10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

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: 33,944,789 shares of the Company's Common Stock (no par value) were outstanding as of April 27, 2017.

Forward-Looking Statements

This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “may”, “should”, “will”, “is likely”, or is “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, 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, 2016. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

INDEX

		Page Number
Part I.	Financial Information:
	Item 1.
	Consolidated Financial Statements	4
	Notes to Consolidated Financial Statements	10
	Item 2.
	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	50
	Item 4.
	Controls and Procedures	51
Part II.	Other Information:
	Item 6.
	Exhibits	52
Signatures		53

Part I Financial Information

Item 1.

MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

As of March 31, 2017 (unaudited) and December 31, 2016

(Dollars in thousands, except per share data)

	March 31, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	30,631		$	27,690
Federal funds sold and other short-term investments		83,118			62,129
Cash and cash equivalents		113,749			89,819
Securities available for sale, at fair value		184,605			184,433
Securities held to maturity (fair value 2017 - $69,079 and 2016 - $69,849)		68,473			69,378
Federal Home Loan Bank (FHLB) stock		11,558			11,558
Loans held for sale, at fair value		2,767			2,181
Total loans		1,266,128			1,280,812
Allowance for loan losses		(16,696	)		(16,962	)
Net loans		1,249,432			1,263,850
Premises and equipment – net		49,832			50,026
Accrued interest receivable		4,204			4,092
Bank-owned life insurance		39,524			39,274
Other real estate owned - net		12,074			12,253
Net deferred tax asset		8,330			8,863
Other assets		4,305			5,286
Total assets	$	1,748,853		$	1,741,013
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	466,415		$	501,478
Interest-bearing		966,731			947,246
Total deposits		1,433,146			1,448,724
Other borrowed funds		102,785			84,173
Long-term debt		41,238			41,238
Accrued expenses and other liabilities		5,539			4,639
Total liabilities		1,582,708			1,578,774
Commitments and contingent liabilities		---			---
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized;  33,944,788 and 33,940,788 shares issued and outstanding at March 31, 2017 and December 31, 2016		216,845			216,731
Retained deficit		(49,905	)		(53,008	)
Accumulated other comprehensive income (loss)		(795	)		(1,484	)
Total shareholders' equity		166,145			162,239
Total liabilities and shareholders' equity	$	1,748,853		$	1,741,013

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three Month Periods Ended March 31, 2017 and 2016

(unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Interest income
Loans, including fees	$	12,455		$	11,756
Securities
Taxable		639			550
Tax-exempt		538			433
FHLB Stock		124			124
Federal funds sold and other short-term investments		92			145
Total interest income		13,848			13,008
Interest expense
Deposits		481			463
Other borrowings		382			442
Long-term debt		402			365
Total interest expense		1,265			1,270
Net interest income		12,583			11,738
Provision for loan losses		(500	)		(100	)
Net interest income after provision for loan losses		13,083			11,838
Noninterest income
Service charges and fees		1,060			1,047
Net gains on mortgage loans		428			487
Trust fees		778			708
ATM and debit card fees		1,201			1,186
Gain on sales of securities		3			89
Bank owned life insurance ("BOLI") income		238			444
Other		523			647
Total noninterest income		4,231			4,608
Noninterest expense
Salaries and benefits		5,999			6,187
Occupancy of premises		1,026			982
Furniture and equipment		732			865
Legal and professional		225			159
Marketing and promotion		227			275
Data processing		682			659
FDIC assessment		136			251
Interchange and other card expense		313			286
Bond and D&O Insurance		117			132
Net losses (gains) on repossessed and foreclosed properties		(85	)		36
Administration and disposition of problem assets		180			375
Other		1,336			1,344
Total noninterest expenses		10,888			11,551
Income before income tax		6,426			4,895
Income tax expense		1,966			1,400
Net income	$	4,460		$	3,495
Basic earnings per common share	$	0.13		$	0.10
Diluted earnings per common share	$	0.13		$	0.10
Cash dividends per common share	$	0.04		$	0.03

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Month Periods Ended March 31, 2017 and 2016

(unaudited)

(Dollars in thousands)

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Net income	$	4,460		$	3,495
Other comprehensive income:
Unrealized gains (losses):
Net change in unrealized gains (losses) on securities available for sale		1,063			1,064
Tax effect		(372	)		(372	)
Net change in unrealized gains (losses) on securities available for sale, net of tax		691			692
Less: reclassification adjustments:
Reclassification for gains included in net income		3			89
Tax effect		(1	)		(31	)
Reclassification for gains included in net income, net of tax		2			58
Other comprehensive income (loss), net of tax		689			634
Comprehensive income	$	5,149		$	4,129

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Three Month Periods Ended March 31, 2017 and 2016

(unaudited)

(Dollars in thousands, except per share data)

	Common Stock		Retained Deficit			Accumulated Other Comprehensive Income (Loss)		Total Shareholders' Equity
Balance, January 1, 2016	$	216,540	$	(64,910	)	$	347	$	151,977
Net income for the three months ended March 31, 2016		---		3,495			---		3,495
Cash dividends at $.03 per share		---		(1,012	)		---		(1,012	)
Net change in unrealized gain on securities available for sale, net of tax		---		---			634		634
Stock compensation expense		147		---			---		147
Balance, March 31, 2016	$	216,687	$	(62,427	)	$	981	$	155,241

Balance, January 1, 2017	$	216,731	$	(53,008	)	$	(1,484	)	$	162,239
Net income for the three months ended March 31, 2017		---		4,460			---			4,460
Cash dividends at $.04 per share		---		(1,357	)		---			(1,357	)
Net change in unrealized loss on securities available for sale, net of tax		---		---			689			689
Stock compensation expense		114		---			---			114
Balance, March 31, 2017	$	216,845	$	(49,905	)	$	(795	)	$	166,145

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Month Periods Ended March 31, 2017 and 2016

(unaudited)

(Dollars in thousands)

