UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

OR

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

For the transition period from _______ to _______

Commission file number: 000-25927

MACATAWA BANK CORPORATION

(Exact name of registrant as specified in its charter)

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

10753 Macatawa Drive, Holland, Michigan 49424

(Address of principal executive offices) (Zip Code)

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

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐
 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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 ☐	Accelerated filer ☒	Non-accelerated filer ☐	Smaller reporting company ☐
		(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 ☐ No ☒
 

The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 33,922,289 shares of the Company's Common Stock (no par value) were outstanding as of July 28, 2016.

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”, “encouraged”, “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” 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 and reserve recoveries, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future FDIC assessment 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, continue payment of dividends and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2015. 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	39
	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	54
	Item 4.
	Controls and Procedures	55
Part II.	Other Information:
	Item 2.
	Unregistered Sales of Equity Securities and Use of Proceeds	56
	Item 6.
	Exhibits	56
Signatures		57

Part I Financial Information

Item 1.

MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

As of June 30, 2016 (unaudited) and December 31, 2015

(Dollars in thousands, except per share data)

	June 30, 2016			December 31, 2015
ASSETS
Cash and due from banks	$	30,045		$	29,104
Federal funds sold and other short-term investments		94,888			152,372
Cash and cash equivalents		124,933			181,476
Interest-bearing time deposits in other financial institutions		---			20,000
Securities available for sale, at fair value		173,580			166,815
Securities held to maturity (fair value 2016 - $50,803 and 2015 - $52,837)		49,373			51,856
Federal Home Loan Bank (FHLB) stock		11,558			11,558
Loans held for sale, at fair value		1,138			2,776
Total loans		1,211,844			1,197,932
Allowance for loan losses		(16,959	)		(17,081	)
Net loans		1,194,885			1,180,851
Premises and equipment – net		50,639			51,456
Accrued interest receivable		3,657			3,622
Bank-owned life insurance		28,942			28,858
Other real estate owned - net		14,066			17,572
Net deferred tax asset		8,422			8,819
Other assets		5,354			3,984
Total assets	$	1,666,547		$	1,729,643
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	451,644		$	477,032
Interest-bearing		903,434			958,480
Total deposits		1,355,078			1,435,512
Other borrowed funds		104,840			96,169
Long-term debt		41,238			41,238
Accrued expenses and other liabilities		6,929			4,747
Total liabilities		1,508,085			1,577,666
Commitments and contingent liabilities		---			---
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized;  33,922,289 and 33,925,113 shares issued and outstanding at June 30, 2016 and December 31, 2015		216,799			216,540
Retained deficit		(59,695	)		(64,910	)
Accumulated other comprehensive income		1,358			347
Total shareholders' equity		158,462			151,977
Total liabilities and shareholders' equity	$	1,666,547		$	1,729,643

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three and Six Month Periods Ended June 30, 2016 and 2015

(unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended June 30, 2016			Three Months Ended June 30, 2015			Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
Interest income
Loans, including fees	$	11,634		$	11,152		$	23,390		$	22,115
Securities
Taxable		565			501			1,115			1,002
Tax-exempt		441			376			874			720
FHLB Stock		122			111			246			228
Federal funds sold and other short-term investments		111			98			256			184
Total interest income		12,873			12,238			25,881			24,249
Interest expense
Deposits		439			610			902			1,229
Other borrowings		458			452			900			867
Long-term debt		368			331			733			656
Total interest expense		1,265			1,393			2,535			2,752
Net interest income		11,608			10,845			23,346			21,497
Provision for loan losses		(750	)		(500	)		(850	)		(1,500	)
Net interest income after provision for loan losses		12,358			11,345			24,196			22,997
Noninterest income
Service charges and fees		1,112			1,097			2,159			2,098
Net gains on mortgage loans		572			821			1,060			1,544
Trust fees		788			723			1,496			1,457
ATM and debit card fees		1,257			1,219			2,443			2,329
Gain on sale of securities		10			---			99			83
Bank owned life insurance ("BOLI") income		158			171			602			333
Other		639			481			1,285			963
Total noninterest income		4,536			4,512			9,144			8,807
Noninterest expense
Salaries and benefits		6,168			6,134			12,355			12,316
Occupancy of premises		901			903			1,883			1,875
Furniture and equipment		839			813			1,704			1,596
Legal and professional		188			191			347			431
Marketing and promotion		275			263			550			568
Data processing		688			648			1,347			1,226
FDIC assessment		220			289			472			571
Interchange and other card expense		308			285			594			560
Bond and D&O Insurance		131			146			263			292
Net losses (gains) on repossessed and foreclosed properties		258			(31	)		294			420
Administration and disposition of problem assets		202			284			577			660
Other		1,292			1,297			2,635			2,569
Total noninterest expenses		11,470			11,222			23,021			23,084
Income before income tax		5,424			4,635			10,319			8,720
Income tax expense		1,679			1,420			3,079			2,665
Net income	$	3,745		$	3,215		$	7,240		$	6,055
Basic earnings per common share	$	0.11		$	0.09		$	0.21		$	0.18
Diluted earnings per common share	$	0.11		$	0.09		$	0.21		$	0.18
Cash dividends per common share	$	0.03		$	0.03		$	0.06		$	0.05

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and Six Month Periods Ended June 30, 2016 and 2015

(unaudited)

(Dollars in thousands)

	Three Months Ended June 30, 2016			Three Months Ended June 30, 2015			Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
Net income	$	3,745		$	3,215		$	7,240		$	6,055
Other comprehensive income:
Unrealized gains (losses):
Net change in unrealized gains (losses) on securities available for sale		590			(1,214	)		1,654			67
Tax effect		(206	)		425			(579	)		(24	)
Net change in unrealized gains (losses) on securities available for sale, net of tax		384			(789	)		1,075			43
Less: reclassification adjustments:
Reclassification for gains included in net income		10			---			99			83
Tax effect		(3	)		---			(35	)		(29	)
Reclassification for gains included in net income, net of tax		7			---			64			54
Other comprehensive income (loss), net of tax		377			(789	)		1,011			(11	)
Comprehensive income	$	4,122		$	2,426		$	8,251		$	6,044

See accompanying notes to consolidated financial statements.

- 6 -

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Six Month Periods Ended June 30, 2016 and 2015

(unaudited)

(Dollars in thousands, except per share data)

	Common Stock			Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balance, January 1, 2015	$	216,460		$	(74,002	)	$	61		$	142,519
Net income for the six months ended June 30, 2015		---			6,055			---			6,055
Cash dividends at $.05 per share		---			(1,682	)		---			(1,682	)
Net change in unrealized gain on securities available for sale, net of tax		---			---			(11	)		(11	)
Tax effect of expired common stock warrants		(280	)		---			---			(280	)
Stock compensation expense		242			---			---			242
Balance, June 30, 2015	$	216,422		$	(69,629	)	$	50		$	146,843
Balance, January 1, 2016	$	216,540		$	(64,910	)	$	347		$	151,977
Net income for the six months ended June 30, 2016		---			7,240			---			7,240
Cash dividends at $.06 per share		---			(2,025	)		---			(2,025	)
Repurchase of 2,824 shares for taxes withheld on vested restricted stock		(19	)		---			---			(19	)
Net change in unrealized gain on securities available for sale, net of tax		---			---			1,011			1,011
Stock compensation expense		278			---			---			278
Balance, June 30, 2016	$	216,799		$	(59,695	)	$	1,358		$	158,462

See accompanying notes to consolidated financial statements.

- 7 -

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Month Periods Ended June 30, 2016 and 2015

(unaudited)

(Dollars in thousands)

	Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
Cash flows from operating activities
Net income	$	7,240		$	6,055
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		1,403			1,522
Stock compensation expense		278			242
Tax effect of expired common stock warrants		---			(280	)
Provision for loan losses		(850	)		(1,500	)
Origination of loans for sale		(37,891	)		(51,416	)
Proceeds from sales of loans originated for sale		40,589			50,193
Net gains on mortgage loans		(1,060	)		(1,544	)
Gain on sales of securities		(99	)		(83	)
Write-down of other real estate		555			624
Net (gain) loss on sales of other real estate		(260	)		(205	)
Change in net deferred tax asset		(147	)		1,336
Change in accrued interest receivable and other assets		(1,405	)		(1,702	)
Earnings in bank-owned life insurance		(602	)		(333	)
Change in accrued expenses and other liabilities		2,182			(703	)
Net cash from operating activities		9,933			2,206
Cash flows from investing activities
Loan originations and payments, net		(13,286	)		(12,264	)
Change in interest-bearing deposits in other financial institutions		20,000			---
Purchases of securities available for sale		(43,570	)		(19,604	)
Purchases of securities held to maturity		(1,144	)		(11,826	)
Purchase FHLB stock		---			(320	)
Proceeds from:
Maturities and calls of securities		30,480			8,944
Sales of securities available for sale		9,648			12,063
Principal paydowns on securities		1,873			1,952
Sales of other real estate		3,313			2,962
Death benefit from bank-owned life insurance		518			---
Additions to premises and equipment		(501	)		(529	)
Net cash from investing activities		7,331			(18,622	)
Cash flows from financing activities
Change in deposits		(80,434	)		21,488
Repayments of other borrowed funds		(1,329	)		(1,271	)
Proceeds from other borrowed funds		10,000			10,000
Cash dividends paid		(2,025	)		(1,682	)
Repurchase of shares for taxes withheld on vested restricted stock		(19	)		---
Net cash from financing activities		(73,807	)		28,535
Net change in cash and cash equivalents		(56,543	)		12,119
Cash and cash equivalents at beginning of period		181,476			129,455
Cash and cash equivalents at end of period	$	124,933		$	141,574

See accompanying notes to consolidated financial statements.

- 8 -

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six Month Periods Ended June 30, 2016 and 2015

(unaudited)

(Dollars in thousands)

	Six Months Ended June 30, 2016		Six Months Ended June 30, 2015
Supplemental cash flow information
Interest paid	$	2,536	$	2,758
Income taxes paid		3,200		3,675
Supplemental noncash disclosures:
Transfers from loans to other real estate		102		1,442
Security settlement		---		(330	)

See accompanying notes to consolidated financial statements.

- 9 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

The Company owns all of the common stock of Macatawa Statutory Trust I and Macatawa Statutory Trust II. These are grantor trusts that issued trust preferred securities and are not consolidated with the Company under accounting principles generally accepted in the United States of America.

