,000			5,847
Net operating loss carryforward		---			1,743
Unrealized loss on securities available for sale		143			1,053
Other		1,962			1,808
Gross deferred tax assets		14,883			18,512
Valuation allowance		---			---
Total net deferred tax assets		14,883			18,512
Deferred tax liabilities
Depreciation		(1,903	)		(1,620	)
Prepaid expenses		(204	)		(308	)
Other		(389	)		(384	)
Gross deferred tax liabilities		(2,496	)		(2,312	)
Net deferred tax asset	$	12,387		$	16,200

At September 30, 2014, we had no U.S. federal net operating loss carry forwards remaining.

There were no unrecognized tax benefits at September 30, 2014 or December 31, 2013 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2011.

XML

CONSOLIDATED STATEMENTS OF INCOME (unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Interest income
Loans, including fees	$ 10,639	$ 10,995	$ 32,129	$ 34,156
Securities
Taxable	504	476	1,503	1,352
Tax-exempt	309	211	828	508
FHLB Stock	105	98	365	294
Federal funds sold and other short-term investments	117	139	347	349
Total interest income	11,674	11,919	35,172	36,659
Interest expense
Deposits	614	953	1,974	3,020
Other borrowings	756	842	2,263	2,568
Subordinated and long-term debt	0	0	0	0
Total interest expense	1,370	1,795	4,237	5,588
Net interest income	10,304	10,124	30,935	31,071
Provision for loan losses	(750)	(1,500)	(2,750)	(3,250)
Net interest income after provision for loan losses	11,054	11,624	33,685	34,321
Noninterest income
Service charges and fees	1,163	1,072	3,219	3,041
Net gains on mortgage loans	679	612	1,405	2,145
Trust fees	669	584	2,002	1,797
ATM and debit card fees	1,170	1,104	3,425	3,212
Gain on sale of securities	0	0	51	80
Other	622	579	1,779	1,850
Total noninterest income	4,303	3,951	11,881	12,125
Noninterest expense
Salaries and benefits	5,810	5,834	17,177	17,359
Occupancy of premises	897	908	2,837	2,759
Furniture and equipment	803	819	2,394	2,414
Legal and professional	196	192	639	565
Marketing and promotion	226	245	703	738
Data processing	635	570	1,807	1,704
FDIC assessment	287	317	934	1,133
Interchange and other card expense	288	315	825	967
Bond and D&O Insurance	166	187	493	555
Net losses on repossessed and foreclosed properties	449	1,059	634	1,412
Administration and disposition of problem assets	412	752	1,584	2,660
Other	1,220	1,164	3,770	3,552
Total noninterest expenses	11,389	12,362	33,797	35,818
Income before income tax	3,968	3,213	11,769	10,628
Income tax expense	1,206	975	3,614	3,313
Net income	2,762	2,238	8,155	7,315
Dividends declared on preferred shares	0	0	0	0
Net income available to common shares	$ 2,762	$ 2,238	$ 8,155	$ 7,315
Basic earnings per common share (in dollars per share)	$ 0.08	$ 0.08	$ 0.24	$ 0.27
Diluted earnings per common share (in dollars per share)	$ 0.08	$ 0.08	$ 0.24	$ 0.27
Cash dividends per common share (in dollars per share)	$ 0.02	$ 0	$ 0.06	$ 0

XML

LOANS

9 Months Ended

Sep. 30, 2014

LOANS [Abstract]

LOANS

NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):  

	September 30,			December 31,
	2014			2013
Commercial and industrial	$	285,833		$	274,099
Commercial real estate:
Residential developed		13,527			18,130
Unsecured to residential developers		7,126			7,315
Vacant and unimproved		48,407			42,988
Commercial development		4,362			2,434
Residential improved		70,228			76,294
Commercial improved		248,946			247,195
Manufacturing and industrial		75,321			77,984
Total commercial real estate		467,917			472,340
Consumer
Residential mortgage		192,386			188,648
Unsecured		1,048			1,337
Home equity		96,507			95,961
Other secured		11,097			9,992
Total consumer		301,038			295,938
Total loans		1,054,788			1,042,377
Allowance for loan losses		(19,629	)		(20,798	)
	$	1,035,159		$	1,021,579

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

	Commercial and			Commercial
Three months ended September 30, 2014	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,721		$	9,341		$	3,933		$	54		$	20,049
Charge-offs		(4	)		---			(116	)		---			(120	)
Recoveries		75			336			39			---			450
Provision for loan losses		(394	)		(407	)		60			(9	)		(750	)
Ending Balance	$	6,398		$	9,270		$	3,916		$	45		$	19,629

	Commercial and			Commercial
Three months ended September 30, 2013	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	5,602		$	12,324		$	4,255		$	67		$	22,248
Charge-offs		(23	)		(202	)		(129	)		---			(354	)
Recoveries		585			253			40			---			878
Provision for loan losses		(446	)		(1,253	)		230			(31	)		(1,500	)
Ending Balance	$	5,718		$	11,122		$	4,396		$	36		$	21,272

	Commercial and			Commercial
Nine months ended September 30, 2014	Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,174		$	10,868		$	3,703		$	53		$	20,798
Charge-offs		(43	)		(23	)		(228	)		---			(294	)
Recoveries		440			1,289			146			---			1,875
Provision for loan losses		(173	)		(2,864	)		295			(8	)		(2,750	)
Ending Balance	$	6,398		$	9,270		$	3,916		$	45		$	19,629

	Commercial and			Commercial
Nine months ended September 30, 2013	Industrial			Real Estate			Consumer			Unallocated		Total
Beginning balance	$	6,459		$	13,457		$	3,787		$	36	$	23,739
Charge-offs		(272	)		(661	)		(762	)		---		(1,695	)
Recoveries		1,011			1,248			219			---		2,478
Provision for loan losses		(1,480	)		(2,922	)		1,152			---		(3,250	)
Ending Balance	$	5,718		$	11,122		$	4,396		$	36	$	21,272

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

	Commercial and		Commercial
September 30, 2014	Industrial		Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	2,742	$	827	$	892	$	---	$	4,461
Collectively evaluated for impairment		3,656		8,443		3,024		45		15,168
Total ending allowance balance	$	6,398	$	9,270	$	3,916	$	45	$	19,629
Loans:
Individually reviewed for impairment	$	10,446	$	37,025	$	14,491	$	---	$	61,962
Collectively evaluated for impairment		275,387		430,892		286,547		---		992,826
Total ending loans balance	$	285,833	$	467,917	$	301,038	$	---	$	1,054,788

	Commercial and		Commercial
December 31, 2013	Industrial		Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	1,981	$	1,008	$	881	$	---	$	3,870
Collectively evaluated for impairment		4,193		9,860		2,822		53		16,928
Total ending allowance balance	$	6,174	$	10,868	$	3,703	$	53	$	20,798
Loans:
Individually reviewed for impairment	$	13,155	$	41,285	$	14,483	$	---	$	68,923
Collectively evaluated for impairment		260,944		431,055		281,455		---		973,454
Total ending loans balance	$	274,099	$	472,340	$	295,938	$	---	$	1,042,377

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2014 (dollars in thousands):

	Unpaid
	Principal		Recorded		Allowance
September 30, 2014	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial	$	3,159	$	3,159	$	---
Commercial real estate:
Residential developed		4,129		3,196		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		230		230		---
Residential improved		672		672		---
Commercial improved		331		331		---
Manufacturing and industrial		206		206		---
		5,568		4,635		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	8,727	$	7,794	$	---
With an allowance recorded:
Commercial and industrial	$	7,287	$	7,287	$	2,742
Commercial real estate:
Residential developed		587		587		35
Unsecured to residential developers		---		---		---
Vacant and unimproved		1,576		1,576		43
Commercial development		201		201		5
Residential improved		7,840		7,840		242
Commercial improved		17,315		17,315		441
Manufacturing and industrial		4,871		4,871		61
		32,390		32,390		827
Consumer:
Residential mortgage		9,551		9,551		588
Unsecured		---		---		---
Home equity		4,940		4,940		304
Other secured		---		---		---
		14,491		14,491		892
	$	54,168	$	54,168	$	4,461
Total	$	62,895	$	61,962	$	4,461

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013 (dollars in thousands):