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Cash flows from operating activities
Net income	$	4,460		$	3,495
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		537			659
Stock compensation expense		114			147
Provision for loan losses		(500	)		(100	)
Origination of loans for sale		(16,960	)		(18,883	)
Proceeds from sales of loans originated for sale		16,802			19,887
Net gains on mortgage loans		(428	)		(487	)
Gain on sales of securities		(3	)		(89	)
Write-down of other real estate		64			129
Net gain on sales of other real estate		(149	)		(92	)
Deferred income tax expense		162			(68	)
Change in accrued interest receivable and other assets		869			(1,124	)
Earnings in bank-owned life insurance		(238	)		(444	)
Change in accrued expenses and other liabilities		664			2,073
Net cash from operating activities		5,394			5,103
Cash flows from investing activities
Loan originations and payments, net		14,862			(18,206	)
Change in interest-bearing deposits in other financial institutions		---			20,000
Purchases of securities available for sale		(8,867	)		(21,802	)
Proceeds from:
Maturities and calls of securities		6,457			12,883
Sales of securities available for sale		3,440			9,418
Principal paydowns on securities		1,109			911
Sales of other real estate		320			1,475
Death benefit from bank-owned life insurance		---			518
Additions to premises and equipment		(462	)		(154	)
Net cash from investing activities		16,859			5,043
Cash flows from financing activities
Change in deposits		(15,578	)		(94,678	)
Repayments and maturities of other borrowed funds		(1,388	)		(1,329	)
Proceeds from other borrowed funds		20,000			---
Cash dividends paid		(1,357	)		(1,012	)
Net cash from financing activities		1,677			(97,019	)
Net change in cash and cash equivalents		23,930			(86,873	)
Cash and cash equivalents at beginning of period		89,819			181,476
Cash and cash equivalents at end of period	$	113,749		$	94,603

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Three Month Periods Ended March 31, 2017 and 2016

(unaudited)

(Dollars in thousands)

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Supplemental cash flow information
Interest paid	$	1,272	$	1,270
Income taxes paid		---		---
Supplemental noncash disclosures:
Transfers from loans to other real estate		56		102
Security settlement		236		1,012

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Operating results for the three month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

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 March 31, 2017, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

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

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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 March 31, 2017 and December 31, 2016, the total notional amount of such agreements was $43.5 million and $48.1 million and resulted in a derivative asset with a fair value of $383,000 and $494,000, respectively, which were included in other assets and a derivative liability of $383,000 and $494,000, respectively, which were included in other liabilities.

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

Adoption of New Accounting Standards:  The Financial Accounting Standards Board “FASB” issued Accounting Standards Update (“ASU”) ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.  This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes.  The amendments are effective for annual periods beginning after December 15, 2016, and for interim periods within those annual periods.  The impact of adoption of this ASU by the Company was not material as no stock awards vested in the three months ended March 31, 2017, but could cause some volatility in income tax expense in future periods where stock awards vest.

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

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

FASB issued ASU No. 2016-13, 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.

FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force).  This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.  The amendments are effective for annual periods beginning after December 15, 2017, and for interim periods within those annual periods.  The impact of adoption of this ASU by the Company is not expected to be material.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2017
Available for Sale:
U.S. Treasury and federal agency securities	$	86,517	$	61	$	(900	)	$	85,678
U.S. Agency MBS and CMOs		11,306		16		(157	)		11,165
Tax-exempt state and municipal bonds		39,746		411		(348	)		39,809
Taxable state and municipal bonds		34,757		82		(342	)		34,497
Corporate bonds and other debt securities		12,002		16		(32	)		11,986
Other equity securities		1,500		---		(30	)		1,470
	$	185,828	$	586	$	(1,809	)	$	184,605
Held to Maturity
Tax-exempt state and municipal bonds	$	68,473	$	683	$	(77	)	$	69,079

December 31, 2016
Available for Sale:
U.S. Treasury and federal agency securities	$	85,582	$	49	$	(1,281	)	$	84,350
U. S. Agency MBS and CMOs		12,037		11		(231	)		11,817
Tax-exempt state and municipal bonds		39,578		212		(603	)		39,187
Taxable state and municipal bonds		34,255		65		(437	)		33,883
Corporate bonds and other debt securities		13,765		16		(55	)		13,726
Other equity securities		1,500		---		(30	)		1,470
	$	186,717	$	353	$	(2,637	)	$	184,433
Held to Maturity:
Tax-exempt state and municipal bonds	$	69,378	$	573	$	(102	)	$	69,849

Proceeds from the sale of securities available for sale were $3.4 million and $9.4 million, respectively, in the three month periods ended March 31, 2017 and 2016 resulting in net gain on sale of $3,000 and $89,000, respectively, as reported in the Consolidated Statements of Income.  This resulted in a reclassification of $3,000 ($2,000 net of tax) for the three months ended March 31, 2017 and $89,000 ($58,000 net of tax) for the three months ended March 31, 2016 from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income.

Contractual maturities of debt securities at March 31, 2017 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	$	24,552	$	24,519	$	18,210	$	18,212
Due from one to five years		14,710		15,048		96,325		95,760
Due from five to ten years		8,279		8,471		54,895		54,526
Due after ten years		20,932		21,041		14,898		14,637
	$	68,473	$	69,079	$	184,328	$	183,135

- 13 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (Continued)

Securities with unrealized losses at March 31, 2017 and December 31, 2016, 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
March 31, 2017	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	60,493	$	(890	)	$	3,039	$	(10	)	$	63,532	$	(900	)
U.S. Agency MBS and CMOs		10,114		(157	)		---		---			10,114		(157	)
Tax-exempt state and municipal bonds		37,802		(412	)		397		(8	)		38,199		(420	)
Taxable state and municipal bonds		19,139		(347	)		---		---			19,139		(347	)
Corporate bonds and other debt securities		5,628		(28	)		500		(4	)		6,128		(32	)
Other equity securities		1,470		(30	)		---		---			1,470		(30	)
Total temporarily impaired	$	134,646	$	(1,864	)	$	3,936	$	(22	)	$	138,582	$	(1,886	)

	Less than 12 Months					12 Months or More					Total
December 31, 2016	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	59,129	$	(1,271	)	$	3,053	$	(10	)	$	62,182	$	(1,281	)
U.S. Agency MBS and CMOs		10,702		(231	)		---		---			10,702		(231	)
Tax-exempt state and municipal bonds		49,508		(698	)		1,672		(7	)		51,180		(705	)
Taxable state and municipal bonds		22,633		(437	)		---		---			22,633		(437	)
Corporate bonds and other debt securities		5,745		(50	)		500		(5	)		6,245		(55	)
Other equity securities		1,470		(30	)		---		---			1,470		(30	)
Total temporarily impaired	$	149,187	$	(2,717	)	$	5,225	$	(22	)	$	154,412	$	(2,739	)

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 month periods ended March 31, 2017 and 2016.