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

Operating results for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015.

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 June 30, 2016, 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.

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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 June 30, 2016 and December 31, 2015, the total notional amount of such agreements was $48.5 million and resulted in a derivative asset with a fair value of $1.4 million and $790,000, respectively, which were included in other assets and a derivative liability of $1.4 million and $790,000, respectively, which were included in other liabilities.

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

Adoption of New Accounting Standards:  The Financial Accounting Standards Board “FASB” issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs.  This ASU requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Further, the ASU requires the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. The new guidance was effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance must be applied retrospectively. The impact of adoption of this ASU by the Company was not material.

- 11 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.  This ASU provides guidance related to the accounting for internal-use software accessed through a hosting arrangement (e.g., cloud computing, software as a service, etc.) only if both of the following criteria are met: (1) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty (there is no significant penalty if the customer has the ability to take delivery of the software without incurring significant cost and the ability to use the software separately without significant loss of utility or value); and (2) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. If both of the criteria are present in a hosting arrangement, then the arrangement contains a software license and the customer should generally capitalize and subsequently amortize the cost of the license. If both of the criteria are not present, the customer should account for the arrangement as a service contract (i.e., expense fees as incurred). The new guidance was effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The impact of adoption of this ASU by the Company was not material.

Newly Issued Not Yet Effective Standards:  FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The amendments in this Update create a new topic in the Codification, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue.  In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic.   The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.  The impact of adoption of this ASU by the Company is not expected to be material.

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

FASB issued ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Cards (a consensus of the FASB Emerging Issues Task Force), which addresses the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability.  When an entity sells a prepaid stored-value card that is redeemable at a third-party merchant, it recognizes a liability for its obligation to provide the customer with the ability to purchase goods or services at that third-party merchant. When the customer redeems the prepaid stored-value card, the liability (or part of that liability) between the entity and the customer is extinguished. At the same time, the entity incurs a liability to the merchant that provided the goods or services. This liability is typically extinguished with cash through a card-settlement process. In some cases, however, a prepaid stored-value card may be unused wholly or partially for an indefinite time period.  ASU No. 2016-04 provides that liabilities related to the sale of prepaid stored-value products within its scope are financial liabilities. Additionally, it provides a narrow-scope exception to Subtopic 405-20, Liabilities—Extinguishments of Liabilities, to require that breakage be accounted for consistent with the breakage guidance in Topic 606 for those liabilities with the characteristics described above.  The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years.  The impact of adoption of this ASU by the Company is not expected to be material.

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

- 12 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2019, and for interim periods within those years.  The Company is currently evaluating the impact of this new ASU on its consolidated financial statements.

NOTE 2 – SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2016
Available for Sale:
U.S. Treasury and federal agency securities	$	82,677		443		(65	)	$	83,055
U.S. Agency MBS and CMOs		12,564		101		(2	)		12,663
Tax-exempt state and municipal bonds		34,114		1,082		(3	)		35,193
Taxable state and municipal bonds		27,850		431		(12	)		28,269
Corporate bonds and other debt securities		12,786		92		(3	)		12,875
Other equity securities		1,500		25		---			1,525
	$	171,491	$	2,174	$	(85	)	$	173,580
Held to Maturity
Tax-exempt state and municipal bonds	$	49,373	$	1,430	$	---		$	50,803
December 31, 2015
Available for Sale:
U.S. Treasury and federal agency securities	$	74,618		48		(274	)	$	74,392
U. S. Agency MBS and CMOs		13,828		35		(108	)		13,755
Tax-exempt state and municipal bonds		32,943		692		(37	)		33,598
Taxable state and municipal bonds		28,554		246		(37	)		28,763
Corporate bonds and other debt securities		14,838		19		(44	)		14,813
Other equity securities		1,500		---		(6	)		1,494
	$	166,281	$	1,040	$	(506	)	$	166,815
Held to Maturity:
Tax-exempt state and municipal bonds	$	51,856	$	986	$	(5	)	$	52,837

- 13 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (Continued)

Proceeds from the sale of securities available for sale were $230,000 in the three month period ended June 30, 2016 and $9.6 million in the six month period ended June 30, 2016 resulting in net gains on sale of $10,000 and $99,000, respectively, as reported in the Consolidated Statements of Income.  This resulted in reclassifications of $10,000 ($7,000 net of tax) and $99,000 ($64,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the three and six month periods ended June 30, 2016.  There were no sales of securities in the three month period ended June 30, 2015.  Proceeds from the sale of securities available for sale were $12.1 million in the six month period ended June 30, 2015 resulting in net gains on sale of $83,000, as reported in the Consolidated Statements of Income.  This resulted in reclassifications of $83,000 ($54,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the six month period ended June 30, 2015.

Contractual maturities of debt securities at June 30, 2016 were as follows (dollars in thousands):

	Held–to-Maturity Securities				Available-for-Sale Securities
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	13,397	$	13,421	$	10,876	$	10,943
Due from one to five years		9,221		9,444		94,834		95,745
Due from five to ten years		14,555		15,497		51,059		52,040
Due after ten years		12,200		12,441		13,222		13,327
	$	49,373	$	50,803	$	169,991	$	172,055

Securities with unrealized losses at June 30, 2016 and December 31, 2015, 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
June 30, 2016	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	23,483	$	(61	)	$	3,092	$	(4	)	$	26,575	$	(65	)
U.S. Agency MBS and CMOs		2,301		(1	)		1,097		(1	)		3,398		(2	)
Tax-exempt state and municipal bonds		836		(3	)		---		---			836		(3	)
Taxable state and municipal bonds		1,488		(12	)		---		---			1,488		(12	)
Corporate bonds and other debt securities		1,416		(3	)		---		---			1,416		(3	)
Other equity securities		---		---			---		---			---		---
Total temporarily impaired	$	29,524	$	(80	)	$	4,189	$	(5	)	$	33,713	$	(85	)

	Less than 12 Months					12 Months or More					Total
December 31, 2015	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	35,090	$	(187	)	$	7,036	$	(82	)	$	42,126	$	(269	)
U.S. Agency MBS and CMOs		8,842		(108	)		---		---			8,842		(108	)
Tax-exempt state and municipal bonds		3,487		(9	)		2,022		(33	)		5,509		(42	)
Taxable state and municipal bonds		8,158		(29	)		640		(8	)		8,798		(37	)
Corporate bonds and other debt securities		9,330		(47	)		499		(2	)		9,829		(49	)
Other equity securities		1,494		(6	)		---					1,494		(6	)
Total temporarily impaired	$	66,401	$	(386	)	$	10,197	$	(125	)	$	76,598	$	(511	)

- 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") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Management determined that the unrealized losses for each period were attributable to changes in interest rates and not due to credit quality.  As such, no OTTI charges were necessary during the three and six month periods ended June 30, 2016 and 2015.

Securities with a carrying value of approximately $2.0 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at June 30, 2016 and December 31, 2015.

NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

	June 30, 2016			December 31, 2015
Commercial and industrial	$	381,058		$	377,298
Commercial real estate:
Residential developed		13,702			10,448
Unsecured to residential developers		7,423			7,372
Vacant and unimproved		38,694			42,881
Commercial development		652			559
Residential improved		70,026			67,922
Commercial improved		291,926			289,651
Manufacturing and industrial		90,952			89,839
Total commercial real estate		513,375			508,672
Consumer
Residential mortgage		221,636			209,972
Unsecured		540			637
Home equity		87,145			92,716
Other secured		8,090			8,637
Total consumer		317,411			311,962
Total loans		1,211,844			1,197,932
Allowance for loan losses		(16,959	)		(17,081	)
	$	1,194,885		$	1,180,851

- 15 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

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

Three months ended June 30, 2016	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance	$	4,945			8,449		$	3,699		$	36	$	17,129
Charge-offs		---			---			(36	)		---		(36	)
Recoveries		23			557			36			---		616
Provision for loan losses		(8	)		(941	)		195			4		(750	)
Ending Balance	$	4,960		$	8,065		$	3,894		$	40	$	16,959

Three months ended June 30, 2015	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance	$	6,174		$	8,570		$	3,907		$	29	$	18,680
Charge-offs		(173	)		---			(29	)		---		(202	)
Recoveries		44			117			42			---		203
Provision for loan losses		336			(748	)		(89	)		1		(500	)
Ending Balance	$	6,381		$	7,939		$	3,831		$	30	$	18,181

Six months ended June 30, 2016	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance	$	4,826		8,457		$	3,761		$	37	$	17,081
Charge-offs		---		---			(112	)		---		(112	)
Recoveries		72		678			90					840
Provision for loan losses		62		(1,070	)		155			3		(850	)
Ending Balance	$	4,960	$	8,065		$	3,894		$	40	$	16,959

Six months ended June 30, 2015	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,173		$	8,690		$	4,046		$	53		$	18,962
Charge-offs		(173	)		---			(107	)		---			(280	)
Recoveries		128			725			146			---			999
Provision for loan losses		253			(1,476	)		(254	)		(23	)		(1,500	)
Ending Balance	$	6,381		$	7,939		$	3,831		$	30		$	18,181

- 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):

June 30, 2016	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	569	$	446	$	788	$	---	$	1,803
Collectively evaluated for impairment		4,391		7,619		3,106		40		15,156
Total ending allowance balance	$	4,960	$	8,065	$	3,894	$	40	$	16,959
Loans:
Individually reviewed for impairment	$	4,178	$	13,101	$	12,798	$	---	$	30,077
Collectively evaluated for impairment		376,880		500,274		304,613		---		1,181,767
Total ending loans balance	$	381,058	$	513,375	$	317,411	$	---	$	1,211,844

December 31, 2015	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	673	$	436	$	829	$	---	$	1,938
Collectively evaluated for impairment		4,153		8,021		2,932		37		15,143
Total ending allowance balance	$	4,826	$	8,457	$	3,761	$	37	$	17,081
Loans:
Individually reviewed for impairment	$	7,718	$	17,569	$	13,463	$	---	$	38,750
Collectively evaluated for impairment		369,580		491,103		298,499		---		1,159,182
Total ending loans balance	$	377,298	$	508,672	$	311,962	$	---	$	1,197,932

- 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 June 30, 2016 (dollars in thousands):