	Unpaid
	Principal		Recorded		Allowance
December 31, 2013	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial	$	3,287	$	3,284	$	---
Commercial real estate:
Residential developed		5,273		4,340		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		3		3		---
Commercial development		362		362		---
Residential improved		1,493		1,493		---
Commercial improved		2,797		2,272		---
Manufacturing and industrial		252		252		---
		10,180		8,722		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	13,467	$	12,006	$	---
With an allowance recorded:
Commercial and industrial	$	9,871	$	9,871	$	1,981
Commercial real estate:
Residential developed		618		618		33
Unsecured to residential developers		---		---		---
Vacant and unimproved		1,900		1,900		47
Commercial development		207		207		5
Residential improved		9,534		9,534		342
Commercial improved		14,450		14,450		479
Manufacturing and industrial		5,854		5,854		102
		32,563		32,563		1,008
Consumer:
Residential mortgage		9,454		9,454		575
Unsecured		---		---		---
Home equity		5,029		5,029		306
Other secured		---		---		---
		14,483		14,483		881
	$	56,917	$	56,917	$	3,870
Total	$	70,384	$	68,923	$	3,870

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, 2014 and 2013 (dollars in thousands):

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2014		2013		2014		2013
Average of impaired loans during the period:
Commercial and industrial	$	10,469	$	12,325	$	12,220	$	14,794
Commercial real estate:
Residential developed		3,801		5,898		4,139		6,526
Unsecured to residential developers		---		---		---		---
Vacant and unimproved		1,593		2,542		1,688		3,073
Commercial development		443		1,233		484		421
Residential improved		8,771		11,072		9,685		11,759
Commercial improved		17,876		19,449		18,100		20,809
Manufacturing and industrial		5,131		6,105		6,085		6,420
Consumer		14,544		14,984		14,453		14,599
Interest income recognized during impairment:
Commercial and industrial		359		186		970		915
Commercial real estate		401		478		1,309		1,656
Consumer		131		141		400		409
Cash-basis interest income recognized
Commercial and industrial		353		194		968		914
Commercial real estate		406		465		1,328		1,648
Consumer		133		141		404		402

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, 2014 and December 31, 2013:

			Over 90
			days
September 30, 2014	Nonaccrual		Accruing
Commercial and industrial	$	4,372	$	---
Commercial real estate:
Residential developed		2,245		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		29		---
Residential improved		918		---
Commercial improved		307		---
Manufacturing and industrial		---		---
		3,499		---
Consumer:
Residential mortgage		144		---
Unsecured		57		---
Home equity		353		---
Other secured		---		---
		554		---
Total	$	8,425	$	---

			Over 90
			days
December 31, 2013	Nonaccrual		Accruing
Commercial and industrial	$	5,625	$	---
Commercial real estate:
Residential developed		2,590		153
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		23		---
Residential improved		429		---
Commercial improved		2,511		---
Manufacturing and industrial		---		---
		5,553		153
Consumer:
Residential mortgage		639		---
Unsecured		33		---
Home equity		332		---
Other secured		---		---
		1,004		---
Total	$	12,182	$	153

The following table presents the aging of the recorded investment in past due loans as of September 30, 2014 and December 31, 2013 by class of loans (dollars in thousands):

	30-90		Greater Than		Total		Loans Not
September 30, 2014	Days		90 Days		Past Due		Past Due		Total
Commercial and industrial	$	179	$	123	$	302	$	285,531	$	285,833
Commercial real estate:
Residential developed		---		1,968		1,968		11,559		13,527
Unsecured to residential developers		---		---		---		7,126		7,126
Vacant and unimproved		---		---		---		48,407		48,407
Commercial development		---		29		29		4,333		4,362
Residential improved		67		819		886		69,342		70,228
Commercial improved		714		---		714		248,232		248,946
Manufacturing and industrial		7		---		7		75,314		75,321
		788		2,816		3,604		464,313		467,917
Consumer:
Residential mortgage		533		141		674		191,712		192,386
Unsecured		---		---		---		1,048		1,048
Home equity		473		31		504		96,003		96,507
Other secured		---		---		---		11,097		11,097
		1,006		172		1,178		299,860		301,038
Total	$	1,973	$	3,111	$	5,084	$	1,049,704	$	1,054,788

	30-90		Greater Than		Total		Loans Not
December 31, 2013	Days		90 Days		Past Due		Past Due		Total
Commercial and industrial	$	---	$	---	$	---	$	274,099	$	274,099
Commercial real estate:
Residential developed		143		2,296		2,439		15,691		18,130
Unsecured to residential developers		---		---		---		7,315		7,315
Vacant and unimproved		---		---		---		42,988		42,988
Commercial development		---		23		23		2,411		2,434
Residential improved		98		50		148		76,146		76,294
Commercial improved		438		2,056		2,494		244,701		247,195
Manufacturing and industrial		---		---		---		77,984		77,984
		679		4,425		5,104		467,236		472,340
Consumer:
Residential mortgage		78		---		78		188,570		188,648
Unsecured		9		---		9		1,328		1,337
Home equity		317		---		317		95,644		95,961
Other secured		12		---		12		9,980		9,992
		416		---		416		295,522		295,938
Total	$	1,095	$	4,425	$	5,520	$	1,036,857	$	1,042,377

The Company had allocated $4,410,000 and $3,870,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of September 30, 2014 and December 31, 2013, respectively.  These loans involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure.  For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan.  In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt.  The second note is charged off immediately and collected only after the first note is paid in full.  This modification type is commonly referred to as an A-B note structure.  For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

Based upon recently issued regulatory guidance, the Company has determined that 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 designation may be removed.  This guidance was applied to loans outstanding at September 30, 2014.  In addition, the TDR designation may also be removed from loans modified under an A-B note structure.  If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms.  The market rate relative to the borrower’s credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model.  The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration differences in credit risk.  In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.

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

The following table presents information regarding troubled debt restructurings as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30, 2014				December 31, 2013
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		36	$	7,551		43	$	7,787
Commercial real estate		93		34,648		122		45,774
Consumer		111		14,566		106		14,531
		240	$	56,765		271	$	68,092

The following tables present information regarding troubled debt restructurings executed during the three month periods ended September 30, 2014 and 2013 (dollars in thousands):

Three Months Ended September 30, 2014	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		---	$	---	$	---
Commercial real estate		---		---		---
Consumer		8		183		---
		8	$	183	$	---

Three Months Ended September 30, 2013	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		2	$	823	$	---
Commercial real estate		2		186		---
Consumer		3		137		---
		7	$	1,146	$	---

The following tables present information regarding troubled debt restructurings executed during the nine month periods ended September 30, 2014 and 2013 (dollars in thousands):

Nine Months Ended September 30, 2014	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		1	$	61	$	---
Commercial real estate		10		4,046		---
Consumer		10		257		---
		21	$	4,364	$	---

Nine Months Ended September 30, 2013	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		5	$	1,085	$	---
Commercial real estate		11		2,903		---
Consumer		33		5,606		1,770
		49	$	9,594	$	1,770

According to the accounting standards, not all loan modifications are TDRs.  TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress.  The Company reviews all modifications and renewals for determination of TDR status.  In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession.  These modifications are not considered TDRs.  In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress.  This could be the case if the Company is matching a competitor’s interest rate.  These modifications would also not be considered TDRs.  Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.  The following table presents information regarding modifications and renewals executed during the three month periods ended September 30, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Three Months Ended					Three Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		124		$	18,113		141		$	24,425
Commercial real estate		101			12,476		80			19,422
Consumer		2			45		10			271
		227		$	30,634		231		$	44,118

The following table presents information regarding modifications and renewals executed during the nine month periods ended September 30, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Nine Months Ended					Nine Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		322		$	57,936		351		$	72,878
Commercial real estate		202			37,389		277			95,058
Consumer		14			1,320		38			1,203
		538		$	96,645		666		$	169,139

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the three month periods ended September 30, 2014 and 2013 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

	Three Months Ended					Three Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		---		$	---		---		$	---
Commercial real estate		---			---		---			---
Consumer		---			---		---			---

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the nine month periods ended September 30, 2014 and 2013 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

	Nine Months Ended					Nine Months Ended
	September 30, 2014					September 30, 2013
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		---		$	---		---		$	---
Commercial real estate		1			131		---			---
Consumer		---			---		---			---