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 March 31, 2017 and December 31, 2016.

- 14 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

	March 31, 2017			December 31, 2016
Commercial and industrial	$	453,311		$	449,342
Commercial real estate:
Residential developed		10,188			11,970
Unsecured to residential developers		4,785			4,734
Vacant and unimproved		44,950			40,286
Commercial development		499			378
Residential improved		73,064			75,348
Commercial improved		277,898			289,478
Manufacturing and industrial		97,424			95,787
Total commercial real estate		508,808			517,981
Consumer
Residential mortgage		212,949			217,614
Unsecured		343			396
Home equity		83,666			88,113
Other secured		7,051			7,366
Total consumer		304,009			313,489
Total loans		1,266,128			1,280,812
Allowance for loan losses		(16,696	)		(16,962	)
	$	1,249,432		$	1,263,850

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

Three months ended March 31, 2017	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,345	$	6,703		$	3,871		$	43		$	16,962
Charge-offs		---		---			(26	)		---			(26	)
Recoveries		23		162			75			---			260
Provision for loan losses		101		(267	)		(329	)		(5	)		(500	)
Ending Balance	$	6,469	$	6,598		$	3,591		$	38		$	16,696

Three months ended March 31, 2016	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	4,826	$	8,457		$	3,761		$	37		$	17,081
Charge-offs		---		---			(76	)		---			(76	)
Recoveries		49		121			54			---			224
Provision for loan losses		70		(129	)		(40	)		(1	)		(100	)
Ending Balance	$	4,945	$	8,449		$	3,699		$	36		$	17,129

- 15 -

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):

March 31, 2017	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	642	$	304	$	702	$	---	$	1,648
Collectively evaluated for impairment		5,827		6,294		2,889		38		15,048
Total ending allowance balance	$	6,469	$	6,598	$	3,591	$	38	$	16,696
Loans:
Individually reviewed for impairment	$	7,445	$	9,931	$	11,400	$	---	$	28,776
Collectively evaluated for impairment		445,866		498,877		292,609		---		1,237,352
Total ending loans balance	$	453,311	$	508,808	$	304,009	$	---	$	1,266,128

December 31, 2016	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	605	$	368	$	723	$	---	$	1,696
Collectively evaluated for impairment		5,740		6,335		3,148		43		15,266
Total ending allowance balance	$	6,345	$	6,703	$	3,871	$	43	$	16,962
Loans:
Individually reviewed for impairment	$	5,994	$	11,934	$	11,726	$	---	$	29,654
Collectively evaluated for impairment		443,348		506,047		301,763		---		1,251,158
Total ending loans balance	$	449,342	$	517,981	$	313,489	$	---	$	1,280,812

- 16 -

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 March 31, 2017 (dollars in thousands):

March 31, 2017	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	3,921	$	3,921	$	---
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		27		27		---
Commercial improved		---		---		---
Manufacturing and industrial		---		---		---
		27		27		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
Total with no related allowance recorded	$	3,948	$	3,948	$	---
With an allowance recorded:
Commercial and industrial	$	3,524	$	3,524	$	642
Commercial real estate:
Residential developed		185		185		3
Unsecured to residential developers		---		---		---
Vacant and unimproved		375		375		10
Commercial development		189		189		6
Residential improved		2,815		2,815		149
Commercial improved		6,116		6,116		132
Manufacturing and industrial		224		224		4
		9,904		9,904		304
Consumer:
Residential mortgage		7,467		7,467		460
Unsecured		---		---		---
Home equity		3,933		3,933		242
Other secured		---		---		---
		11,400		11,400		702
Total with an allowance recorded	$	24,828	$	24,828	$	1,648
Total	$	28,776	$	28,776	$	1,648

- 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 December 31, 2016 (dollars in thousands):

December 31, 2016	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	2,298	$	2,298	$	---
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		27		27		---
Commercial improved		350		350		---
Manufacturing and industrial		---		---		---
		377		377		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
Total with no related allowance recorded	$	2,675	$	2,675	$	---
With an allowance recorded:
Commercial and industrial	$	3,696	$	3,696	$	605
Commercial real estate:
Residential developed		187		187		4
Unsecured to residential developers		---		---		---
Vacant and unimproved		387		387		9
Commercial development		189		189		6
Residential improved		4,687		4,687		216
Commercial improved		5,879		5,879		128
Manufacturing and industrial		228		228		5
		11,557		11,557		368
Consumer:
Residential mortgage		7,523		7,523		464
Unsecured		---		---		---
Home equity		4,203		4,203		259
Other secured		---		---		---
		11,726		11,726		723
Total with an allowance recorded	$	26,979	$	26,979	$	1,696
Total	$	29,654	$	29,654	$	1,696

- 18 -

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 month periods ended March 31, 2017 and 2016 (dollars in thousands):

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Average of impaired loans during the period:
Commercial and industrial	$	6,843	$	8,265
Commercial real estate:
Residential developed		185		---
Unsecured to residential developers		---		---
Vacant and unimproved		379		446
Commercial development		189		192
Residential improved		4,086		5,543
Commercial improved		6,158		9,537
Manufacturing and industrial		225		239
Consumer		11,495		13,140
Interest income recognized during impairment:
Commercial and industrial		278		298
Commercial real estate		126		201
Consumer		109		122
Cash-basis interest income recognized
Commercial and industrial		265		288
Commercial real estate		123		200
Consumer		107		123

- 19 -

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 March 31, 2017 and December 31, 2016:

March 31, 2017	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	127	$	---
Commercial real estate:
Residential developed		---		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		79		---
Commercial improved		124		---
Manufacturing and industrial		---		---
		252		---
Consumer:
Residential mortgage		2		---
Unsecured		13		---
Home equity		7		---
Other secured		---		---
		22		---
Total	$	401	$	---

December 31, 2016	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	36	$	---
Commercial real estate:
Residential developed		---		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		6		---
Commercial improved		128		---
Manufacturing and industrial		---		---
		183		---
Consumer:
Residential mortgage		58		---
Unsecured		16		---
Home equity		7		---
Other secured		---		---
		81		---
Total	$	300	$	---

- 20 -

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 March 31, 2017 and December 31, 2016 by class of loans (dollars in thousands):

March 31, 2017	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	30	$	121	$	151	$	453,160	$	453,311
Commercial real estate:
Residential developed		---		---		---		10,188		10,188
Unsecured to residential developers		---		---		---		4,785		4,785
Vacant and unimproved		---		---		---		44,950		44,950
Commercial development		189		49		238		261		499
Residential improved		92		79		171		72,893		73,064
Commercial improved		124		---		124		277,774		277,898
Manufacturing and industrial		---		---		---		97,424		97,424
		405		128		533		508,275		508,808
Consumer:
Residential mortgage		204		---		204		212,745		212,949
Unsecured		12		---		12		331		343
Home equity				---		---		83,666		83,666
Other secured		15		---		15		7,036		7,051
		231		---		231		303,778		304,009
Total	$	666	$	249	$	915	$	1,265,213	$	1,266,128

December 31, 2016	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	425	$	28	$	453	$	448,889	$	449,342
Commercial real estate:
Residential developed		---		---		---		11,970		11,970
Unsecured to residential developers		---		---		---		4,734		4,734
Vacant and unimproved		---		---		---		40,286		40,286
Commercial development		---		49		49		329		378
Residential improved		74		5		79		75,269		75,348
Commercial improved		478		---		478		289,000		289,478
Manufacturing and industrial		---		---		---		95,787		95,787
		552		54		606		517,375		517,981
Consumer:
Residential mortgage		64		56		120		217,494		217,614
Unsecured		---		---		---		396		396
Home equity		187		---		187		87,926		88,113
Other secured		81		---		81		7,285		7,366
		332		56		388		313,101		313,489
Total	$	1,309	$	138	$	1,447	$	1,279,365	$	1,280,812

- 21 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

The Company had allocated $1,648,000 and $1,696,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of March 31, 2017 and December 31, 2016, respectively.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  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 March 31, 2017 and December 31, 2016 (dollars in thousands):

	March 31, 2017				December 31, 2016
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		24	$	7,444		25	$	5,994
Commercial real estate		43		9,931		49		11,933
Consumer		111		11,782		116		12,059
		178	$	29,157		190	$	29,986

- 22 -

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 March 31, 2017 and December 31, 2016.  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):

	March 31, 2017		December 31, 2016
Accruing TDR - nonaccrual at restructuring	$	---	$	---
Accruing TDR - accruing at restructuring		23,215		25,665
Accruing TDR - upgraded to accruing after six consecutive payments		5,800		4,172
	$	29,015	$	29,837

The following tables present information regarding troubled debt restructurings executed during the three month periods ended March 31, 2017 and 2016 (dollars in thousands):

	Three Months Ended March 31, 2017						Three Months Ended March 31, 2016
	# of Loans		Pre-TDR Balance		Writedown Upon TDR		# of Loans		Pre-TDR Balance		Writedown Upon TDR
Commercial and industrial		---	$	---	$	---		---	$	---	$	---
Commercial real estate		---		---		---		---		---		---
Consumer		---		---		---		4		238		---
		---		---	$	---		4	$	238	$	---

According to the accounting standards, not all loan modifications are TDRs.  TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress.  The Company reviews all modifications and renewals for determination of TDR status.  In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession.  These modifications are not considered TDRs.  In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress.  This could be the case if the Company is matching a competitor’s interest rate.  These modifications would also not be considered TDRs.  Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.  As with other loans not considered TDR or impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.

Payment defaults on TDRs have been minimal and during the three months ended March 31, 2017 and 2016, the balance of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.

- 23 -

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.

- 24 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

As of March 31, 2017 and December 31, 2016, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

March 31, 2017		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	---	$	24,690	$	111,044	$	297,713	$	12,063	$	7,674	$	127	$	---	$	453,311
Commercial real estate:
Residential developed		---		---		1,703		7,640		845		---		---		---		10,188
Unsecured to residential developers		---		---		---		4,785		---		---		---		---		4,785
Vacant and unimproved		---		---		21,257		20,157		3,536		---		---		---		44,950
Commercial development		---		---		121		139		---		190		49		---		499
Residential improved		---		---		6,132		62,688		2,572		1,593		79		---		73,064
Commercial improved		---		3,656		58,960		206,827		7,233		1,098		124		---		277,898
Manufacturing & industrial		---		1,587		37,797		55,153		2,308		579		---		---		97,424
	$	---	$	29,933	$	237,014	$	655,102	$	28,557	$	11,134	$	379	$	---	$	962,119

December 31, 2016		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	---	$	27,619	$	118,243	$	282,527	$	14,610	$	6,307	$	36	$	---	$	449,342
Commercial real estate:
Residential developed		---		---		2,328		8,786		856		---		---		---		11,970
Unsecured to residential developers		---		---		---		4,734		---		---		---		---		4,734
Vacant and unimproved		---		---		17,672		19,028		3,586		---		---		---		40,286
Commercial development		---		---		---		140		---		189		49		---		378
Residential improved		---		---		7,100		63,957		2,628		1,657		6		---		75,348
Commercial improved		---		2,433		66,259		210,449		9,084		1,125		128		---		289,478
Manufacturing & industrial		---		1,665		38,719		51,718		3,076		609		---		---		95,787
	$	---	$	31,717	$	250,321	$	641,339	$	33,840	$	9,887	$	219	$	---	$	967,323

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):