June 30, 2016	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	134	$	134	$	---
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		205		205		---
Commercial development		---		---		---
Residential improved		80		80		---
Commercial improved		---		---		---
Manufacturing and industrial		---		---		---
		285		285		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
Total with no related allowance recorded	$	419	$	419	$	---
With an allowance recorded:
Commercial and industrial	$	4,044	$	4,044	$	569
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		226		226		6
Commercial development		191		191		6
Residential improved		5,450		5,450		265
Commercial improved		6,712		6,712		160
Manufacturing and industrial		237		237		9
		12,816		12,816		446
Consumer:
Residential mortgage		8,320		8,320		512
Unsecured		---		---		---
Home equity		4,478		4,478		276
Other secured		---		---		---
		12,798		12,798		788
Total with an allowance recorded	$	29,658	$	29,658	$	1,803
Total	$	30,077	$	30,077	$	1,803

- 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, 2015 (dollars in thousands):

December 31, 2015	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	2,736	$	2,736	$	---
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		206		206		---
Commercial development		---		---		---
Residential improved		5		5		---
Commercial improved		---		---		---
Manufacturing and industrial		---		---		---
		211		211		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
Total with no related allowance recorded	$	2,947	$	2,947	$	---
With an allowance recorded:
Commercial and industrial	$	4,982	$	4,982	$	673
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		247		247		7
Commercial development		192		192		6
Residential improved		5,254		5,254		140
Commercial improved		11,425		11,425		274
Manufacturing and industrial		240		240		9
		17,358		17,358		436
Consumer:
Residential mortgage		8,655		8,655		533
Unsecured		---		---		---
Home equity		4,808		4,808		296
Other secured		---		---		---
		13,463		13,463		829
Total with an allowance recorded	$	35,803	$	35,803	$	1,938
Total	$	38,750	$	38,750	$	1,938

- 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 six month periods ended June 30, 2016 and 2015 (dollars in thousands):

	Three Months Ended June 30, 2016		Three Months Ended June 30, 2015		Six Months Ended June 30, 2016		Six Months Ended June 30, 2015
Average of impaired loans during the period:
Commercial and industrial	$	6,110	$	7,084	$	7,187	$	8,394
Commercial real estate:
Residential developed		---		682		---		810
Unsecured to residential developers		---		---		---		---
Vacant and unimproved		436		1,416		441		1,453
Commercial development		192		195		192		196
Residential improved		5,488		7,018		5,516		7,340
Commercial improved		6,817		16,363		8,177		16,561
Manufacturing and industrial		237		2,650		238		2,678
Consumer		12,842		14,583		12,991		14,683
Interest income recognized during impairment:
Commercial and industrial		239		292		537		618
Commercial real estate		143		336		344		692
Consumer		116		128		238		264
Cash-basis interest income recognized
Commercial and industrial		262		292		551		620
Commercial real estate		144		334		344		685
Consumer		113		128		235		267

- 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 June 30, 2016 and December 31, 2015 (dollars in thousands):

June 30, 2016	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	26	$	---
Commercial real estate:
Residential developed		---		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		103		---
Commercial improved		139		---
Manufacturing and industrial		---		---
		291		---
Consumer:
Residential mortgage		2		---
Unsecured		22		---
Home equity		9		---
Other secured		---		---
		33		---
Total	$	350	$	---

December 31, 2015	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	174	$	---
Commercial real estate:
Residential developed		195		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		124		---
Commercial improved		157		---
Manufacturing and industrial		---		---
		525		---
Consumer:
Residential mortgage		2		---
Unsecured		28		---
Home equity		10		17
Other secured		---		---
		40		17
Total	$	739	$	17

- 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 June 30, 2016 and December 31, 2015 by class of loans (dollars in thousands):

June 30, 2016	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	220	$	---	$	220	$	380,838	$	381,058
Commercial real estate:
Residential developed		---		---		---		13,702		13,702
Unsecured to residential developers		---		---		---		7,423		7,423
Vacant and unimproved		---		---		---		38,694		38,694
Commercial development		---		49		49		603		652
Residential improved		98		5		103		69,923		70,026
Commercial improved		342		---		342		291,584		291,926
Manufacturing and industrial		---		---		---		90,952		90,952
		440		54		494		512,881		513,375
Consumer:
Residential mortgage		104		---		104		221,532		221,636
Unsecured		---		---		---		540		540
Home equity		161		---		161		86,984		87,145
Other secured		---		---		---		8,090		8,090
		265		---		265		317,146		317,411
Total	$	925	$	54	$	979	$	1,210,865	$	1,211,844

December 31, 2015	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	719	$	100	$	819	$	376,479	$	377,298
Commercial real estate:
Residential developed		---		---		---		10,448		10,448
Unsecured to residential developers		---		---		---		7,372		7,372
Vacant and unimproved		---		---		---		42,881		42,881
Commercial development		---		49		49		510		559
Residential improved		73		6		79		67,843		67,922
Commercial improved		375		---		375		289,276		289,651
Manufacturing and industrial		---		---		---		89,839		89,839
		448		55		503		508,169		508,672
Consumer:
Residential mortgage		---		---		---		209,972		209,972
Unsecured		---		---		---		637		637
Home equity		32		17		49		92,667		92,716
Other secured		---		---		---		8,637		8,637
		32		17		49		311,913		311,962
Total	$	1,199	$	172	$	1,371	$	1,196,561	$	1,197,932

- 22 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The Company had allocated $1,803,000 and $1,938,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of June 30, 2016 and December 31, 2015, respectively.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure.  For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan.  In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt.  The second note is charged off immediately and collected only after the first note is paid in full.  This modification type is commonly referred to as an A-B note structure.  For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

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

As with other impaired 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 June 30, 2016 and December 31, 2015 (dollars in thousands):

	June 30, 2016				December 31, 2015
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		31	$	4,178		33	$	7,611
Commercial real estate		52		13,291		56		17,871
Consumer		120		13,072		124		13,570
		203	$	30,541		213	$	39,052

- 23 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The following table presents information related to accruing troubled debt restructurings as of June 30, 2016 and December 31, 2015.  The table presents the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of each period reported (dollars in thousands):

	June 30, 2016		December 31, 2015
Accruing TDR - nonaccrual at restructuring	$	---	$	---
Accruing TDR - accruing at restructuring		28,203		33,691
Accruing TDR - upgraded to accruing after six consecutive payments		2,063		4,784
	$	30,266	$	38,475

The following tables present information regarding troubled debt restructurings executed during the three month periods ended June 30, 2016 and 2015 (dollars in thousands):

Three Months Ended June 30, 2016	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		---	$	---	$	---
Commercial real estate		---		---		---
Consumer		2		39		---
		2	$	39	$	---

Three Months Ended June 30, 2015	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		---	$	---	$	---
Commercial real estate		---		---		---
Consumer		2		72		---
		2	$	72	$	---

The following tables present information regarding troubled debt restructurings executed during the six month periods ended June 30, 2016 and 2015 (dollars in thousands):

Six Months Ended June 30, 2016	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon  Modification
Commercial and industrial		---	$	---	$	---
Commercial real estate		---		---		---
Consumer		6		277		---
		6	$	277	$	---

Six Months Ended June 30, 2015	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		1	$	408	$	---
Commercial real estate		1		42		---
Consumer		31		753		---
		33	$	1,203	$	---

- 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.  As with other loans not considered TDR or impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the three and six month periods ended June 30, 2016 and 2015 (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 June 30, 2016				Three Months Ended June 30, 2015
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		---	$	---		---	$	---
Commercial real estate		---		---		---		---
Consumer		---		---		---		---

	Six Months Ended June 30, 2016				Six Months Ended June 30, 2015
	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)

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 the credit department 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.

- 26 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

As of June 30, 2016 and December 31, 2015, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

June 30, 2016		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	---	$	18,366	$	114,391	$	230,736	$	15,426	$	2,113	$	26	$	---	$	381,058
Commercial real estate:
Residential developed		---		---		2,572		8,195		2,745		190		---		---		13,702
Unsecured to residential developers		---		---		---		7,423		---		---		---		---		7,423
Vacant and unimproved		---		---		16,789		17,610		4,295		---		---		---		38,694
Commercial development		---		---		---		412		---		191		49		---		652
Residential improved		---		---		5,975		58,905		3,314		1,729		103		---		70,026
Commercial improved		---		1,837		64,675		214,197		9,466		1,612		139		---		291,926
Manufacturing & industrial		---		1,872		31,570		54,745		2,765		---		---		---		90,952
	$	---	$	22,075	$	235,972	$	592,223	$	38,011	$	5,835	$	317	$	---	$	894,433

December 31, 2015		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	196	$	8,774	$	114,451	$	242,253	$	5,235	$	6,215	$	174	$	---	$	377,298
Commercial real estate:
Residential developed		---		---		2,226		5,191		2,836		---		195		---		10,448
Unsecured to residential developers		---		---		---		7,372		---		---		---		---		7,372
Vacant and unimproved		---		---		17,768		20,588		4,525		---		---		---		42,881
Commercial development		---		---		---		318		---		192		49		---		559
Residential improved		---		---		7,191		54,376		4,722		1,509		124		---		67,922
Commercial improved		---		3,094		60,475		208,127		15,645		2,153		157		---		289,651
Manufacturing & industrial		---		1,478		34,857		50,023		3,481		---		---		---		89,839
	$	196	$	13,346	$	236,968	$	588,248	$	36,444	$	10,069	$	699	$	---	$	885,970

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):

	June 30, 2016		December 31, 2015
Not classified as impaired	$	1,083	$	1,986
Classified as impaired		5,069		8,782
Total commercial loans classified substandard or worse	$	6,152	$	10,768

- 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):

June 30, 2016	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	221,636	$	540	$	87,145	$	8,090
Nonperforming		---		---		---		---
Total	$	221,636	$	540	$	87,145	$	8,090

December 31, 2015	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	209,972	$	637	$	92,699	$	8,637
Nonperforming		---		---		17		---
Total	$	209,972	$	637	$	92,716	$	8,637

NOTE 4 – OTHER REAL ESTATE OWNED

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

	Six Months Ended June 30, 2016			Year Ended December 31, 2015			Six Months Ended June 30, 2015
Beginning balance	$	28,377		$	43,071		$	43,071
Additions, transfers from loans		102			2,520			1,442
Proceeds from sales of other real estate owned		(3,313	)		(11,540	)		(2,962	)
Valuation allowance reversal upon sale		(334	)		(4,748	)		(427	)
Gain (loss) on sales of other real estate owned		260			(926	)		205
		25,092			28,377			41,329
Less: valuation allowance		(11,026	)		(10,805	)		(15,026	)
Ending balance	$	14,066		$	17,572		$	26,303