Credit Quality Indicators:The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Company analyzes commercial loans individually and classifies these relationships by credit risk grading.  The Company uses an eight point grading system, with grades 5 through 8 being considered classified, or watch, credits.  All commercial loans are assigned a grade at origination, at each renewal or any amendment.  When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by credit and the loan officer.  All watch credits have an ALR completed monthly which analyzes the collateral position and cash flow of the borrower and its guarantors.  The loan officer is required to complete both a short term and long term plan to rehabilitate or exit the credit and to give monthly comments on the progress to these plans.  Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled.  When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR.  Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process.  The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero balance.  The Company uses the following definitions for the risk grades:

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

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

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

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

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

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

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

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

As of September 30, 2014 and December 31, 2013, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

September 30, 2014	1		2		3		4		5		6		7		8
Commercial and industrial	$	77	$	9,775	$	98,564	$	163,897	$	7,775	$	1,373	$	4,372	$	---
Commercial real estate:
Residential developed		---		---		2,389		2,510		5,537		846		2,245		---
Unsecured to residential developers		---		---		---		7,124		2		---		---		---
Vacant and unimproved		---		---		10,480		30,172		7,372		383		---		---
Commercial development		---		---		---		3,914		218		201		29		---
Residential improved		---		104		16,220		43,979		5,847		3,160		918		---
Commercial improved		---		4,284		55,331		160,733		24,231		4,060		307		---
Manufacturing and industrial		---		704		27,235		42,354		4,690		338		---		---
	$	77	$	14,867	$	210,219	$	454,683	$	55,672	$	10,361	$	7,871	$	---

December 31, 2013	1		2		3		4		5		6		7		8
Commercial and industrial	$	509	$	15,836	$	81,577	$	155,680	$	13,513	$	1,359	$	5,625	$	---
Commercial real estate:
Residential developed		---		---		2,039		5,653		5,232		2,616		2,590		---
Unsecured to residential developers		---		---		---		7,309		6		---		---		---
Vacant and unimproved		---		---		11,191		24,638		6,761		398		---		---
Commercial development		---		---		---		1,673		532		207		23		---
Residential improved		---		109		15,121		45,018		9,391		6,226		429		---
Commercial improved		---		7,382		45,391		161,897		24,937		5,075		2,511		---
Manufacturing and industrial		---		311		24,546		42,133		10,402		593		---		---
	$	509	$	23,638	$	179,865	$	444,001	$	70,774	$	16,474	$	11,178	$	---

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

	September 30,		December 31,
	2014		2013
Not classified as impaired	$	4,035		$	7,400
Classified as impaired		14,197			20,252
Total commercial loans classified substandard or worse	$	18,232		$	27,652

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in consumer loans based on payment activity (dollars in thousands):

	Residential		Consumer		Home		Consumer
September 30, 2014	Mortgage		Unsecured		Equity		Other
Performing	$	192,245	$	1,048	$	96,476	$	11,097
Nonperforming		141		---		31		---
Total	$	192,386	$	1,048	$	96,507	$	11,097

	Residential		Consumer		Home		Consumer
December 31, 2013	Mortgage		Unsecured		Equity		Other
Performing	$	188,648	$	1,337	$	95,961	$	9,992
Nonperforming		---		---		---		---
Total	$	188,648	$	1,337	$	95,961	$	9,992

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SECURITIES

9 Months Ended

Sep. 30, 2014

SECURITIES [Abstract]

SECURITIES

NOTE 2 – SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2014
Available for Sale:
U.S. Treasury and federal agency securities	$	67,769	$	62	$	(715	)	$	67,116
U.S. Agency MBS and CMOs		17,517		36		(289	)		17,264
Tax-exempt state and municipal bonds		36,286		333		(221	)		36,398
Taxable state and municipal bonds		26,131		433		(85	)		26,479
Corporate bonds and other debt securities		13,307		66		(19	)		13,354
Other equity securities		1,500		---		(10	)		1,490
	$	162,510	$	930	$	(1,339	)	$	162,101
Held to Maturity
Tax-exempt state and municipal bonds	$	31,744	$	102	$	(75	)	$	31,771
December 31, 2013
Available for Sale:
U.S. Treasury and federal agency securities	$	55,701	$	92	$	(1,354	)	$	54,439
U. S. Agency MBS and CMOs		20,029		9		(673	)		19,365
Tax-exempt state and municipal bonds		27,920		47		(1,118	)		26,849
Taxable state and municipal bonds		26,306		307		(285	)		26,328
Corporate bonds and other debt securities		11,211		64		(63	)		11,212
Other equity securities		1,500		---		(34	)		1,466
	$	142,667	$	519	$	(3,527	)	$	139,659
Held to Maturity:
Tax-exempt state and municipal bonds	$	19,248	$	46	$	(16	)	$	19,278

There were no sales of securities in the three month periods ended September 30, 2014 and 2013. Proceeds from sales of available for sale securities were $5.2 million in the nine month period ended September 30, 2014 resulting in net gains on sale of $51,000, as reported in the Consolidated Statements of Income.  This resulted in reclassifications of $51,000 ($33,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the nine month period ended September 30, 2014.   Proceeds from the sale of securities available for sale were $3.8 million in the nine month period ended September 30, 2013 resulting in net gains on sale of $80,000, as reported in the Consolidated Statements of Income.  This resulted in reclassifications of $80,000 ($52,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the nine month period ended September 30, 2013.

Contractual maturities of debt securities at September 30, 2014 were as follows (dollars in thousands):

	Held–to-Maturity Securities				Available-for-Sale Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	19,075	$	19,035	$	4,424	$	4,450
Due from one to five years		745		746		92,569		92,577
Due from five to ten years		5,624		5,690		38,215		38,051
Due after ten years		6,300		6,300		25,802		25,533
	$	31,744	$	31,771	$	161,010	$	160,611

Securities with unrealized losses at September 30, 2014 and December 31, 2013, 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
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2014	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and federal agency securities	$	17,499	$	(48	)	$	40,350	$	(667	)	$	57,849	$	(715	)
U.S. Agency MBS and CMOs		1,497		(6	)		12,617		(283	)		14,114		(289	)
Tax-exempt state and municipal bonds		23,642		(107	)		8,726		(189	)		32,368		(296	)
Taxable state and municipal bonds		3,053		(12	)		4,173		(73	)		7,226		(85	)
Corporate bonds and other debt securities		2,702		(2	)		1,988		(17	)		4,690		(19	)
Other equity securities		---		---			1,490		(10	)		1,490		(10	)
Total temporarily impaired	$	48,393	$	(175	)	$	69,344	$	(1,239	)	$	117,737	$	(1,414	)

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2013	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and federal agency securities	$	43,212	$	(1,354	)	$	---	$	---		$	43,212	$	(1,354	)
U.S. Agency MBS and CMOs		18,494		(673	)		---		---			18,494		(673	)
Tax-exempt state and municipal bonds		21,359		(1,066	)		831		(68	)		22,190		(1,134	)
Taxable state and municipal bonds		9,599		(256	)		1,015		(29	)		10,614		(285	)
Corporate bonds and other debt securities		3,928		(63	)		---		---			3,928		(63	)
Other equity securities		1,466		(34	)		---		---			1,466		(34	)
Total temporarily impaired	$	98,058	$	(3,446	)	$	1,846	$	(97	)	$	99,904	$	(3,543	)

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Management determined that no OTTI charges were necessary during the three and nine month periods ended September 30, 2014 and 2013.

Securities with a carrying value of approximately $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, 2014 and December 31, 2013.