	March 31, 2017		December 31, 2016
Not classified as impaired	$	2,434	$	2,608
Classified as impaired		9,079		7,498
Total commercial loans classified substandard or worse	$	11,513	$	10,106

- 25 -

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):

March 31, 2017	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	212,949	$	343	$	83,666	$	7,051
Nonperforming		---		---		---		---
Total	$	212,949	$	343	$	83,666	$	7,051

December 31, 2016	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	217,558	$	396	$	88,113	$	7,366
Nonperforming		56		---		---		---
Total	$	217,614	$	396	$	88,113	$	7,366

NOTE 4 – OTHER REAL ESTATE OWNED

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

	Three Months Ended March 31, 2017			Year Ended December 31, 2016			Three Months Ended March 31, 2016
Beginning balance	$	22,864		$	28,377		$	28,377
Additions, transfers from loans		56			339			102
Proceeds from sales of other real estate owned		(320	)		(5,339	)		(1,475	)
Valuation allowance reversal upon sale		(250	)		(1,158	)		(251	)
Gain on sales of other real estate owned		149			645			92
		22,499			22,864			26,845
Less: valuation allowance		(10,425	)		(10,611	)		(10,683	)
Ending balance	$	12,074		$	12,253		$	16,162

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

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Beginning balance	$	10,611		$	10,805
Additions charged to expense		64			129
Reversals upon sale		(250	)		(251	)
Ending balance	$	10,425		$	10,683

- 26 -

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.

- 27 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

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

	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2017
U.S. Treasury and federal agency securities	$	85,678		$	---	$	85,678	$	---
U.S. Agency MBS and CMOs		11,165			---		11,165		---
Tax-exempt state and municipal bonds		39,809			---		39,809		---
Taxable state and municipal bonds		34,497			---		34,497		---
Corporate bonds and other debt securities		11,986			---		11,986		---
Other equity securities		1,470			---		1,470		---
Loans held for sale		2,767			---		2,767		---
Interest rate swaps		383			---		---		383
Interest rate swaps		(383	)		---		---		(383	)

December 31, 2016
U.S. Treasury and federal agency securities	$	84,350		$	---	$	84,350	$	---
U.S. Agency MBS and CMOs		11,817			---		11,817		---
Tax-exempt state and municipal bonds		39,187			---		39,187		---
Taxable state and municipal bonds		33,883			---		33,883		---
Corporate bonds and other debt securities		13,726			---		13,726		---
Other equity securities		1,470			---		1,470		---
Loans held for sale		2,181			---		2,181		---
Interest rate swaps		494			---		---		494
Interest rate swaps		(494	)		---		---		(494	)

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)
March 31, 2017
Impaired loans	$	3,282	$	---	$	---	$	3,282
Other real estate owned		9,400		---		---		9,400
December 31, 2016
Impaired loans	$	3,436	$	---	$	---	$	3,436
Other real estate owned		9,542		---		---		9,542

- 28 -

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 was as follows at period end (dollars in thousands):

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
March 31, 2017
Impaired Loans	$	3,282	Sales comparison approach	Adjustment for differences between comparable sales		1.0 to 35.0
			Income approach	Capitalization rate		9.5 to 11.0
Other real estate owned		9,400	Sales comparison approach	Adjustment for differences between comparable sales		2.0 to 42.0
			Income approach	Capitalization rate		9.5 to 11.5

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
December 31, 2016
Impaired Loans	$	3,436	Sales comparison approach	Adjustment for differences between comparable sales		1.0 to35.0
			Income approach	Capitalization rate		9.5 to 11.5
Other real estate owned		9,542	Sales comparison approach	Adjustment for differences between comparable sales		2.0 to 32.5
			Income approach	Capitalization rate		9.5 to 11.5

- 29 -

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 March 31, 2017 and December 31, 2016 (dollars in thousands):

Financial assets	Level in Fair Value Hierarchy	March 31, 2017						December 31, 2016
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and due from banks	Level 1	$	30,631		$	30,631		$	27,690		$	27,690
Cash equivalents	Level 2		83,118			83,118			62,129			62,129
Securities held to maturity	Level 3		68,473			69,079			69,378			69,849
FHLB stock			11,558		NA				11,558		NA
Loans, net	Level 2		1,245,996			1,234,716			1,260,414			1,247,842
Bank owned life insurance	Level 3		39,524			39,524			39,274			39,274
Accrued interest receivable	Level 2		4,204			4,204			4,092			4,092
Financial liabilities
Deposits	Level 2		(1,433,146	)		(1,433,068	)		(1,448,724	)		(1,448,692	)
Other borrowed funds	Level 2		(102,785	)		(102,595	)		(84,173	)		(84,051	)
Long-term debt	Level 2		(41,238	)		(36,277	)		(41,238	)		(36,112	)
Accrued interest payable	Level 2		(275	)		(275	)		(282	)		(282	)
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.

- 30 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 – DEPOSITS

Deposits are summarized as follows (in thousands):

	March 31, 2017		December 31, 2016
Noninterest-bearing demand	$	466,415	$	501,478
Interest bearing demand		342,812		340,715
Savings and money market accounts		548,761		532,853
Certificates of deposit		75,158		73,678
	$	1,433,146	$	1,448,724

Time deposits that exceed the FDIC insurance limit of $250,000 were approximately $18.1 million at March 31, 2017 and $17.4 million at December 31, 2016.

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
March 31, 2017
Single maturity fixed rate advances	$	100,000	April 2017 to April 2021		1.41	%
Amortizable mortgage advances		2,785	March 2018 to July 2018		3.75	%
	$	102,785

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
December 31, 2016
Single maturity fixed rate advances	$	80,000	February 2018 to April 2021		1.60	%
Amortizable mortgage advances		4,173	March 2018 to July 2018		3.78	%
	$	84,173

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 $464,498,000 and $424,951,000 under a blanket lien arrangement at March 31, 2017 and December 31, 2016, respectively.