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

	Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
Beginning balance	$	10,805		$	14,829
Additions charged to expense		555			624
Reversals upon sale		(334	)		(427	)
Ending balance	$	11,026		$	15,026

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

	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2016
U.S. Treasury and federal agency securities	$	83,055		$	---	$	83,055	$	---
U.S. Agency MBS and CMOs		12,663			---		12,663		---
Tax-exempt state and municipal bonds		35,193			---		35,193		---
Taxable state and municipal bonds		28,269			---		28,269		---
Corporate bonds and other debt securities		12,875			---		12,875		---
Other equity securities		1,525			---		1,525		---
Loans held for sale		1,138			---		1,138		---
Interest rate swaps		1,360			---		---		1,360
Interest rate swaps		(1,360	)		---		---		(1,360	)
December 31, 2015
U.S. Treasury and federal agency securities	$	74,392		$	---	$	74,392	$	---
U.S. Agency MBS and CMOs		13,755			---		13,755		---
Tax-exempt state and municipal bonds		33,598			---		33,598		---
Taxable state and municipal bonds		28,763			---		28,763		---
Corporate bonds and other debt securities		14,813			---		14,813		---
Other equity securities		1,494			---		1,494		---
Loans held for sale		2,776			---		2,776		---
Interest rate swaps		790			---		---		790
Interest rate swaps		(790	)		---		---		(790	)

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

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2016
Impaired loans	$	3,764	$	---	$	---	$	3,764
Other real estate owned		11,165		---		---		11,165
December 31, 2015
Impaired loans	$	6,573	$	---	$	---	$	6,573
Other real estate owned		13,602		---		---		13,602

- 30 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

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

	Asset (Liability) Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
June 30, 2016
Impaired Loans	$	3,764	Sales comparison approach	Adjustment for differences between comparable sales	10.0 to  22.0
			Income approach	Capitalization rate	9.0 to 11.0
Other real estate owned		11,165	Sales comparison approach	Adjustment for differences between comparable sales	10.0 to  35.0
			Income approach	Capitalization rate	9.5 to 11.0

	Asset (Liability) Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
December 31, 2015
Impaired Loans	$	6,573	Sales comparison approach	Adjustment for differences between comparable sales	1.0 to 19.0
			Income approach	Capitalization rate	9.5 to 11.0
Other real estate owned		13,602	Sales comparison approach	Adjustment for differences between comparable sales	4.5 to 32.5
			Income approach	Capitalization rate	9.5 to 11.0

- 31 -

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 June 30, 2016 and December 31, 2015 (dollars in thousands):

	Level in	June 30, 2016						December 31, 2015
	Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and due from banks	Level 1	$	30,045			30,045		$	29,104			29,104
Cash equivalents	Level 2		94,888			94,888			152,372			152,372
Interest-bearing time deposits in other financial institutions	Level 2		---			---			20,000			20,008
Securities held to maturity	Level 3		49,373			50,803			51,856			52,837
FHLB stock			11,558		NA				11,558		NA
Loans, net	Level 2		1,191,121			1,189,597			1,187,423			1,177,527
Bank owned life insurance	Level 3		28,942			28,942			28,858			28,858
Accrued interest receivable	Level 2		3,657			3,657			3,622			3,622
Financial liabilities
Deposits	Level 2		(1,355,078	)		(1,355,040	)		(1,435,512	)		(1,435,473	)
Other borrowed funds	Level 2		(104,840	)		(105,928	)		(96,169	)		(96,465	)
Long-term debt	Level 2		(41,238	)		(35,985	)		(41,238	)		(35,757	)
Accrued interest payable	Level 2		(272	)		(272	)		(273	)		(273	)
Off-balance sheet credit-related items
Loan commitments			---			---			---			---

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

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

- 32 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 – DEPOSITS

Deposits are summarized as follows (in thousands):

	June 30, 2016		December 31, 2015
Noninterest-bearing demand	$	451,644	$	477,032
Interest bearing demand		308,835		358,306
Savings and money market accounts		515,515		512,980
Certificates of deposit		79,084		87,194
	$	1,355,078	$	1,435,512

Approximately $16.8 million and $17.1 million in certificates of deposit were in denominations of $250,000 or more at June 30, 2016 and December 31, 2015, respectively.

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):

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
June 30, 2016
Single maturity fixed rate advances	$	100,000	August 2016 to April 2021		1.66	%
Amortizable mortgage advances		4,840	March 2018 to July 2018		3.76	%
	$	104,840

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
December 31, 2015
Single maturity fixed rate advances	$	90,000	August 2016 to March 2020		1.69	%
Amortizable mortgage advances		6,169	March 2018 to July 2018		3.78	%
	$	96,169

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 $434,930,000 and $440,660,000 under a blanket lien arrangement at June 30, 2016 and December 31, 2015, respectively.

- 33 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 - OTHER BORROWED FUNDS

Scheduled repayments of FHLB advances as of June 30, 2016 were as follows (in thousands):

2016	$	20,667
2017		2,055
2018		52,118
2019		10,000
2020		10,000
Thereafter		10,000
	$	104,840

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank.  There were no borrowings outstanding at June 30, 2016 and December 31, 2015, and the Company had approximately $19.5 million and $18.5 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $22.4 million and $21.6 million at June 30, 2016 and December 31, 2015, respectively.

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 six month periods ended June 30, 2016 and 2015 are as follows (dollars in thousands, except per share data):

	Three Months Ended June 30, 2016		Three Months Ended June 30, 2015		Six Months Ended June 30, 2016		Six Months Ended June 30, 2015
Net income available to common shares	$	3,745	$	3,215	$	7,240	$	6,055
Weighted average shares outstanding, including participating stock awards - Basic		33,922,506		33,866,789		33,923,810		33,866,789
Dilutive potential common shares:
Stock options		---		---		---		---
Stock warrants		---		---		---		---
Weighted average shares outstanding - Diluted		33,922,506		33,866,789		33,923,810		33,866,789
Basic earnings per common share	$	0.11	$	0.09	$	0.21	$	0.18
Diluted earnings per common share	$	0.11	$	0.09	$	0.21	$	0.18

Stock options for 100,896 shares of common stock for both the three and six month periods ended June 30, 2016 were not considered in computing diluted earnings per share because they were antidilutive.  Stock options for 258,361 shares of common stock for both the three and six month periods ended June 30, 2015 were not considered in computing diluted earnings per share because they were antidilutive.

- 34 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9 - FEDERAL INCOME TAXES

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

	Three Months Ended June 30, 2016			Three Months Ended June 30, 2015		Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
Current	$	1,757		$	676	$	3,226		$	1,329
Deferred		(78	)		744		(147	)		1,336
	$	1,679		$	1,420	$	3,079		$	2,665

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 June 30, 2016			Three Months Ended June 30, 2015			Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
Statutory rate		35	%		35	%		35	%		35	%
Statutory rate applied to income before taxes	$	1,899		$	1,622		$	3,612		$	3,052
Add (deduct)
Tax-exempt interest income		(149	)		(127	)		(297	)		(244	)
Bank-owned life insurance		(56	)		(60	)		(211	)		(117	)
Other, net		(15	)		(15	)		(25	)		(26	)
	$	1,679		$	1,420		$	3,079		$	2,665

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 June 30, 2016 or December 31, 2015.

- 35 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9 - FEDERAL INCOME TAXES (Continued)

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

	June 30, 2016			December 31, 2015
Deferred tax assets
Allowance for loan losses	$	5,936		$	5,978
Nonaccrual loan interest		800			850
Valuation allowance on other real estate owned		3,859			3,782
Unrealized loss on securities available for sale		---			---
Other		743			647
Gross deferred tax assets		11,338			11,257
Valuation allowance		---			---
Total net deferred tax assets		11,338			11,257
Deferred tax liabilities
Depreciation		(1,655	)		(1,739	)
Prepaid expenses		(191	)		(191	)
Unrealized gain on securities available for sale		(731	)		(187	)
Other		(339	)		(321	)
Gross deferred tax liabilities		(2,916	)		(2,438	)
Net deferred tax asset	$	8,422		$	8,819

There were no unrecognized tax benefits at June 30, 2016 or December 31, 2015 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 2012.

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):

	June 30, 2016		December 31, 2015
Commitments to make loans	$	105,023	$	97,991
Letters of credit		15,062		12,976
Unused lines of credit		432,042		426,080

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $34.3 million and $19.8 million at June 30, 2016 and December 31, 2015, respectively.

- 36 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 – COMMITMENTS AND OFF BALANCE-SHEET RISK (Continued)

At June 30, 2016, approximately 39% of the Bank’s commitments to make loans were at fixed rates, offered at current market rates.  The remainder of the commitments to make loans were at variable rates tied to prime or one month LIBOR and generally expire within 30 days.  The majority of the unused lines of credit were at variable rates tied to prime.

NOTE 11 – CONTINGENCIES

The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. As of June 30, 2016, there were no material pending legal proceedings to which the Company or any of its subsidiaries are a party or which any of its properties are the subject.

NOTE 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.

In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. The capital conservation buffer requirement is 0.625% for 2016, increasing to 1.25% for 2017, 1.875% for 2018 and 2.50% for 2019 and thereafter.  Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.  Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in).  It raises the minimum total capital to risk-weighted assets ratio from 6.0% to 8.0% (which with the capital conservation buffer fully phased-in effectively results in a 10.5% ratio), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.