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SECURITIES (Tables)

9 Months Ended

Sep. 30, 2014

SECURITIES [Abstract]

Amortized cost and fair value of securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2014
Available for Sale:
U.S. Treasury and federal agency securities	$	67,769	$	62	$	(715	)	$	67,116
U.S. Agency MBS and CMOs		17,517		36		(289	)		17,264
Tax-exempt state and municipal bonds		36,286		333		(221	)		36,398
Taxable state and municipal bonds		26,131		433		(85	)		26,479
Corporate bonds and other debt securities		13,307		66		(19	)		13,354
Other equity securities		1,500		---		(10	)		1,490
	$	162,510	$	930	$	(1,339	)	$	162,101
Held to Maturity
Tax-exempt state and municipal bonds	$	31,744	$	102	$	(75	)	$	31,771
December 31, 2013
Available for Sale:
U.S. Treasury and federal agency securities	$	55,701	$	92	$	(1,354	)	$	54,439
U. S. Agency MBS and CMOs		20,029		9		(673	)		19,365
Tax-exempt state and municipal bonds		27,920		47		(1,118	)		26,849
Taxable state and municipal bonds		26,306		307		(285	)		26,328
Corporate bonds and other debt securities		11,211		64		(63	)		11,212
Other equity securities		1,500		---		(34	)		1,466
	$	142,667	$	519	$	(3,527	)	$	139,659
Held to Maturity:
Tax-exempt state and municipal bonds	$	19,248	$	46	$	(16	)	$	19,278

Contractual maturities of debt securities

Contractual maturities of debt securities at September 30, 2014 were as follows (dollars in thousands):

	Held–to-Maturity Securities				Available-for-Sale Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	19,075	$	19,035	$	4,424	$	4,450
Due from one to five years		745		746		92,569		92,577
Due from five to ten years		5,624		5,690		38,215		38,051
Due after ten years		6,300		6,300		25,802		25,533
	$	31,744	$	31,771	$	161,010	$	160,611

Securities in continuous unrealized loss position

Securities with unrealized losses at September 30, 2014 and December 31, 2013, 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
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2014	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and federal agency securities	$	17,499	$	(48	)	$	40,350	$	(667	)	$	57,849	$	(715	)
U.S. Agency MBS and CMOs		1,497		(6	)		12,617		(283	)		14,114		(289	)
Tax-exempt state and municipal bonds		23,642		(107	)		8,726		(189	)		32,368		(296	)
Taxable state and municipal bonds		3,053		(12	)		4,173		(73	)		7,226		(85	)
Corporate bonds and other debt securities		2,702		(2	)		1,988		(17	)		4,690		(19	)
Other equity securities		---		---			1,490		(10	)		1,490		(10	)
Total temporarily impaired	$	48,393	$	(175	)	$	69,344	$	(1,239	)	$	117,737	$	(1,414	)

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2013	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury and federal agency securities	$	43,212	$	(1,354	)	$	---	$	---		$	43,212	$	(1,354	)
U.S. Agency MBS and CMOs		18,494		(673	)		---		---			18,494		(673	)
Tax-exempt state and municipal bonds		21,359		(1,066	)		831		(68	)		22,190		(1,134	)
Taxable state and municipal bonds		9,599		(256	)		1,015		(29	)		10,614		(285	)
Corporate bonds and other debt securities		3,928		(63	)		---		---			3,928		(63	)
Other equity securities		1,466		(34	)		---		---			1,466		(34	)
Total temporarily impaired	$	98,058	$	(3,446	)	$	1,846	$	(97	)	$	99,904	$	(3,543	)

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COMMITMENTS AND OFF BALANCE-SHEET RISK

9 Months Ended

Sep. 30, 2014

COMMITMENTS AND OFF BALANCE-SHEET RISK [Abstract]

COMMITMENTS AND OFF BALANCE-SHEET RISK

NOTE 10 – COMMITMENTS AND OFF BALANCE-SHEET RISK

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

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

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

	September 30,		December 31,
	2014		2013
Commitments to make loans	$	141,628		$	87,513
Letters of credit		10,827			10,774
Unused lines of credit		360,344			313,232

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $13.7 million and $14.7 million at September 30, 2014 and December 31, 2013, respectively.

At September 30, 2014, approximately 34% of the Bank’s commitments to make loans were at fixed rates, offered at current market rates.  The remainder of the commitments to make loans were at variable rates tied to prime and generally expire within 30 days.  The majority of the unused lines of credit were at variable rates tied to prime.

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DEPOSITS

9 Months Ended

Sep. 30, 2014

DEPOSITS [Abstract]

DEPOSITS

NOTE 6 – DEPOSITS

Deposits are summarized as follows (in thousands):

	September 30,		December 31,
	2014		2013
Noninterest-bearing demand	$	385,182	$	344,550
Interest bearing demand		278,302		287,417
Savings and money market accounts		425,877		469,542
Certificates of deposit		126,728		148,225
	$	1,216,089	$	1,249,734

Approximately $52.6 million and $56.7 million in certificates of deposit were in denominations of $100,000 or more at September 30, 2014 and December 31, 2013, respectively.

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OTHER REAL ESTATE OWNED

9 Months Ended

Sep. 30, 2014

OTHER REAL ESTATE OWNED [Abstract]

OTHER REAL ESTATE OWNED

NOTE 4 – OTHER REAL ESTATE OWNED

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

	Nine			Year			Nine
	Months Ended			Ended			Months Ended
	September 30,			December 31,			September 30,
	2014			2013			2013
Beginning balance	$	53,501		$	69,743		$	69,743
Additions, transfers from loans		2,565			3,539			3,170
Proceeds from sales of other real estate owned		(9,964	)		(16,501	)		(10,545	)
Valuation allowance reversal upon sale		(3,409	)		(4,378	)		(2,794	)
Gain on sale of other real estate owned		475			1,098			1,004
		43,168			53,501			60,578
Less: valuation allowance		(14,405	)		(16,705	)		(17,782	)
Ending balance	$	28,763		$	36,796		$	42,796

  Activity in the valuation allowance was as follows (dollars in thousands):

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2014			2013
Beginning balance	$	16,705		$	18,161
Additions charged to expense		1,109			2,415
Reversals upon sale		(3,409	)		(2,794	)
Ending balance	$	14,405		$	17,782

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FAIR VALUE

9 Months Ended

Sep. 30, 2014

FAIR VALUE [Abstract]

FAIR VALUE

NOTE 5 – FAIR VALUE

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

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

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

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

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

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

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

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

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

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

	Fair			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable		Significant Unobservable Inputs
	Value			(Level 1)		Inputs (Level 2)		(Level 3)
September 30, 2014
U.S. Treasury and federal agency securities	$	67,116		$	---	$	67,116	$	---
U.S. Agency MBS and CMOs		17,264			---		17,264		---
Tax-exempt state and municipal bonds		36,398			---		36,398		---
Taxable state and municipal bonds		26,479			---		26,479		---
Corporate bonds and other debt securities		13,354			---		13,354		---
Other equity securities		1,490			---		1,490		---
Loans held for sale		905			---		905		---
Interest rate swaps		89			---		---		89
Interest rate swaps		(89	)		---		---		(89	)
December 31, 2013
U.S. Treasury and federal agency securities	$	54,439		$	---	$	54,439	$	---
U.S. Agency MBS and CMOs		19,365			---		19,365		---
Tax-exempt state and municipal bonds		26,849			---		26,849		---
Taxable state and municipal bonds		26,328			---		26,328		---
Corporate bonds and other debt securities		11,212			---		11,212		---
Other equity securities		1,466			---		1,466		---
Loans held for sale		1,915			---		1,915		---
Interest rate swaps		94			---		---		94
Interest rate swaps		(94	)		---		---		(94	)

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

	Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable		Significant Unobservable Inputs
	Value		(Level 1)		Inputs (Level 2)		(Level 3)
September 30, 2014
Impaired loans	$	17,709	$	---	$	---	$	17,709
Other real estate owned		23,442		---		---		23,442
December 31, 2013
Impaired loans	$	22,403	$	---	$	---	$	22,403
Other real estate owned		29,711		---		---		29,711

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at September 30, 2014 and December 31, 2013 (dollars in thousands).