- 31 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 - OTHER BORROWED FUNDS

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

2017	$	20,667
2018		52,118
2019		10,000
2020		10,000
2021		10,000
Thereafter		---
	$	102,785

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank.  There were no borrowings outstanding at March 31, 2017 and December 31, 2016, and the Company had approximately $16.3 million and $18.1 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $20.4 million and $20.7 million at March 31, 2017 and December 31, 2016, 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 month periods ended March 31, 2017 and 2016 are as follows (dollars in thousands, except per share data):

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Net income available to common shares	$	4,460	$	3,495
Weighted average shares outstanding, including participating stock awards - Basic		33,941,010		33,925,113
Dilutive potential common shares:
Stock options		7,574		---
Stock warrants		---		---
Weighted average shares outstanding - Diluted		33,948,584		33,925,113
Basic earnings per common share	$	0.13	$	0.10
Diluted earnings per common share	$	0.13	$	0.10

Stock options for 101,473 shares of common stock for the three month period ended March 31, 2016, were not considered in computing diluted earnings per share because they were antidilutive. There were no antidilutive shares of common stock at March 31, 2017.

- 32 -

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 March 31, 2017		Three Months Ended March 31, 2016
Current	$	1,804	$	1,468
Deferred		162		(68	)
	$	1,966	$	1,400

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 March 31, 2017			Three Months Ended March 31, 2016
Statutory rate		35	%		35	%
Statutory rate applied to income before taxes	$	2,249		$	1,713
Deduct
Tax-exempt interest income		(183	)		(148	)
Bank-owned life insurance		(83	)		(155	)
Other, net		(17	)		(10	)
	$	1,966		$	1,400

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 March 31, 2017 or December 31, 2016.

- 33 -

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):

	March 31, 2017			December 31, 2016
Deferred tax assets
Allowance for loan losses	$	5,844		$	5,937
Nonaccrual loan interest		642			718
Valuation allowance on other real estate owned		3,649			3,714
Unrealized loss on securities available for sale		428			799
Other		216			176
Gross deferred tax assets		10,779			11,344
Valuation allowance		---			---
Total net deferred tax assets		10,779			11,344
Deferred tax liabilities
Depreciation		(1,655	)		(1,705	)
Prepaid expenses		(399	)		(399	)
Unrealized gain on securities available for sale		---			---
Other		(395	)		(377	)
Gross deferred tax liabilities		(2,449	)		(2,481	)
Net deferred tax asset	$	8,330		$	8,863

There were no unrecognized tax benefits at March 31, 2017 or December 31, 2016 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2013.

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):

	March 31, 2017		December 31, 2016
Commitments to make loans	$	95,653	$	90,293
Letters of credit		13,598		13,823
Unused lines of credit		446,346		437,435

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $16.8 million and $19.8 million at March 31, 2017 and December 31, 2016, respectively.

- 34 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

At March 31, 2017, approximately 37.5% 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 March 31, 2017, 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%.  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), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures.

- 35 -

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – SHAREHOLDERS' EQUITY (Continued)

At March 31, 2017 and December 31, 2016, 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
March 31, 2017
CET1 capital (to risk weighted assets)
Consolidated	$	166,880		11.3	%	$	66,557		4.5	%	$	85,045		5.8	%		N/A		N/A
Bank		201,129		13.6			66,552		4.5			85,038		5.8		$	96,130		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		206,880		14.0			88,742		6.0			107,230		7.3			N/A		N/A
Bank		201,129		13.6			88,736		6.0			107,222		7.3			118,314		8.0
Total capital (to risk weighted assets)
Consolidated		223,575		15.1			118,323		8.0			136,811		9.3			N/A		N/A
Bank		217,825		14.7			118,314		8.0			136,801		9.3			147,893		10.0
Tier 1 capital (to average assets)
Consolidated		206,880		12.1			68,329		4.0			N/A		N/A			N/A		N/A
Bank		201,129		11.8			68,264		4.0			N/A		N/A			85,330		5.0
December 31, 2016
CET1 capital (to risk weighted assets)
Consolidated	$	163,663		11.0	%	$	66,743		4.5	%	$	76,013		5.1	%		N/A		N/A
Bank		197,972		13.4			66,737		4.5			76,006		5.1		$	96,398		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		203,663		13.7			88,991		6.0			98,261		6.6			N/A		N/A
Bank		197,972		13.4			88,983		6.0			98,252		6.6			118,644		8.0
Total capital (to risk weighted assets)
Consolidated		220,625		14.9			118,655		8.0			127,925		8.6			N/A		N/A
Bank		214,934		14.5			118,644		8.0			127,913		8.6			148,305		10.0
Tier 1 capital (to average assets)
Consolidated		203,663		12.0			67,810		4.0			N/A		N/A			N/A		N/A
Bank		197,972		11.7			67,742		4.0			N/A		N/A			84,677		5.0

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

The Bank was categorized as "well capitalized" at March 31, 2017 and December 31, 2016.

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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 Consolidated Financial Statements.

At March 31, 2017, we had total assets of $1.75 billion, total loans of $1.27 billion, total deposits of $1.43 billion and shareholders' equity of $166.1 million.  During the first quarter of 2017, we recognized net income of $4.5 million compared to net income of $3.5 million in the first quarter of 2016.  The Bank was categorized as “well capitalized” under regulatory capital standards at March 31, 2017.

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 second through fourth quarters of 2015 and each quarter of 2016.  We increased the dividend to $0.04 per share in the first quarter of 2017.

RESULTS OF OPERATIONS

Summary: Net income for the quarter ended March 31, 2017 was $4.5 million, compared to net income of $3.5 million in the first quarter of 2016. Net income per common share on a diluted basis was $0.13 for the first quarter of 2017 and $0.10 for the first quarter of 2016.

The increase in earnings in the first quarter of 2017 compared to the first quarter of 2016 was due primarily to increased net interest income, a larger negative provision for loan losses and reduced nonperforming asset expenses, partially offset by lower earnings on bank owned life insurance.  Net interest income increased to $12.6 million in the first quarter of 2017 compared to $11.7 million in the same period in 2016.  The provision for loan losses was a negative $500,000 for the first quarter of 2017, compared to a negative $100,000 for the first quarter of 2016.  Bank owned life insurance income decreased to $238,000 in the first quarter of 2017 compared to $444,000 in the first quarter of 2016.  Nonperforming asset expenses (including administration costs and losses) were $95,000 for the first quarter of 2017 compared to $411,000 for the first quarter of 2016, primarily as a result of a decrease of $4.1 million in other real estate owned.  We again were in a net loan recovery position for the first quarter of 2017, with $234,000 in net loan recoveries, compared to $148,000 in net loan recoveries in the first quarter of 2016.  Each of these items is discussed more fully below.