- 37 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – SHAREHOLDERS' EQUITY (Continued)

At June 30, 2016 and December 31, 2015, actual capital levels and minimum required levels were (dollars in thousands):

	Actual					Minimum Capital Adequacy					Minimum Capital Adequacy With Capital Buffer					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2016
CET1 capital (to risk weighted assets)
Consolidated	$	157,104		11.1	%	$	63,451		4.5	%	$	72,264		5.1	%		N/A		N/A
Bank		191,596		13.6			63,432		4.5			72,242		5.1		$	91,624		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		197,104		14.0			84,601		6.0			93,414		6.6			N/A		N/A
Bank		191,596		13.6			84,576		6.0			93,386		6.6			112,767		8.0
Total capital (to risk weighted assets)
Consolidated		214,074		15.2			112,802		8.0			121,614		8.6			N/A		N/A
Bank		208,566		14.8			112,767		8.0			121,577		8.6			140,959		10.0
Tier 1 capital (to average assets)
Consolidated		197,104		11.9			66,106		4.0			N/A		N/A			N/A		N/A
Bank		191,596		11.6			66,037		4.0			N/A		N/A			82,547		5.0
December 31, 2015
CET1 capital (to risk weighted assets)
Consolidated	$	151,630		10.8	%	$	63,479		4.5	%		N/A		N/A			N/A		N/A
Bank		186,930		13.2			63,463		4.5			N/A		N/A		$	91,668		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		191,630		13.6			84,638		6.0			N/A		N/A			N/A		N/A
Bank		186,930		13.2			84,617		6.0			N/A		N/A			112,822		8.0
Total capital (to risk weighted assets)
Consolidated		208,711		14.8			112,851		8.0			N/A		N/A			N/A		N/A
Bank		203,471		14.4			112,822		8.0			N/A		N/A			141,028		10.0
Tier 1 capital (to average assets)
Consolidated		191,630		11.5			66,400		4.0			N/A		N/A			N/A		N/A
Bank		186,930		11.2			66,332		4.0			N/A		N/A			82,915		5.0

Approximately $40.0 million of trust preferred securities outstanding at June 30, 2016 and December 31, 2015, respectively, qualified as Tier 1 capital. Refer to our 2015 Form 10-K for more information on the trust preferred securities.

The Bank was categorized as "well capitalized" at June 30, 2016 and December 31, 2015.

- 38 -

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 June 30, 2016, we had total assets of $1.67 billion, total loans of $1.21 billion, total deposits of $1.36 billion and shareholders' equity of $158.5 million.  During the second quarter of 2016, we recognized net income of $3.7 million compared to net income of $3.2 million in the second quarter of 2015.  For the six months ended June 30, 2016, we recognized net income of $7.2 million compared to $6.1 million for the same period in 2015.  The Bank was categorized as “well capitalized” under regulatory capital standards at June 30, 2016.

We paid a dividend of $0.02 per share in each quarter in 2014 and in the first quarter of 2015, increasing to $0.03 per share in the remaining quarters of 2015 and the first two quarters of 2016.

RESULTS OF OPERATIONS

Summary: Net income for the quarter ended June 30, 2016 was $3.7 million, compared to net income of $3.2 million in the second quarter of 2015. Net income per common share on a diluted basis was $0.11 for the second quarter of 2016 and $0.09 for the second quarter of 2015.  For the first six months ended June 30, 2016, net income was $7.2 million, compared to $6.1 million for the same period in 2015.  Net income per share on a diluted basis for the six months ended June 30, 2016 was $0.21 compared to $0.18 for the same period in 2015.

The increase in earnings in the second quarter of 2016 compared to the second quarter of 2015, was due primarily to increased net interest income and an increased negative provision for loan losses, partially offset by reduced level of mortgage loan sale gains and an increase in nonperforming asset expenses.  Net interest income increased to $11.6 million in the second quarter of 2016 compared to $10.8 million in the same period in 2015.  The provision for loan losses was a negative $750,000 for the second quarter of 2016, compared to a negative $500,000 for the second quarter of 2015.  We realized a lower level of income from gains on sales of residential mortgages, which decreased from $821,000 in the second quarter of 2015 to $572,000 in the second quarter of 2016.  Nonperforming asset expenses (including administration costs and losses) were $460,000 for the second quarter of 2016 compared to $253,000 for the second quarter of 2015, as a result of an increase of $320,000 in writedowns of other real estate owned.

The increase in earnings for the six month period ended June 30, 2016 compared to the same period of 2015, was due primarily to increased net interest income, earnings on bank owned life insurance and reduced nonperforming asset expenses, partially offset by a reduced negative provision for loan losses and reduced level of mortgage loans sale gains. Net interest income increased to $23.3 million in the first six months of 2016 compared to $21.5 million in the same period in 2015.  Bank owned life insurance income increased to $602,000 in the first six months of 2016 compared to $333,000 in the first six months of 2015. Nonperforming asset expenses (including administration costs and losses) were $871,000 for the first six months of 2016 compared to $1.1 million for the first six months of 2015, primarily as a result of a decrease of $12.2 million in other real estate owned.  The provision for loan losses was a negative $850,000 for the first six months of 2016, compared to a negative $1.5 million for the first six months of 2015.  We realized a lower level of income from gains on sales of residential mortgages, which decreased from $1.5 million in the first half of 2015 to $1.1 million in the first half of 2016.  We again were in a net loan recovery position for the first half of 2016, with $728,000 in net loan recoveries, compared to $719,000 in net loan recoveries in the first half of 2015.  Lost interest from elevated levels of nonperforming assets was approximately $169,000 and $363,000, respectively, for the three and six months ended June 30, 2016 compared to $350,000 and $765,000, respectively, for the three and six months ended June 30, 2015.  Each of these items is discussed more fully below.

Net Interest Income: Net interest income totaled $11.6 million for the second quarter of 2016 and $10.8 million for the second quarter of 2015.   For the first six months of 2016, net interest income was $23.3 million compared to $21.5 million for the same period in 2015.

- 39 -

Net interest income was positively impacted in the second quarter of 2016 by an increase in average earning assets of $71.5 million compared to the second quarter of 2015.  Our average yield on earning assets for the second quarter of 2016 increased 2 basis points compared to the same period in 2015 from 3.39% to 3.41%.  Average interest earning assets totaled $1.53 billion for the second quarter of 2016 compared to $1.46 billion for the second quarter of 2015. The net interest margin was 3.08% for the second quarter of 2016 compared to 3.01% for the second quarter of 2015.  An increase of $19.4 million in average securities between periods and an increase of $66.6 million in average loans mitigated the impact of reduction in our average commercial loan yield from 3.94% in the second quarter of 2015 to 3.86% in the second quarter of 2016.  While competitive pressures forced loan yields down over the last year, the late 2015 increase in federal funds rate had a net positive impact on our net interest margin position as more loans repriced at the higher rate than our funding sources.

Margin continued to be dampened by the impact of our elevated levels of nonperforming assets, including other real estate owned.  However as we continue to further reduce these levels, our margin is expected to continue to benefit.  We are encouraged by the increase in higher yielding average earning assets in the first six months of 2016 and expect these balances to continue to increase in 2016, which should positively affect net interest income.

Average interest earning assets increased to $1.54 billion for the first six months of 2016, compared to $1.44 billion for the first six months of 2015.  Our average yield on earning assets declined 2 basis points for the first half of 2016 in comparison to the same period in 2015.  Our net interest margin was 3.09% for the first six months of 2016 compared to 3.04% for the same period in 2015.

The decreases in yields on interest earning assets for the three and six month periods ended June 30, 2016 were primarily due to new loan volume containing lower risk, high credit quality loans resulting in lower interest rates.  Also impacting the yields in these periods was the downward repricing of certain loans in this extended low interest rate environment.  The yield on our commercial, residential and consumer loan portfolios decreased in these periods, but at a slower pace than experienced in recent periods.

We believe the bulk of our loans subject to repricing in this low interest rate environment have already repriced and that our portfolio rates have now stabilized.  As we are now experiencing loan growth and continue to deploy our excess liquidity, net interest margin should be positively impacted.

The cost of funds decreased 5 basis points to 0.47% in the three and six month periods of 2016 from 0.52% in the same periods of 2015. A decrease in the rates paid on our savings and money market accounts in response to declining market 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.  Partially offsetting this was the effect of a $10 million FHLB advance taken out on April 21, 2016.

- 40 -

The following table shows an analysis of net interest margin for the three month periods ended June 30, 2016 and 2015 (dollars in thousands):

	For the three months ended June 30,
	2016								2015
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost
Assets
Taxable securities	$	132,431		$	565		1.71	%	$	119,892		$	501		1.67	%
Tax-exempt securities (1)		84,468			441		3.37			77,650			376		3.17
Commercial loans (2)		899,336			8,768		3.86			832,776			8,282		3.94
Residential mortgage loans		219,301			1,917		3.49			202,689			1,838		3.62
Consumer loans		95,722			949		3.99			105,908			1,032		3.90
Federal Home Loan Bank stock		11,558			122		4.18			11,361			111		3.86
Federal funds sold and other short-term investments		88,719			111		0.49			109,749			98		0.36
Total interest earning assets (1)		1,531,535			12,873		3.41			1,460,025			12,238		3.39
Noninterest earning assets:
Cash and due from banks		26,537								25,163
Other		96,253								109,177
Total assets	$	1,654,325							$	1,594,365
Liabilities
Deposits:
Interest bearing demand	$	325,432		$	77		0.10	%	$	344,471		$	102		0.12	%
Savings and money market accounts		509,098			231		0.18			474,383			219		0.19
Time deposits		85,585			131		0.62			114,356			289		1.01
Borrowings:
Other borrowed funds		102,642			458		1.77			98,594			452		1.81
Long-term debt		41,238			368		3.53			41,238			331		3.18
Total interest bearing liabilities		1,063,995			1,265		0.47			1,073,042			1,393		0.52
Noninterest bearing liabilities:
Noninterest bearing demand accounts		426,588								369,138
Other noninterest bearing liabilities		7,078								5,781
Shareholders' equity		156,664								146,404
Total liabilities and shareholders' equity	$	1,654,325							$	1,594,365
Net interest income				$	11,608							$	10,845
Net interest spread (1)							2.94	%							2.87	%
Net interest margin (1)							3.08	%							3.01	%
Ratio of average interest earning assets to average interest bearing liabilities		143.94	%							136.06	%

(1) Yield adjusted to fully tax equivalent.

(2) Includes average nonaccrual loans of approximately $207,000 and $9.7 million for the three months ended June 30, 2016 and 2015.