	Level in	September 30, 2014						December 31, 2013
	Fair Value	Carrying			Fair			Carrying			Fair
	Hierarchy	Amount			Value			Amount			Value
Financial assets
Cash and due from banks	Level 1	$	24,731		$	24,731		$	38,714		$	38,714
Cash equivalents	Level 2		74,808			74,808			118,178			118,178
Interest-bearing time deposits in other financial institutions	Level 2		20,000			20,089			25,000			25,003
Securities held to maturity	Level 3		31,744			31,771			19,248			19,278
FHLB stock			11,236		NA				11,236		NA
Loans, net	Level 2		1,017,450			1,015,635			999,176			990,084
Bank owned life insurance	Level 3		28,021			28,021			27,517			27,517
Accrued interest receivable	Level 2		3,415			3,415			3,231			3,231
Financial liabilities
Deposits	Level 2		(1,216,089	)		(1,216,601	)		(1,249,734	)		(1,250,886	)
Other borrowed funds	Level 2		(88,107	)		(88,543	)		(89,991	)		(90,321	)
Long-term debt	Level 2		(41,238	)		(35,514	)		(41,238	)		(35,098	)
Subordinated debt	Level 2		---			---			---			---
Accrued interest payable	Level 2		(291	)		(291	)		(308	)		(308	)
Off-balance sheet credit-related items
Loan commitments			---			---			---			---

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

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

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OTHER BORROWED FUNDS

9 Months Ended

Sep. 30, 2014

OTHER BORROWED FUNDS [Abstract]

OTHER BORROWED FUNDS

NOTE 7 - OTHER BORROWED FUNDS

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

Federal Home Loan Bank Advances

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

				Weighted
	Advance			Average
Principal Terms	Amount		Range of Maturities	Interest Rate
September 30, 2014
Single maturity fixed rate advances	$	80,000	August 2016 to February 2019		1.69	%
Amortizable mortgage advances		8,107	March 2018 to July 2018		3.78	%
	$	88,107

				Weighted
	Advance			Average
Principal Terms	Amount		Range of Maturities	Interest Rate
December 31, 2013
Single maturity fixed rate advances	$	80,000	August 2016 to February 2019		1.69	%
Amortizable mortgage advances		9,991	March 2018 to July 2018		3.78	%
	$	89,991

Each advance is subject to a prepayment fee if paid prior to its maturity date.  Fixed rate advances are payable at maturity.   Amortizable mortgage advances are fixed rate advances with scheduled repayments based upon amortization to maturity.  These advances were collateralized by residential and commercial real estate loans totaling $447,484,000 and $411,715,000 under a blanket lien arrangement at September 30, 2014 and December 31, 2013, respectively.

Scheduled repayments of FHLB advances as of September 30, 2014 were as follows (in thousands):

2014	$	---
2015		1,938
2016		21,996
2017		2,055
2018		52,118
Thereafter		10,000
	$	88,107

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank.  There were no borrowings outstanding at September 30, 2014 and December 31, 2013, and the Company had approximately $24.4 million and $22.7 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $28.2 million and $26.6 million at September 30, 2014 and December 31, 2013, respectively.

XML

SECURITIES (Details) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Available for Sale [Abstract]
Amortized Cost	$ 162,510,000		$ 162,510,000		$ 142,667,000
Gross Unrealized Gains	930,000		930,000		519,000
Gross Unrealized Losses	(1,339,000)		(1,339,000)		(3,527,000)
Fair Value	162,101,000		162,101,000		139,659,000
Held to Maturity [Abstract]
Fair Value	31,771,000		31,771,000		19,278,000
Proceeds from sale of available-for-sale securities	0	0	5,164,000	3,778,000
Gain on sale of securities	0	0	51,000	80,000
Reclassification adjustment for securities gain recognized in earnings, net of tax	0	0	33,000	52,000
Held-to-Maturity Securities, Amortized Cost [Abstract]
Due in one year or less	19,075,000		19,075,000
Due from one to five years	745,000		745,000
Due from five to ten years	5,624,000		5,624,000
Due after ten years	6,300,000		6,300,000
Held-to-Maturity Securities, Total Amortized Cost	31,744,000		31,744,000		19,248,000
Held-to-Maturity Securities, Fair Value [Abstract]
Due in one year or less	19,035,000		19,035,000
Due from one to five years	746,000		746,000
Due from five to ten years	5,690,000		5,690,000
Due after ten years	6,300,000		6,300,000
Held-to-maturity securities, Total Fair Value	31,771,000		31,771,000		19,278,000
Available-for-Sale Securities, Amortized Cost [Abstract]
Due in one year or less	4,424,000		4,424,000
Due from one to five years	92,569,000		92,569,000
Due from five to ten years	38,215,000		38,215,000
Due after ten years	25,802,000		25,802,000
Available-for-Sale Securities, Total Amortized Cost	161,010,000		161,010,000
Available-for-Sale Securities, Fair Value [Abstract]
Due in one year or less	4,450,000		4,450,000
Due from one to five years	92,577,000		92,577,000
Due from five to ten years	38,051,000		38,051,000
Due after ten years	25,533,000		25,533,000
Available-for-Sale Securities, Total Fair Value	160,611,000		160,611,000
Securities in continuous unrealized losses position, Fair value [Abstract]
Less than 12 Months, Fair Value	48,393,000		48,393,000		98,058,000
12 Months or More, Fair Value	69,344,000		69,344,000		1,846,000
Total, Fair Value	117,737,000		117,737,000		99,904,000
Securities in continuous unrealized loss position, Aggregate losses [Abstract]
Less than 12 Months, Unrealized Losses			(175,000)		(3,446,000)
12 Months or More, Unrealized Losses			(1,239,000)		(97,000)
Total, Unrealized Loss			(1,414,000)		(3,543,000)
Securities pledged as security for public deposits, letters of credit and for other purposes required or permitted by law	1,000,000		1,000,000		1,000,000
U.S. Treasury and Federal Agency Securities [Member]
Available for Sale [Abstract]
Amortized Cost	67,769,000		67,769,000		55,701,000
Gross Unrealized Gains	62,000		62,000		92,000
Gross Unrealized Losses	(715,000)		(715,000)		(1,354,000)
Fair Value	67,116,000		67,116,000		54,439,000
Securities in continuous unrealized losses position, Fair value [Abstract]
Less than 12 Months, Fair Value	17,499,000		17,499,000		43,212,000
12 Months or More, Fair Value	40,350,000		40,350,000		0
Total, Fair Value	57,849,000		57,849,000		43,212,000
Securities in continuous unrealized loss position, Aggregate losses [Abstract]
Less than 12 Months, Unrealized Losses			(48,000)		(1,354,000)
12 Months or More, Unrealized Losses			(667,000)		0
Total, Unrealized Loss			(715,000)		(1,354,000)
U.S. Agency MBS and CMOs [Member]
Available for Sale [Abstract]
Amortized Cost	17,517,000		17,517,000		20,029,000
Gross Unrealized Gains	36,000		36,000		9,000
Gross Unrealized Losses	(289,000)		(289,000)		(673,000)
Fair Value	17,264,000		17,264,000		19,365,000
Securities in continuous unrealized losses position, Fair value [Abstract]
Less than 12 Months, Fair Value	1,497,000		1,497,000		18,494,000
12 Months or More, Fair Value	12,617,000		12,617,000		0
Total, Fair Value	14,114,000		14,114,000		18,494,000
Securities in continuous unrealized loss position, Aggregate losses [Abstract]
Less than 12 Months, Unrealized Losses			(6,000)		(673,000)
12 Months or More, Unrealized Losses			(283,000)		0
Total, Unrealized Loss			(289,000)		(673,000)
Tax-Exempt State and Municipal Bonds [Member]
Available for Sale [Abstract]
Amortized Cost	36,286,000		36,286,000		27,920,000
Gross Unrealized Gains	333,000		333,000		47,000
Gross Unrealized Losses	(221,000)		(221,000)		(1,118,000)
Fair Value	36,398,000		36,398,000		26,849,000
Held to Maturity [Abstract]
Amortized Cost	31,744,000		31,744,000		19,248,000
Gross Unrealized Gains	102,000		102,000		46,000
Gross Unrealized Losses	(75,000)		(75,000)		(16,000)
Fair Value	31,771,000		31,771,000		19,278,000
Held-to-Maturity Securities, Fair Value [Abstract]
Held-to-maturity securities, Total Fair Value	31,771,000		31,771,000		19,278,000
Securities in continuous unrealized losses position, Fair value [Abstract]
Less than 12 Months, Fair Value	23,642,000		23,642,000		21,359,000
12 Months or More, Fair Value	8,726,000		8,726,000		831,000
Total, Fair Value	32,368,000		32,368,000		22,190,000
Securities in continuous unrealized loss position, Aggregate losses [Abstract]
Less than 12 Months, Unrealized Losses			(107,000)		(1,066,000)
12 Months or More, Unrealized Losses			(189,000)		(68,000)
Total, Unrealized Loss			(296,000)		(1,134,000)
Taxable State and Municipal Bonds [Member]
Available for Sale [Abstract]
Amortized Cost	26,131,000		26,131,000		26,306,000
Gross Unrealized Gains	433,000		433,000		307,000
Gross Unrealized Losses	(85,000)		(85,000)		(285,000)
Fair Value	26,479,000		26,479,000		26,328,000
Securities in continuous unrealized losses position, Fair value [Abstract]
Less than 12 Months, Fair Value	3,053,000		3,053,000		9,599,000
12 Months or More, Fair Value	4,173,000		4,173,000		1,015,000
Total, Fair Value	7,226,000		7,226,000		10,614,000
Securities in continuous unrealized loss position, Aggregate losses [Abstract]
Less than 12 Months, Unrealized Losses			(12,000)		(256,000)
12 Months or More, Unrealized Losses			(73,000)		(29,000)
Total, Unrealized Loss			(85,000)		(285,000)
Corporate Bonds and Other Debt Securities [Member]
Available for Sale [Abstract]
Amortized Cost	13,307,000		13,307,000		11,211,000
Gross Unrealized Gains	66,000		66,000		64,000
Gross Unrealized Losses	(19,000)		(19,000)		(63,000)
Fair Value	13,354,000		13,354,000		11,212,000
Securities in continuous unrealized losses position, Fair value [Abstract]
Less than 12 Months, Fair Value	2,702,000		2,702,000		3,928,000
12 Months or More, Fair Value	1,988,000		1,988,000		0
Total, Fair Value	4,690,000		4,690,000		3,928,000
Securities in continuous unrealized loss position, Aggregate losses [Abstract]
Less than 12 Months, Unrealized Losses			(2,000)		(63,000)
12 Months or More, Unrealized Losses			(17,000)		0
Total, Unrealized Loss			(19,000)		(63,000)
Other Equity Securities [Member]
Available for Sale [Abstract]
Amortized Cost	1,500,000		1,500,000		1,500,000
Gross Unrealized Gains	0		0		0
Gross Unrealized Losses	(10,000)		(10,000)		(34,000)
Fair Value	1,490,000		1,490,000		1,466,000
Securities in continuous unrealized losses position, Fair value [Abstract]
Less than 12 Months, Fair Value	0		0		1,466,000
12 Months or More, Fair Value	1,490,000		1,490,000		0
Total, Fair Value	1,490,000		1,490,000		1,466,000
Securities in continuous unrealized loss position, Aggregate losses [Abstract]
Less than 12 Months, Unrealized Losses			0		(34,000)
12 Months or More, Unrealized Losses			(10,000)		0
Total, Unrealized Loss			$ (10,000)		$ (34,000)