Net Interest Income: Net interest income totaled $12.6 million for the first quarter of 2017 and $11.7 million for the first quarter of 2016.

Net interest income was positively impacted in the first quarter of 2017 by an increase in average earning assets of $40.6 million compared to the first quarter of 2016.  Our average yield on earning assets for the first quarter of 2017 increased 17 basis points compared to the same period in 2016 from 3.42% to 3.59%.  Average interest earning assets totaled $1.58 billion for the first quarter of 2017 compared to $1.54 billion for the first quarter of 2016. The net interest margin was 3.26% for the first quarter of 2017 compared to 3.09% for the first quarter of 2016.  An increase of $42.1 million in average securities between periods and an increase of $62.8 million in loans were the primary drivers of the increase.  Yield on commercial loans increased from 3.95% for the first quarter of 2016 to 4.04% for the first quarter of 2017.  The commercial loan yield in the first quarter of 2017 was positively impacted by the complete payoff of a loan that had been on nonaccrual, resulting in the realization of $267,000 in interest income that had been deferred.  Yield on residential mortgage loans decreased from 3.54% for the first quarter of 2016 to 3.46% for the first quarter of 2017, while yields on consumer loans increased from 3.95% for the first quarter of 2016 to 3.98% for the first quarter of 2017.  The December 2016 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.  The March 2017 increase also had a limited positive impact on our net interest margin.

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The cost of funds was 0.47% in both the first quarter of 2017 and the first quarter of 2016.  An increase in average other borrowed funds offset the decrease due to a continued shift in our deposit mix from higher costing time deposits to lower costing demand and savings accounts.

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

	For the three months ended March 31,
	2017								2016
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost
Assets
Taxable securities	$	147,639		$	639		1.72	%	$	129,541		$	550		1.69	%
Tax-exempt securities (1)		108,608			538		3.07			84,635			433		3.20
Commercial loans (2)		956,151			9,657		4.04			891,238			8,892		3.95
Residential mortgage loans		217,256			1,881		3.46			213,063			1,884		3.54
Consumer loans		93,381			917		3.98			99,667			980		3.95
Federal Home Loan Bank stock		11,558			124		4.27			11,558			124		4.24
Federal funds sold and other short-term investments		45,165			92		0.81			109,464			145		0.53
Total interest earning assets (1)		1,579,758			13,848		3.59			1,539,166			13,008		3.42
Noninterest earning assets:
Cash and due from banks		26,252								25,031
Other		100,633								99,393
Total assets	$	1,706,643							$	1,663,590
Liabilities
Deposits:
Interest bearing demand	$	321,008		$	70		0.09	%	$	334,726		$	85		0.10	%
Savings and money market accounts		549,693			291		0.21			513,243			238		0.19
Time deposits		77,967			120		0.62			90,278			140		0.62
Borrowings:
Other borrowed funds		99,022			382		1.54			95,921			442		1.83
Long-term debt		41,238			402		3.91			41,238			365		3.51
Total interest bearing liabilities		1,088,928			1,265		0.47			1,075,406			1,270		0.47
Noninterest bearing liabilities:
Noninterest bearing demand accounts		448,928								427,634
Other noninterest bearing liabilities		4,470								6,306
Shareholders' equity		164,317								154,244
Total liabilities and shareholders' equity	$	1,706,643							$	1,663,590
Net interest income				$	12,583							$	11,738
Net interest spread (1)							3.12	%							2.95	%
Net interest margin (1)							3.26	%							3.09	%
Ratio of average interest earning assets to average interest bearing liabilities		145.07	%							143.12	%

(1) Yields are presented on a tax equivalent basis using a 35% tax rate.

(2) Includes loan fees of $209,000 and $244,000 for the three months ended March 31, 2017 and 2016.  Includes average nonaccrual loans of approximately $384,000 and $584,000 for the three months ended March 31, 2017 and 2016.

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Provision for Loan Losses: The provision for loan losses for the first quarter of 2017 was a negative $500,000 compared to a negative $100,000 for the first quarter of 2016.  The negative provisions for loan losses for each period were the result of continued stabilization of real estate values on problem credits, continued improvement in asset quality metrics and net loan recoveries of $234,000 in the first quarter of 2017 and $148,000 in the first quarter of 2016.  At March 31, 2017, we had experienced net loan recoveries in eleven of the past twelve quarters, and in each of the past nine quarters.

Gross loan recoveries were $260,000 for the first quarter of 2017 and $224,000 for the same period in 2016.  In the first quarter of 2017, we had $26,000 in charge-offs, compared to $76,000 in the first quarter of 2016.  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.

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 month period ended March 31, 2017 decreased to $4.2 million compared to $4.6 million for the same period in 2016. The components of noninterest income are shown in the table below (in thousands):

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Service charges and fees on deposit accounts	$	1,060	$	1,047
Net gains on mortgage loans		428		487
Trust fees		778		708
Gain as sales of securities		3		89
ATM and debit card fees		1,201		1,186
Bank owned life insurance (“BOLI”) income		238		444
Investment services fees		216		304
Other income		307		343
Total noninterest income	$	4,231	$	4,608

Net gains on mortgage loans were down $59,000 in the first quarter of 2017 compared to the first quarter of 2016 as a result of an overall lower level of volume.  Mortgage loans originated for sale in the first quarter of 2017 were $17.0 million, compared to $18.9 million in the first quarter of 2016.  Mortgage loans originated for portfolio in the first quarter of 2017 were $8.9 million, compared to $14.1 million in the first quarter of 2016.  BOLI income in the first quarter of 2016 included $290,000 in net benefits from the distribution of a death claim on a covered former employee.  Trust fees and investment service fees were down in the first quarter of 2017 due to investment market volatility in the quarter, particularly at the beginning of the year.