- 41 -

The following table shows an analysis of net interest margin for the six month periods ended June 30, 2016 and 2015 (dollars in thousands):

	For the six months ended June 30,
	2016								2015
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost
Assets
Taxable securities	$	130,986		$	1,115		1.70	%	$	119,802		$	1,002		1.67	%
Tax-exempt securities (1)		84,551			874		3.28			74,229			720		3.15
Commercial loans (2)		895,287			17,660		3.90			825,529			16,429		3.96
Residential mortgage loans		216,182			3,801		3.51			199,204			3,609		3.62
Consumer loans		97,695			1,929		3.97			106,954			2,077		3.91
Federal Home Loan Bank stock		11,558			246		4.21			11,300			228		4.00
Federal funds sold and other short-term investments		99,092			256		0.51			100,939			184		0.37
Total interest earning assets (1)		1,535,351			25,881		3.41			1,437,957			24,249		3.43
Noninterest earning assets:
Cash and due from banks		25,784								24,719
Other		97,823								109,817
Total assets	$	1,658,958							$	1,572,493
Liabilities
Deposits:
Interest bearing demand	$	330,079		$	162		0.10	%	$	334,714		$	199		0.12	%
Savings and money market accounts		511,171			469		0.19			469,399			435		0.19
Time deposits		87,931			271		0.62			117,719			595		1.02
Borrowings:
Other borrowed funds		99,282			900		1.79			93,543			867		1.84
Long-term debt		41,238			733		3.52			41,238			656		3.17
Total interest bearing liabilities		1,069,701			2,535		0.47			1,056,613			2,752		0.52
Noninterest bearing liabilities:
Noninterest bearing demand accounts		427,111								365,043
Other noninterest bearing liabilities		6,692								5,598
Shareholders' equity		155,454								145,239
Total liabilities and shareholders' equity	$	1,658,958							$	1,572,493
Net interest income				$	23,346							$	21,497
Net interest spread (1)							2.94	%							2.91	%
Net interest margin (1)							3.09	%							3.04	%
Ratio of average interest earning assets to average interest bearing liabilities		143.53	%							136.09	%

(1) Yield adjusted to fully tax equivalent.

(2) Includes average nonaccrual loans of approximately $317,000 and $10.5 million for the six months ended June 30, 2016 and 2015.

- 42 -

Provision for Loan Losses: The provision for loan losses for the second quarter of 2016 was a negative $750,000 compared to a negative $500,000 for the second quarter of 2015.  The negative provision for loan losses for both periods was caused by stabilizing real estate values on problem credits, continued improvement in asset quality metrics and net loan recoveries of $580,000 in the second quarter of 2016 and $1,000 in the second quarter of 2015.  At June, 2016, we had experienced net loan recoveries in eleven of the past thirteen quarters, and in each of the past six quarters.  The provision for loan losses for the first half of 2016 was a negative $850,000 compared to a negative $1.5 million for the same period in 2015.

Gross loan recoveries were $616,000 for the second quarter of 2016 and $203,000 for the same period in 2015.  In the second quarter of 2016, we had $36,000 in charge-offs, compared to $202,000 in the second quarter of 2015.  For the six months ended June 30, 2016, we experienced gross loan recoveries of $840,000 compared to $999,000 in the same period in 2015.  Loan charge-offs were $112,000 for the six months ended June 30, 2016 compared to $280,000 for the same period in 2015.  We continue to experience positive results from our collection efforts as evidenced by our net loan recoveries.  While we expect our collection efforts to produce further recoveries, they may not continue at the same level we have experienced the past several quarters.

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 overall 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 as well as improving market conditions 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 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 six month periods ended June 30, 2016 were $4.5 million and $9.1 million compared to $4.5 million and $8.8 million for the same periods in 2015. The components of noninterest income are shown in the table below (in thousands):

	Three Months Ended June 30, 2016		Three Months Ended June 30, 2015		Six Months Ended June 30, 2016		Six Months Ended June 30, 2015
Service charges and fees on deposit accounts	$	1,112	$	1,097	$	2,159	$	2,098
Net gains on mortgage loans		572		821		1,060		1,544
Trust fees		788		723		1,496		1,457
Gain as sales of securities		10		---		99		83
ATM and debit card fees		1,257		1,219		2,443		2,329
Bank owned life insurance (“BOLI”) income		158		171		602		333
Investment services fees		270		278		573		561
Other income		369		203		712		402
Total noninterest income	$	4,536	$	4,512	$	9,144	$	8,807

Net gains on mortgage loans were down $249,000 in the second quarter of 2016 compared to the second quarter of 2015 as a result of our strategic decision to retain a higher percentage of current production in portfolio and partially due to an overall lower level of volume.  The mortgage loans retained in portfolio are typically loans that conform to secondary market requirements and have a term of fifteen years or less.  Mortgage loans originated for sale in the second quarter of 2016 were $19.0 million, compared to $28.0 million in the second quarter of 2015.  Mortgage loans originated for portfolio in the second quarter of 2016 were $23.1 million, compared to $16.9 million in the second quarter of 2015.  Loans originated for sale for the first six months of 2016 were $37.9 million, down from $51.4 million in the first six months of 2015.

BOLI income was up $269,000 in the first six months of 2016 due to distribution of a death claim on a covered former employee.  Trust fees and investment service fees were up slightly in the second quarter and the first six months of 2016, as were ATM and debit card fees.

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Other income as shown in the table above was up $166,000 in the second quarter of 2016 and was up $310,000 in the first six months of 2016 primarily as a result of an increase in rental income from other real estate owned property.

Noninterest Expense: Noninterest expense increased to $11.5 million for the three month period ended June 30, 2016, from $11.2 million for the same period in 2015. Noninterest expense decreased to $23.0 million for the six month period ended June 30, 2016 compared to $23.1 million for the same period in 2015.  The components of noninterest expense are shown in the table below (in thousands):

	Three Months Ended June 30, 2016		Three Months Ended June 30, 2015			Six Months Ended June 30, 2016		Six Months Ended June 30, 2015
Salaries and benefits	$	6,168	$	6,134		$	12,355	$	12,316
Occupancy of premises		901		903			1,883		1,875
Furniture and equipment		839		813			1,704		1,596
Legal and professional		188		191			347		431
Marketing and promotion		275		263			550		568
Data processing		688		648			1,347		1,226
FDIC assessment		220		289			472		571
Interchange and other card expense		308		285			594		560
Bond and D&O insurance		131		146			263		292
Net losses on repossessed and foreclosed properties		258		(31	)		294		420
Administration and disposition of problem assets		202		284			577		660
Outside services		389		340			758		733
Other noninterest expense		903		957			1,877		1,836
Total noninterest expense	$	11,470	$	11,222		$	23,021	$	23,084

Noninterest expense had minimal increase compared to the second quarter of 2015 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased slightly in the second quarter of 2016 from the second quarter of 2015. This increase is largely due to a higher level of costs associated with medical insurance, which was up $50,000 compared to the second quarter of 2015.  We had 343 full-time equivalent employees at June 30, 2016 compared to 347 at June 30, 2015.

Costs associated with administration and disposition of problem assets remain elevated, but have decreased significantly over the past few years.  These expenses include legal costs, repossessed and foreclosed property administration expense and losses on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. Losses on repossessed and foreclosed properties include both net gains and losses on the sale of properties and unrealized losses from value declines for outstanding properties.

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

	Three Months Ended June 30, 2016		Three Months Ended June 30, 2015			Six Months Ended June 30, 2016		Six Months Ended June 30, 2015
Legal and professional – nonperforming assets	$	29	$	46		$	99	$	135
Repossessed and foreclosed property administration		173		238			478		525
Net (gains) losses on repossessed and foreclosed properties		258		(31	)		294		420
Total	$	460	$	253		$	871	$	1,080

While the overall costs associated with nonperforming assets remain elevated in 2016, they are down significantly from recent year levels and from the prior year. These costs were driven by valuation writedowns and losses on sales of individual properties.  We are encouraged that the overall holding costs continue to decline as we continue to decrease the level of our other real estate owned.  Other real estate owned decreased from $26.3 million at June 30, 2015 to $14.1 million at June 30, 2016.  As our level of problem loans and other real estate owned decreases, we believe we will experience more reductions in these costs going forward.

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Total nonperforming asset expense increased $207,000 in the second quarter of 2016 as a result of an increase of $282,000 in net losses on repossessed and foreclosed properties, primarily due to a writedown on our largest other real estate property.

Total nonperforming asset expense for the six month period ended June 30, 2016, decreased $209,000 from the same period in 2015.  This decrease was primarily due to a lower level of writedowns of other real estate properties in the first six months of 2016.  In the first six months of 2015, such writedowns totaled $624,000, compared to $555,000 in the first six months of 2016.  Also contributing to the decrease was an increase of $55,000 in net gains on sales of other real estate owned.  In the first six months of 2016, we recognized net gains totaling $260,000 on such sales, compared to $205,000 in the same period in 2015.

Federal Income Tax Expense: Werecorded $1.7 million and $3.1 million in federal income tax expense for the three month and six periods ended June 30, 2016 compared to $1.4 million and $2.7 million, respectively, in the same periods in 2015.  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 the second quarter and the first six months of 2016 reflect federal income tax expense, at an effective tax rate of 30.96% and 29.83%, compared to 30.64% and 30.45% for the same periods in 2015.  The effective tax rate decreased for the first half of 2016 due to the elevated level of earnings on bank owned life insurance resulting from payment of a death benefit in the first quarter of 2016.

FINANCIAL CONDITION

Summary:  Total assets were $1.667 billion at June 30, 2016, a decrease of $63.1 million from $1.730 billion at December 31, 2015. This change reflected increases of $13.9 million in our loan portfolio and $4.3 million in our securities portfolio, offset by decreases of $56.5 million in cash and cash equivalents, $20.0 million in interest bearing deposits and $3.5 million in other real estate owned.  Total deposits decreased by $80.4 million and other borrowed funds increased by $8.7 million at June 30, 2016 compared to December 31, 2015.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $124.9 million at June 30, 2016 compared to $181.5 million at December 31, 2015. The $56.5 million decrease was primarily the result of a lower level of deposit balances at June 30, 2016 by some of our larger commercial customers.  We expect declines in our balances of short term investments as loan demand continues to increase and seasonal deposits return to more normal levels.

Interest-bearing Time Deposits with Other Financial Institutions: We opened a time deposit account with our primary correspondent bank totaling $20.0 million in the first quarter of 2014 which matured in February 2016.  This time deposit provided a higher interest rate than federal funds sold or other short-term investments.

Securities: Securities available for sale were $173.6 million at June 30, 2016 compared to $166.8 million at December 31, 2015. The balance at June 30, 2016 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio decreased from $51.9 million at December 31, 2015 to $49.4 million at June 30, 2016.  Our held to maturity portfolio is comprised of state and municipal bonds.