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SHAREHOLDERS' EQUITY (Details) (USD $)	9 Months Ended
	Sep. 30, 2014 Category	Dec. 31, 2013
SHAREHOLDERS' EQUITY [Abstract]
Number of classification of prompt corrective action regulations	5
Summary of actual capital levels and minimum required levels [Abstract]
Trust preferred securities that qualified as Tier one risk based capital	$ 40,000,000	$ 40,000,000
Consolidated [Member]
Summary of actual capital levels and minimum required levels [Abstract]
Total capital (to risk weighted assets), actual amount	186,618,000	174,433,000
Total capital (to risk weighted assets), actual ratio (in hundredths)	16.30%	15.70%
Tier 1 capital (to risk weighted assets), actual amount	172,231,000	160,455,000
Tier 1 capital (to risk weighted assets), actual ratio (in hundredths)	15.00%	14.40%
Tier 1 capital (to average assets), actual amount	172,231,000	160,455,000
Tier 1 capital (to average assets), actual ratio (in hundredths)	11.60%	10.60%
Total capital (to risk weighted assets), minimum required for capital adequacy purposes, amount	91,659,000	88,915,000
Total capital (to risk weighted assets) minimum required for capital adequacy purposes, ratio (in hundredths)	8.00%	8.00%
Tier 1 capital (to risk weighted assets), minimum required for capital adequacy purposes, amount	45,829,000	44,457,000
Tier 1 capital (to risk weighted assets), minimum required for capital adequacy purposes, ratio (in hundredths)	4.00%	4.00%
Tier 1 capital (to average assets), minimum required for capital adequacy purposes, amount	59,571,000	60,482,000
Tier 1 capital (to average assets), minimum required for capital adequacy purposes, ratio (in hundredths)	4.00%	4.00%
Bank [Member]
Summary of actual capital levels and minimum required levels [Abstract]
Total capital (to risk weighted assets), actual amount	183,675,000	171,811,000
Total capital (to risk weighted assets), actual ratio (in hundredths)	16.00%	15.40%
Tier 1 capital (to risk weighted assets), actual amount	169,264,000	157,825,000
Tier 1 capital (to risk weighted assets), actual ratio (in hundredths)	14.80%	14.20%
Tier 1 capital (to average assets), actual amount	169,264,000	157,825,000
Tier 1 capital (to average assets), actual ratio (in hundredths)	11.40%	10.50%
Total capital (to risk weighted assets), minimum required for capital adequacy purposes, amount	91,812,000	88,968,000
Total capital (to risk weighted assets) minimum required for capital adequacy purposes, ratio (in hundredths)	8.00%	8.00%
Tier 1 capital (to risk weighted assets), minimum required for capital adequacy purposes, amount	45,906,000	44,484,000
Tier 1 capital (to risk weighted assets), minimum required for capital adequacy purposes, ratio (in hundredths)	4.00%	4.00%
Tier 1 capital (to average assets), minimum required for capital adequacy purposes, amount	59,500,000	60,407,000
Tier 1 capital (to average assets), minimum required for capital adequacy purposes, ratio (in hundredths)	4.00%	4.00%
Total capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, amount	114,765,000	111,210,000
Total capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, ratio (in hundredths)	10.00%	10.00%
Tier 1 capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, amount	68,859,000	66,726,000
Tier 1 capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, ratio (in hundredths)	6.00%	6.00%
Tier 1 capital (to average assets) to be well capitalized under prompt corrective action regulations, amount	$ 74,376,000	$ 75,509,000
Tier 1 capital (to average assets) to be well capitalized under prompt corrective action regulations, ratio (in hundredths)	5.00%	5.00%

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SHAREHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2014

SHAREHOLDERS' EQUITY [Abstract]

SHAREHOLDERS' EQUITY

NOTE 12 – SHAREHOLDERS' EQUITY

Regulatory Capital

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

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

At September 30, 2014 and December 31, 2013, actual capital levels and minimum required levels were (in thousands):

											To Be Well
						Minimum Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount			Ratio
September 30, 2014
Total capital (to risk weighted assets)
Consolidated	$	186,618		16.3	%	$	91,659		8.0	%		N/	A		N/	A
Bank		183,675		16.0			91,812		8.0		$	114,765			10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		172,231		15.0			45,829		4.0			N/	A		N/	A
Bank		169,264		14.8			45,906		4.0			68,859			6.0
Tier 1 capital (to average assets)
Consolidated		172,231		11.6			59,571		4.0			N/	A		N/	A
Bank		169,264		11.4			59,500		4.0			74,376			5.0
December 31, 2013
Total capital (to risk weighted assets)
Consolidated	$	174,433		15.7	%	$	88,915		8.0	%		N/	A		N/	A
Bank		171,811		15.4			88,968		8.0		$	111,210			10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		160,455		14.4			44,457		4.0			N/	A		N/	A
Bank		157,825		14.2			44,484		4.0			66,726			6.0
Tier 1 capital (to average assets)
Consolidated		160,455		10.6			60,482		4.0			N/	A		N/	A
Bank		157,825		10.5			60,407		4.0			75,509			5.0

Approximately $40.0 million of trust preferred securities outstanding at September 30, 2014 and December 31, 2013, respectively, qualified as Tier 1 capital. Refer to our 2013 Form 10-K for more information on the trust preferred securities.

The Bank was categorized as "well capitalized" at September 30, 2014 and December 31, 2013.

On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III.  This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer.  It also revises the prompt corrective action thresholds and makes changes to risk weights for certain assets and off-balance-sheet exposures.  Banks are required to transition into the new rule beginning on January 1, 2015.  Based on our capital levels and balance sheet composition at September 30, 2014, we believe implementation of the new rule will have no material impact on our capital needs.

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FAIR VALUE (Tables)

9 Months Ended

Sep. 30, 2014

FAIR VALUE [Abstract]

Assets measured at fair value on a recurring basis

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

	Fair			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable		Significant Unobservable Inputs
	Value			(Level 1)		Inputs (Level 2)		(Level 3)
September 30, 2014
U.S. Treasury and federal agency securities	$	67,116		$	---	$	67,116	$	---
U.S. Agency MBS and CMOs		17,264			---		17,264		---
Tax-exempt state and municipal bonds		36,398			---		36,398		---
Taxable state and municipal bonds		26,479			---		26,479		---
Corporate bonds and other debt securities		13,354			---		13,354		---
Other equity securities		1,490			---		1,490		---
Loans held for sale		905			---		905		---
Interest rate swaps		89			---		---		89
Interest rate swaps		(89	)		---		---		(89	)
December 31, 2013
U.S. Treasury and federal agency securities	$	54,439		$	---	$	54,439	$	---
U.S. Agency MBS and CMOs		19,365			---		19,365		---
Tax-exempt state and municipal bonds		26,849			---		26,849		---
Taxable state and municipal bonds		26,328			---		26,328		---
Corporate bonds and other debt securities		11,212			---		11,212		---
Other equity securities		1,466			---		1,466		---
Loans held for sale		1,915			---		1,915		---
Interest rate swaps		94			---		---		94
Interest rate swaps		(94	)		---		---		(94	)

Assets measured at fair value on a non-recurring basis

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

	Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable		Significant Unobservable Inputs
	Value		(Level 1)		Inputs (Level 2)		(Level 3)
September 30, 2014
Impaired loans	$	17,709	$	---	$	---	$	17,709
Other real estate owned		23,442		---		---		23,442
December 31, 2013
Impaired loans	$	22,403	$	---	$	---	$	22,403
Other real estate owned		29,711		---		---		29,711

Carrying amounts and estimated fair values of financial instruments, not previously presented

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at September 30, 2014 and December 31, 2013 (dollars in thousands).

	Level in	September 30, 2014						December 31, 2013
	Fair Value	Carrying			Fair			Carrying			Fair
	Hierarchy	Amount			Value			Amount			Value
Financial assets
Cash and due from banks	Level 1	$	24,731		$	24,731		$	38,714		$	38,714
Cash equivalents	Level 2		74,808			74,808			118,178			118,178
Interest-bearing time deposits in other financial institutions	Level 2		20,000			20,089			25,000			25,003
Securities held to maturity	Level 3		31,744			31,771			19,248			19,278
FHLB stock			11,236		NA				11,236		NA
Loans, net	Level 2		1,017,450			1,015,635			999,176			990,084
Bank owned life insurance	Level 3		28,021			28,021			27,517			27,517
Accrued interest receivable	Level 2		3,415			3,415			3,231			3,231
Financial liabilities
Deposits	Level 2		(1,216,089	)		(1,216,601	)		(1,249,734	)		(1,250,886	)
Other borrowed funds	Level 2		(88,107	)		(88,543	)		(89,991	)		(90,321	)
Long-term debt	Level 2		(41,238	)		(35,514	)		(41,238	)		(35,098	)
Subordinated debt	Level 2		---			---			---			---
Accrued interest payable	Level 2		(291	)		(291	)		(308	)		(308	)
Off-balance sheet credit-related items
Loan commitments			---			---			---			---

XML

COMMITMENTS AND OFF BALANCE-SHEET RISK (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Summary of the contractual amounts of financial instruments with off-balance-sheet risk [Abstract]
Notional amount of commitments to fund mortgage loans to be sold into the secondary market	$ 13,700,000	$ 14,700,000
Commitments to make loans at fixed rates (in hundredths)	34.00%
Expiration period of commitment to make variable rate loan	30 days
Commitments to make Loans [Member]
Summary of the contractual amounts of financial instruments with off-balance-sheet risk [Abstract]
Contractual amounts of financial instruments with off-balance-sheet risk	141,628,000	87,513,000
Letters of Credit [Member]
Summary of the contractual amounts of financial instruments with off-balance-sheet risk [Abstract]
Contractual amounts of financial instruments with off-balance-sheet risk	10,827,000	10,774,000
Unused lines of Credit [Member]
Summary of the contractual amounts of financial instruments with off-balance-sheet risk [Abstract]
Contractual amounts of financial instruments with off-balance-sheet risk	$ 360,344,000	$ 313,232,000

XML

LOANS, Credit Quality Indicators (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014 Grading	Dec. 31, 2013
Risk grade category of commercial loans by class of loans [Abstract]
Number point grading system used for loan quality	8
Internal ratings of loans considered substandard, or worse	6 or worse
Loans classified as substandard or worse [Abstract]
Loans classified as substandard or worse	$ 18,232	$ 27,652
Not Classified as Impaired [Member]
Loans classified as substandard or worse [Abstract]
Loans classified as substandard or worse	4,035	7,400
Classified as Impaired [Member]
Loans classified as substandard or worse [Abstract]
Loans classified as substandard or worse	14,197	20,252
Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	77	509
Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	14,867	23,638
Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	210,219	179,865
Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	454,683	444,001
Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	55,672	70,774
Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	10,361	16,474
Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	7,871	11,178
Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial and Industrial [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	77	509
Commercial and Industrial [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	9,775	15,836
Commercial and Industrial [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	98,564	81,577
Commercial and Industrial [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	163,897	155,680
Commercial and Industrial [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	7,775	13,513
Commercial and Industrial [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	1,373	1,359
Commercial and Industrial [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	4,372	5,625
Commercial and Industrial [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Residential Developed [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Residential Developed [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Residential Developed [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	2,389	2,039
Residential Developed [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	2,510	5,653
Residential Developed [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	5,537	5,232
Residential Developed [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	846	2,616
Residential Developed [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	2,245	2,590
Residential Developed [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Unsecured to Residential Developers [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Unsecured to Residential Developers [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Unsecured to Residential Developers [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Unsecured to Residential Developers [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	7,124	7,309
Unsecured to Residential Developers [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	2	6
Unsecured to Residential Developers [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Unsecured to Residential Developers [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Unsecured to Residential Developers [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Vacant and Unimproved [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Vacant and Unimproved [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Vacant and Unimproved [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	10,480	11,191
Vacant and Unimproved [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	30,172	24,638
Vacant and Unimproved [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	7,372	6,761
Vacant and Unimproved [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	383	398
Vacant and Unimproved [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Vacant and Unimproved [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Development [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Development [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Development [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Development [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	3,914	1,673
Commercial Development [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	218	532
Commercial Development [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	201	207
Commercial Development [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	29	23
Commercial Development [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Residential Improved [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Residential Improved [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	104	109
Residential Improved [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	16,220	15,121
Residential Improved [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	43,979	45,018
Residential Improved [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	5,847	9,391
Residential Improved [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	3,160	6,226
Residential Improved [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	918	429
Residential Improved [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Improved [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Improved [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	4,284	7,382
Commercial Improved [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	55,331	45,391
Commercial Improved [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	160,733	161,897
Commercial Improved [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	24,231	24,937
Commercial Improved [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	4,060	5,075
Commercial Improved [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	307	2,511
Commercial Improved [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Manufacturing and Industrial [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Manufacturing and Industrial [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	704	311
Manufacturing and Industrial [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	27,235	24,546
Manufacturing and Industrial [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	42,354	42,133
Manufacturing and Industrial [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	4,690	10,402
Manufacturing and Industrial [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	338	593
Manufacturing and Industrial [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Manufacturing and Industrial [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Residential Mortgage [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	192,386	188,648
Residential Mortgage [Member] | Performing [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	192,245	188,648
Residential Mortgage [Member] | Nonperforming [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	141	0
Unsecured [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	1,048	1,337
Unsecured [Member] | Performing [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	1,048	1,337
Unsecured [Member] | Nonperforming [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	0	0
Home Equity [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	96,507	95,961
Home Equity [Member] | Performing [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	96,476	95,961
Home Equity [Member] | Nonperforming [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	31	0
Other Secured [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	11,097	9,992
Other Secured [Member] | Performing [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	11,097	9,992
Other Secured [Member] | Nonperforming [Member]
Recorded investment in consumer loans based on payment activity [Abstract]
Recorded investment in consumer loans	$ 0	$ 0

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) [Abstract]
Net income	$ 2,762	$ 2,238	$ 8,155	$ 7,315
Unrealized gains (losses):
Net change in unrealized gains (losses) on securities available for sale	316	(23)	2,650	(3,626)
Tax effect	(111)	8	(928)	1,269
Net change in unrealized gains (losses) on securities available for sale, net of tax	205	(15)	1,722	(2,357)
Less: reclassification adjustments:
Reclassification for gains included in net income	0	0	51	80
Tax effect	0	0	(18)	(28)
Reclassification for gains included in net income, net of tax	0	0	33	52
Other comprehensive income (loss), net of tax	205	(15)	1,689	(2,409)
Comprehensive income	$ 2,967	$ 2,223	$ 9,844	$ 4,906

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.