Portfolio Loans and Asset Quality: Total portfolio loans increased by $13.9 million in the first half of 2016 and were $1.21 billion at June 30, 2016 compared to $1.20 billion at December 31, 2015. During the six months of 2016, our commercial portfolio increased by $8.5 million, while our consumer portfolio decreased by $6.2 million and our residential mortgage portfolio increased by $11.7 million.  We have been focusing efforts to increase our consumer and residential mortgage portfolio segments to further diversify our credit risk.

The volume of residential mortgage loans originated for sale in the first six months of 2016 decreased $13.5 million compared to the same period in 2015 due to the mortgage rate environment and our decision to hold a higher percentage of current production in portfolio. Residential mortgage loans originated for sale were $37.9 million in the first six months of 2016 compared to $51.4 million in the first six months of 2015.  Mortgage loans originated for portfolio in the first six months of 2016 were $37.2 million, compared to $35.7 million in the first six months of 2015.

Our commercial loan portfolio balances declined in recent years leading up to 2014 reflecting the continued soft 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 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 and we experienced year over year growth in commercial loan balances for the first time in many years in 2014, increasing $71.8 million from December 31, 2013 and increasing another $67.8 million in 2015.  We built on this further in the first six months of 2016, with growth of $8.5 million, in our commercial loan portfolio.  This growth took place in our commercial and industrial portfolio, which grew by $3.8 million and in our commercial real estate loans, which grew by $4.7 million in the same period.  We plan to continue measured, high quality loan portfolio growth throughout 2016.

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Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 74% of the total loan portfolio at June 30, 2016 and December 31, 2015. Residential mortgage and consumer loans comprised approximately 26% of total loans at June 30, 2016 and December 31, 2015.

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

	June 30, 2016					December 31, 2015
	Balance		Percent of Total Loans			Balance		Percent of Total Loans
Commercial real estate: (1)
Residential developed	$	13,702		1.1	%	$	10,448		0.9	%
Unsecured to residential developers		7,423		0.6			7,372		0.6
Vacant and unimproved		38,694		3.2			42,881		3.6
Commercial development		652		0.1			559		---
Residential improved		70,026		5.8			67,922		5.7
Commercial improved		291,926		24.1			289,651		24.2
Manufacturing and industrial		90,952		7.5			89,839		7.5
Total commercial real estate		513,375		42.4			508,672		42.5
Commercial and industrial		381,058		31.4	%		377,298		31.5	%
Total commercial		894,433		73.8			885,970		74.0
Consumer
Residential mortgage		221,636		18.3			209,972		17.5
Unsecured		540		---			637		0.1
Home equity		87,145		7.2			92,716		7.7
Other secured		8,090		0.7			8,637		0.7
Total consumer		317,411		26.2			311,962		26.0
Total loans	$	1,211,844		100.0	%	$	1,197,932		100.0	%

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

Commercial real estate loans accounted for approximately 42% of the total loan portfolio at June 30, 2016 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 increased $4.7 million since December 31, 2015. Our commercial and industrial loan portfolio increased by $3.8 million to $381.1 million at June 30, 2016 and represented 31% of our commercial portfolio.

Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised approximately 18% of portfolio loans at June 30, 2016 and December 31, 2015.  We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan to value loans) in an effort to continue to diversify our credit risk and deploy our excess liquidity. A large portion of our residential mortgage loan production continues to be sold on the secondary market with servicing released.

The volume of residential mortgage loans originated for sale during the first six months of 2016 decreased from the first six months of 2015 as a result of interest rate conditions and our decision to increase the percentage of current production to be held in portfolio.  We are also experiencing a shift in production to financing new home purchases versus refinancings.  We have not yet had to repurchase any residential mortgage loans sold to historical purchasers; 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.

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Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. Consumer loans decreased by $6.2 million to $95.8 million at June 30, 2016 from $102.0 million at December 31, 2015, due primarily to a decrease in home equity loans.  Consumer loans comprised approximately 8% of our portfolio loans at June 30, 2016 and 9% at December 31, 2015.

The following table shows our loan origination activity for portfolio loans during the first six months of 2016 and 2015, broken out by loan type and also shows average originated loan size (dollars in thousands):

	Six Months Ended June 30, 2016							Six Months Ended June 30, 2015
	Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size
Commercial real estate:
Residential developed	$	5,227		3.4	%	$	871	$	3,321		2.2	%	$	277
Unsecured to residential developers		---		---			---		---		---			---
Vacant and unimproved		221		0.2			110		2,437		1.6			222
Commercial development		2,200		1.5			2,200		1,111		0.7			1,111
Residential improved		37,174		24.4			409		26,241		17.2			226
Commercial improved		21,382		14.0			1,018		13,535		8.9			410
Manufacturing and industrial		10,956		7.2			996		4,826		3.2			483
Total commercial real estate		77,160		50.7			584		51,471		33.8			281
Commercial and industrial		18,088		11.9			266		44,120		29.0			296
Total commercial		95,248		62.6			476		95,591		62.8			288
Consumer
Residential mortgage		37,201		24.4			201		34,916		23.0			200
Unsecured		12		---			12		35		---			5
Home equity		18,496		12.1			80		19,162		12.6			71
Other secured		1,316		0.9			20		2,468		1.6			29
Total consumer		57,025		37.4			118		56,581		37.2			106
Total loans	$	152,273		100.0	%		223	$	152,172		100.0	%		295

The following table shows a breakout of our commercial loan activity during the first six months of 2016 and 2015 (dollars in thousands):

	Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
Commercial loans originated	$	95,248		$	95,591
Repayments of commercial loans		(79,989	)		(74,998	)
Change in undistributed - available credit		(6,796	)		(14,191	)
Net increase/(decrease) in total commercial loans	$	8,463		$	6,402

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.

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Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At June 30, 2016, nonperforming assets totaled $14.4 million compared to $18.3 million at December 31, 2015. Additions to other real estate owned in the first six months of 2016 were $102,000, compared to $1.4 million in the first six months of 2015.  At June 30, 2016, there were no loans in redemption, so we expect there to be fewer additions to other real estate owned in the second half of 2016 than there were in the second half of 2015.  Proceeds from sales of foreclosed properties were $3.3 million in the first six months of 2016, resulting in a net realized gain on sale of $260,000.  Proceeds from sales of foreclosed properties were $3.0 million in the first six months of 2015 resulting in a net realized gain on sale of $205,000.  We expect the level of sales of foreclosed properties to be similar in the second half of 2016 to that experienced in the first half of 2016.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of June 30, 2016, nonperforming loans totaled $350,000, or 0.03% of total portfolio loans, compared to $756,000, or 0.06% of total portfolio loans, at December 31, 2015.

Nonperforming loans at June 30, 2016 consisted of $291,000 of commercial real estate loans secured by various types of non-residential real estate, $26,000 of commercial and industrial loans, and $33,000 of consumer and residential mortgage loans.

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $14.1 million at June 30, 2016 and $17.6 million at December 31, 2015. Of this balance at June 30, 2016, there were 43 commercial real estate properties totaling approximately $13.7 million. The remaining balance was comprised of six residential properties totaling approximately $381,000.  One commercial real estate property comprised 26% of total other real estate owned at June 30, 2016.  All properties acquired through or in lieu of foreclosure are initially transferred at their fair value less estimated costs to sell and then evaluated monthly for impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least annually on all foreclosed assets.

At June 30, 2016, our foreclosed asset portfolio had a weighted average age held in portfolio of 4.82 years. Below is a breakout of our foreclosed asset portfolio at June 30, 2016 and December 31, 2015 by property type and the percentages the property has been written down since taken into our possession and the combined writedown percentage, including losses taken when the property was loan collateral (dollars in thousands):

	June 30, 2016								December 31, 2015
Foreclosed Asset Property Type	Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)			Carrying Value at Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)
Single Family	$	136		---	%		20.3	%	$	736		---	%		13.2	%
Residential Lot		245		43.5			62.3			277		34.0			59.4
Multi-Family		---		---			---			---		---			---
Vacant Land		3,846		44.6			55.8			3,887		44.0			55.4
Residential Development		2,999		35.2			71.9			3,859		28.7			68.7
Commercial Office		848		28.6			43.4			1,002		25.4			44.1
Commercial Industrial		---		---			---			---		---			---
Commercial Improved		5,992		46.8			49.7			7,811		40.1			44.1
	$	14,066		42.8			58.2		$	17,572		37.0			54.2

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

	June 30, 2016			December 31, 2015
Nonaccrual loans	$	350		$	739
Loans 90 days or more delinquent and still accruing		---			17
Total nonperforming loans (NPLs)		350			756
Foreclosed assets		14,066			17,572
Repossessed assets		---			---
Total nonperforming assets (NPAs)		14,416			18,328
NPLs to total loans		0.03	%		0.06	%
NPAs to total assets		0.87	%		1.06	%

The following table shows the composition and amount of our troubled debt restructurings (“TDRs”) at June 30, 2016 and December 31, 2015 (dollars in thousands):

	June 30, 2016						December 31, 2015
	Commercial		Consumer		Total		Commercial		Consumer		Total
Performing TDRs	$	17,202	$	13,063	$	30,265	$	24,932	$	13,543	$	38,475
Nonperforming TDRs (1)		267		9		276		550		27		577
Total TDRs	$	17,469	$	13,072	$	30,541	$	25,482	$	13,570	$	39,052

(1) Included in nonperforming asset table above

We had a total of $30.5 million and $39.1 million of loans whose terms have been modified in TDRs as of June 30, 2016 and December 31, 2015, respectively.  Approximately half of the decrease in our TDRs is attributable to seasonal paydowns on an agricultural credit.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.  In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be removed.

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

Allowance for loan losses: The allowance for loan losses at June 30, 2016 was $17.0 million compared to $17.1 million at December 31, 2015.  The balance of the allowance for loan losses represented 1.40% of total portfolio loans at June 30, 2016 compared to 1.43% of total portfolio loans at December 31, 2015.  The allowance for loan losses to nonperforming loan coverage ratio increased from 2259.39% at December 31, 2015 to 4845.43% at June 30, 2016.