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, 2014, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

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

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

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

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

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

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

Derivatives:  Certain of our commercial loan customers have entered into interest rate swap agreements directly with the Bank.  At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer.   This is known as a back-to-back swap agreement.  Under this arrangement the Bank has two freestanding interest rate swaps, both of which are carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At September 30, 2014 and December 31, 2013, the total notional amount of such agreements was $20.0 million and resulted in derivative assets with fair values of $89,000 and $94,000, respectively, which were included in other assets and derivative liabilities of $89,000 and $94,000, respectively, which were included in other liabilities.

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

Newly Issued Standards:

The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (ASU) No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized.  These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required.  The amendments are effective for  annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.

FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  The amendments in this Update change the requirements for reporting discontinued operations.  A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  The amendments in this Update require an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position.  This Update also requires additional disclosures about discontinued operations including pretax profit or loss, and any ongoing involvement with the discontinued operation.   The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.

FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The amendments in this Update creates a new topic in the FASB Accounting Standards Codification® (ASC or Codification), Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue.  In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic.   The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016.  The impact of adoption of this ASU by the Company is not expected to be material.

FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists.  This update requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward.  However, to the extent that a net operating loss carryforward or tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit is to be presented in the statement of financial position as a liability.  No new recurring disclosures are required.  The amendments are effective for public business entities for annual periods beginning after December 15, 2013, and interim periods within those periods.  The amendments are to be applied on a prospective basis to all unrecognized tax benefits that exist at the effective date, although retrospective application is permitted.  The impact of prospective adoption of this ASU by the Company in the first quarter of 2014 was not material.

FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.  This update requires creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor.  The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.

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DEPOSITS (Tables)

9 Months Ended

Sep. 30, 2014

DEPOSITS [Abstract]

Deposits at period-end

Deposits are summarized as follows (in thousands):

	September 30,		December 31,
	2014		2013
Noninterest-bearing demand	$	385,182	$	344,550
Interest bearing demand		278,302		287,417
Savings and money market accounts		425,877		469,542
Certificates of deposit		126,728		148,225
	$	1,216,089	$	1,249,734

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LOANS, Impaired Loans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	$ 8,727		$ 8,727		$ 13,467
With no allowance, Recorded Investment	7,794		7,794		12,006
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	54,168		54,168		56,917
With related allowance, Recorded Investment	54,168		54,168		56,917
Allowance Allocated	4,461		4,461		3,870
Total impaired, Unpaid Principal Balance	62,895		62,895		70,384
Total impaired, Recorded Investment, Total	61,962		61,962		68,923
Commercial and Industrial [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	3,159		3,159		3,287
With no allowance, Recorded Investment	3,159		3,159		3,284
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	7,287		7,287		9,871
With related allowance, Recorded Investment	7,287		7,287		9,871
Allowance Allocated	2,742		2,742		1,981
Impaired loans [Abstract]
Average of impaired loans	10,469	12,325	12,220	14,794
Interest income recognized during impairment	359	186	970	915
Cash-basis interest income recognized	353	194	968	914
Commercial Real Estate [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	5,568		5,568		10,180
With no allowance, Recorded Investment	4,635		4,635		8,722
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	32,390		32,390		32,563
With related allowance, Recorded Investment	32,390		32,390		32,563
Allowance Allocated	827		827		1,008
Impaired loans [Abstract]
Interest income recognized during impairment	401	478	1,309	1,656
Cash-basis interest income recognized	406	465	1,328	1,648
Residential Developed [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	4,129		4,129		5,273
With no allowance, Recorded Investment	3,196		3,196		4,340
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	587		587		618
With related allowance, Recorded Investment	587		587		618
Allowance Allocated	35		35		33
Impaired loans [Abstract]
Average of impaired loans	3,801	5,898	4,139	6,526
Unsecured to Residential Developers [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	0		0		0
With no allowance, Recorded Investment	0		0		0
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	0		0		0
With related allowance, Recorded Investment	0		0		0
Allowance Allocated	0		0		0
Impaired loans [Abstract]
Average of impaired loans	0	0	0	0
Vacant and Unimproved [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	0		0		3
With no allowance, Recorded Investment	0		0		3
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	1,576		1,576		1,900
With related allowance, Recorded Investment	1,576		1,576		1,900
Allowance Allocated	43		43		47
Impaired loans [Abstract]
Average of impaired loans	1,593	2,542	1,688	3,073
Commercial Development [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	230		230		362
With no allowance, Recorded Investment	230		230		362
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	201		201		207
With related allowance, Recorded Investment	201		201		207
Allowance Allocated	5		5		5
Impaired loans [Abstract]
Average of impaired loans	443	1,233	484	421
Residential Improved [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	672		672		1,493
With no allowance, Recorded Investment	672		672		1,493
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	7,840		7,840		9,534
With related allowance, Recorded Investment	7,840		7,840		9,534
Allowance Allocated	242		242		342
Impaired loans [Abstract]
Average of impaired loans	8,771	11,072	9,685	11,759
Commercial Improved [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	331		331		2,797
With no allowance, Recorded Investment	331		331		2,272
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	17,315		17,315		14,450
With related allowance, Recorded Investment	17,315		17,315		14,450
Allowance Allocated	441		441		479
Impaired loans [Abstract]
Average of impaired loans	17,876	19,449	18,100	20,809
Manufacturing and Industrial [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	206		206		252
With no allowance, Recorded Investment	206		206		252
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	4,871		4,871		5,854
With related allowance, Recorded Investment	4,871		4,871		5,854
Allowance Allocated	61		61		102
Impaired loans [Abstract]
Average of impaired loans	5,131	6,105	6,085	6,420
Consumer Loan [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	0		0		0
With no allowance, Recorded Investment	0		0		0
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	14,491		14,491		14,483
With related allowance, Recorded Investment	14,491		14,491		14,483
Allowance Allocated	892		892		881
Impaired loans [Abstract]
Average of impaired loans	14,544	14,984	14,453	14,599
Interest income recognized during impairment	131	141	400	409
Cash-basis interest income recognized	133	141	404	402
Residential Mortgage [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	0		0		0
With no allowance, Recorded Investment	0		0		0
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	9,551		9,551		9,454
With related allowance, Recorded Investment	9,551		9,551		9,454
Allowance Allocated	588		588		575
Unsecured [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	0		0		0
With no allowance, Recorded Investment	0		0		0
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	0		0		0
With related allowance, Recorded Investment	0		0		0
Allowance Allocated	0		0		0
Home Equity [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	0		0		0
With no allowance, Recorded Investment	0		0		0
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	4,940		4,940		5,029
With related allowance, Recorded Investment	4,940		4,940		5,029
Allowance Allocated	304		304		306
Other Secured [Member]
With no related allowance recorded [Abstract]
With no allowance, Unpaid Principal Balance	0		0		0
With no allowance, Recorded Investment	0		0		0
With related allowance recorded [Abstract]
With related allowance, Unpaid Principal Balance	0		0		0
With related allowance, Recorded Investment	0		0		0
Allowance Allocated	$ 0		$ 0		$ 0

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CONTINGENCIES

9 Months Ended

Sep. 30, 2014

CONTINGENCIES [Abstract]

CONTINGENCIES

NOTE 11 – CONTINGENCIES

We and our subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business.  On January 27, 2014, our former Chairman and Chief Executive Officer, Mr. Benj. A. Smith III, commenced legal action against us claiming that we breached an alleged employment agreement pursuant to which he claims entitlement to $20,833 monthly for a period of six years from the date of his resignation in February 2009.  Mr. Smith’s complaint seeks damages in an unspecified amount in excess of $25,000.  We are vigorously contesting the action.  As of September 30, 2014, there were no other material pending legal proceedings to which we or any of our subsidiaries are a party or which any of our properties are the subject.