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The table below shows the changes in these metrics over the past five quarters (dollars in millions):

	Quarter Ended June 30, 2016			Quarter Ended March 31, 2016			Quarter Ended December 31, 2015			Quarter Ended September 30, 2015			Quarter Ended June 30, 2015
Commercial loans	$	894.4		$	905.3		$	886.0		$	882.1		$	824.6
Nonperforming loans		0.3			0.4			0.8			4.2			3.7
Other real estate owned and repo assets		14.1			16.2			17.6			25.7			26.3
Total nonperforming assets		14.4			16.6			18.3			29.9			30.0
Net charge-offs (recoveries)		(0.6	)		(0.1	)		(1.6	)		(0.3	)		---
Total delinquencies		1.0			0.8			1.4			2.9			1.9

Nonperforming loans continually declined since the first quarter of 2010 to $350,000 at June 30, 2016.  As discussed earlier, we have had net loan recoveries in several quarters over the last two years and in each of the last six quarters.  Our total delinquencies have continued to stabilize and were $979,000 at June 30, 2016 and $1.4 million at December 31, 2015.  Our delinquency percentage at June 30, 2016 was 0.08%, and was well below the Bank’s peers.

These factors all impact our necessary level of allowance for loan losses and our provision for loan losses. The allowance for loan losses decreased $122,000 in the first six months of 2016.  We recorded a negative provision for loan losses of $850,000 for the six months ended June 30, 2016 compared to a negative $1.5 million for the same period of 2015.  Net loan recoveries were $728,000 for the six months ended June 30, 2016, compared to net loan recoveries of $719,000 for the same period in 2015. The ratio of net charge-offs to average loans was (0.12%) on an annualized basis for the first six months of 2016, compared to (0.13%) for the first six months of 2015.

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 stabilization in economic conditions and real estate markets.  However, we expect it to take additional time for sustained improvement in the economy and real estate markets in order to further reduce our impaired loans.

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

Overall, impaired loans decreased $8.7 million to $30.1 million at June 30, 2016 from $38.8 million at December 31, 2015.  The specific allowance for impaired loans decreased $135,000 to $1.80 million, compared to $1.94 million at December 31, 2015.  The specific allowance for impaired loans represented 6.0% of total impaired loans at June 30, 2016 and 5.0% at December 31, 2015.  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 $12.0 million at June 30, 2016 compared to $12.2 million at December 31, 2015.  This resulted in a general reserve percentage allocated at June 30, 2016 of 1.37% of commercial loans, a slight decrease from 1.41% at December 31, 2015.  The qualitative component of our allowance allocated to commercial loans was $12.0 million at June 30, 2016 (down from $12.2 million at December 31, 2015).

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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 June 30, 2016 and $2.9 million at December 31, 2015.

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 $50.6 million at June 30, 2016, down $817,000 from $51.5 million at December 31, 2015 as depreciation more than offset capital additions of current facilities and equipment during the first six months of 2016.

Deposits and Other Borrowings: Total deposits decreased $80.4 million to $1.36 billion at June 30, 2016, as compared to $1.44 billion at December 31, 2015.  Non-interest checking account balances decreased $25.4 million during the first six months of 2016.  Interest bearing demand account balances decreased $49.4 million and savings and money market account balances increased $2.5 million in the first six months of 2016.  We decreased higher costing certificates of deposits by $8.1 million in the first six months of 2016.  Most of the decrease in demand deposits and money market deposits in the first half of 2016 was due to runoff of the seasonal year end increase in deposits from many of our municipal and business customers.  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 33% of total deposits at June 30, 2016 and December 31, 2015.  These balances typically increase at year end for many of our commercial customers, then decline in the first quarter.  Because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types.  Interest bearing demand, including money market and savings accounts, comprised 61% of total deposits at June 30, 2016 and December 31, 2015. Time accounts as a percentage of total deposits were 6% at June 30, 2016 and December 31, 2015.

Borrowed funds totaled $146.1 million at June 30, 2016, including $104.8 million of Federal Home Loan Bank advances and $41.2 million in long-term debt associated with trust preferred securities.  Borrowed funds totaled $137.4 million at December 31, 2015, including $96.2 million of Federal Home Loan Bank advances and $41.2 million in long-term debt associated with trust preferred securities.  Borrowed funds increased by $8.7 million in the first six months of 2016 due the addition of a $10 million FHLB advance in the second quarter of 2016, partially offset by an annual payment on an amortizing Federal Home Loan Bank advance.

CAPITAL RESOURCES

Total shareholders' equity of $158.5 million at June 30, 2016 increased $6.5 million from $152.0 million at December 31, 2015. The increase was primarily a result of net income of $7.2 million earned in the first six months of 2016 and an increase of $1.0 million in accumulated other comprehensive income, partially offset by the payment of $2.0 million in cash dividends to shareholders.  The Bank was categorized as “well capitalized” at June 30, 2016.

In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in).  It raises the minimum total capital to risk-weighted assets ratio from 6.0% to 8.0% (which with the capital conservation buffer fully phased-in effectively results in a 10.5% ratio), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. We expect that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.

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

	June 30, 2016			March 31, 2016			Dec 31, 2015			Sept 30, 2015			June 30, 2015
Total capital to risk weighted assets		15.2	%		15.0	%		14.8	%		14.6	%		15.1	%
Common Equity Tier 1 to risk weighted assets		11.1			11.1			10.8			10.5			10.9
Tier 1 capital to risk weighted assets		14.0			13.8			13.6			13.4			13.8
Tier 1 capital to average assets		11.9			11.7			11.5			11.3			11.7

Approximately $40.0 million of trust preferred securities outstanding at June 30, 2016 qualified as Tier 1 capital.

LIQUIDITY

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

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

We have actively pursued initiatives to maintain a strong liquidity position.  The Bank 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, $1.8 million in 2013 and $1.9 million in 2014.  We increased other borrowed funds by $8.1 million in 2015 and an additional $8.7 million in the six months ended June 30, 2016.  We continue to maintain significant on-balance sheet liquidity.  At June 30, 2016, the Bank held $94.9 million of federal funds sold and other short-term investments.  In addition, the Bank has available borrowing capacity from correspondent banks of approximately $243.0 million as of June 30, 2016.

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 June 30, 2016 (dollars in thousands):

	Less than 1 year		1-3 years		3-5 years		More than 5 years
Long term debt	$	---	$	---	$	---	$	41,238
Time deposit maturities		48,995		26,286		3,803		---
Other borrowed funds		22,055		62,785		20,000		---
Operating lease obligations		230		459		242		---
Total	$	71,280	$	89,530	$	24,045	$	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 June 30, 2016, we had a total of $432.0 million in unused lines of credit, $105.0 million in unfunded loan commitments and $15.1 million in standby letters of credit.

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Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises.  Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year.  Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings. In 2014, the Company resumed payment of quarterly cash dividends to Company shareholders.  In 2014, the Bank paid dividends to the Company totaling $4.1 million.  In the same period, the Company paid dividends to its shareholders totaling $2.7 million.  The Company retained the remaining balance for general corporate purposes.  In 2015, the Bank paid dividends to the Company totaling $5.1 million.  In the same period, the Company paid dividends to its shareholders totaling $3.7 million.  The Company retained the remaining balance for general corporate purposes.  On February 25, 2016, the Bank paid a dividend of $1.5 million to the Company in anticipation of the common share cash dividend of $0.03 per share paid on February 26, 2016 to shareholders of record on February 12, 2016.  The cash distributed for this cash dividend payment totaled $1.0 million.  The Company retained the remaining balance for general corporate purposes.  On May 26, 2016, the Bank paid a dividend of $1.5 million to the Company in anticipation of the common share cash dividend of $0.03 per share paid on May 27, 2016 to shareholders of record on May 13, 2016.  The cash distributed for this cash dividend payment totaled $1.0 million.  The Company retained the remaining balance for general corporate purposes.

At June 30, 2016, the Bank had a retained earnings balance of $30.9 million.

During 2015 and 2014, the Company received payments from the Bank totaling $3.2 million and $4.0 million, representing the Bank’s intercompany tax liability for the 2015 and 2014 tax years, respectively in accordance with the Company’s tax allocation agreement.  During the first six months of 2016, the Company received payments from the Bank totaling $3.6 million and made associated tax payments totaling $3.2 million.

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 June 30, 2016 was $5.1 million.  The Company believes that it has sufficient liquidity to meet its cash flow obligations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and future results could differ.  The allowance for loan 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 first six months of 2016.

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 June 30, 2016, we had gross deferred tax assets of $11.3 million, gross deferred tax liabilities of $2.9 million resulting in a net deferred tax asset of $8.4 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. With the continued positive results in the first six months of 2016, we again concluded at June 30, 2016 that no valuation allowance on our net deferred tax asset was required.  Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.

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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 June 30, 2016 (dollars in thousands):

Interest Rate Scenario	Economic Value of Equity		Percent Change			Net Interest Income		Percent Change
Interest rates up 200 basis points	$	187,404		(0.89	)%	$	48,607		3.08	%
Interest rates up 100 basis points		189,652		0.30			47,870		1.52
No change		189,088		---			47,155		---
Interest rates down 100 basis points		173,602		(8.19	)		45,733		(3.02	)

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.

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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 June 30, 2016, 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.

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PART II – OTHER INFORMATION

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

The following table provides information regarding the Company’s purchase of its own common stock during the second quarter of 2016.  All employee transactions are under stock compensation plans.  These include shares of Macatawa Bank Corporation common stock submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of restricted shares.  The value of the shares withheld is determined based on the closing price of Macatawa Bank Corporation common stock at the date of vesting.  The Company has no publicly announced repurchase plans or programs.

Macatawa Bank Corporation Purchases of Equity Securities
	Total Number of Shares  Purchased		Average  Price Paid Per Share
Period
April 1 – April 30, 2016
Employee Transactions		2,824	$	6.75
May 1 – May 31, 2016
Employee Transactions		---		---
June 1 – June 30, 2016
Employee Transactions		---		---
Total for Second Quarter ended June 30, 2016
Employee Transactions		2,824	$	6.75

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 February 19, 2015 in Macatawa Bank Corporation's Annual Report on Form 10-K for the year ended December 31, 2014, 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	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.
10.1	Change in Control Agreement with Ronald L. Haan.  Previously filed with the Commission as an exhibit to Macatawa Bank Corporation’s Form 8-K current report dated June 22, 2015.  Here incorporated by reference.
10.2	Change in Control Agreement with Jon W. Swets.  Previously filed with the Commission as an exhibit to Macatawa Bank Corporation’s Form 8-K current report dated June 22, 2015.  Here incorporated by reference.
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

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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: July 28, 2016

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