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Noninterest Expense: Noninterest expense decreased to $10.9 million for the three month period ended March 31, 2017, down $663,000 from $11.6 million for the same period in 2016. The components of noninterest expense are shown in the table below (in thousands):

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Salaries and benefits	$	5,999		$	6,187
Occupancy of premises		1,026			982
Furniture and equipment		732			865
Legal and professional		225			159
Marketing and promotion		227			275
Data processing		682			659
FDIC assessment		136			251
Interchange and other card expense		313			286
Bond and D&O insurance		117			132
Net (gains) losses on repossessed and foreclosed properties		(85	)		36
Administration and disposition of problem assets		180			375
Outside services		448			370
Other noninterest expense		888			974
Total noninterest expense	$	10,888		$	11,551

Many categories of noninterest expense had reductions compared to the first quarter of 2016 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, decreased by $188,000 in the first quarter of 2017 from the first quarter of 2016. This decrease is largely due to a lower level of costs associated with employee benefits, particularly medical insurance, which was down $75,000 compared to the first quarter of 2016 due to a lower level of claims.  Variable based compensation was down $75,000 compared to the first quarter of 2016 due to lower mortgage production and brokerage volume.  We had 338 full-time equivalent employees at March 31, 2017 and 2016.

Our FDIC assessment costs decreased by $115,000 in the first quarter of 2017 compared to the same period in 2016 due primarily to positive changes in our assessment rates.   These costs have been trending down for the past few years and we believe the rate has stabilized and future expense fluctuations will likely be dependent on changes in our asset size.

Costs associated with administration and disposition of problem assets remain elevated, but have decreased significantly over the past several years.  These expenses include legal costs, repossessed and foreclosed property administration expense and losses on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. Losses on repossessed and foreclosed properties include both net gains and losses on the sale of properties and unrealized losses from value declines for outstanding properties.  We experienced decreases in each of these three expense categories in the first quarter of 2017 compared to the same period in the prior year.

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

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Legal and professional – nonperforming assets	$	17		$	71
Repossessed and foreclosed property administration		163			304
Net (gains) losses on repossessed and foreclosed properties		(85	)		36
Total	$	95		$	411

As problem loans move through the collection process, the costs associated with nonperforming assets remained elevated, but have decreased significantly over the past several years.  Other real estate owned decreased from $16.2 million at March 31, 2016 to $12.1 million at March 31, 2017.  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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Losses on repossessed assets and foreclosed properties for the three month period ended March 31, 2017 decreased $121,000 from the same period in 2016.  This decrease was primarily due to a lower level of writedowns of other real estate properties in the first quarter of 2017.  In the first quarter of 2016, such writedowns totaled $128,000, compared to $64,000 in the first quarter of 2017.  Also contributing to the decrease was an increase of $57,000 in net gains on sales of other real estate owned.  In the first quarter of 2016, we recognized net gains totaling $92,000 on such sales, compared to $148,000 in the first quarter of 2017.

Federal Income Tax Expense: Werecorded $1,966,000 in federal income tax expense for the three month period ended March 31, 2017 compared to $1,400,000 in the same period in 2016.  Our effective tax rate was 30.59% for the first quarter of 2017 compared to 28.61% for first quarter of 2016.  The effective tax rate was lower in the first quarter of 2016 due to the level of earnings on bank owned life insurance resulting from payment of a death benefit.

FINANCIAL CONDITION

Summary:  Over the past several years, we focused on improving our financial position through diversification of credit risk, improved capital ratios, and reduced reliance on non-core funding.   We experienced positive results in each of these areas over the past several years. With the success in strengthening our financial condition, we also turned our focus in 2014 to achieving high quality loan portfolio growth, and have experienced this growth since then.

Total assets were $1.75 billion at March 31, 2017, an increase of $7.8 million from $1.74 billion at December 31, 2016. This change reflected increases of $23.9 million in cash and cash equivalents offset by decreases of $14.7 million in our loan portfolio and $1.4 million in other assets.  Total deposits decreased by $15.6 million and other borrowed funds increased by $18.6 million at March 31, 2017 compared to December 31, 2016.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $113.7 million at March 31, 2017 compared to $89.8 million at December 31, 2016. Since total loans and total deposits decreased by approximately the same amount during the first quarter, the $23.9 million increase was primarily the result of an additional short-term borrowing of $20 million obtained early in the quarter.  We expect declines in our balances of short term investments as loan demand continues to increase and seasonal deposits return to more normal levels.

Securities: Securities available for sale were $184.6 million at March 31, 2017 compared to $184.4 million at December 31, 2016. The balance at March 31, 2017 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio decreased from $69.4 million at December 31, 2016 to $68.5 million at March 31, 2017.  Our held to maturity portfolio is comprised of state and municipal bonds.

Portfolio Loans and Asset Quality: Total portfolio loans decreased by $14.7 million in the first quarter of 2017 and were $1.27 billion at March 31, 2017 compared to $1.28 billion at December 31, 2016. During the first quarter of 2017, our commercial portfolio decreased by $5.2 million, while our consumer portfolio decreased by $4.8 million and our residential mortgage portfolio decreased by $4.7 million.  These decreases are seasonal and we expect balances to increase throughout the remainder of 2017.  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 quarter of 2017 decreased $1.9 million compared to the same period in 2016 due to a higher interest rate environment. Residential mortgage loans originated for sale were $17.0 million in the first quarter of 2017 compared to $18.9 million in the first quarter of 2016.  Mortgage loans originated for portfolio in the first quarter of 2017 were $8.9 million, compared to $14.1 million in the first quarter of 2016.  Mortgage loans originated for portfolio are typically loans that conform to secondary market requirements and have a term of fifteen years or less.

We experienced year over year growth in commercial loan balances for the first time in many years in 2014, increasing $71.8 million in 2014, $67.8 million in 2015 and $81.4 million in 2016.  We experienced a slight decrease in the first quarter of 2017 due to the payoff of a couple of large commercial credits at the end of the quarter.  Overall, the commercial loan portfolio decreased $5.2 million in the first quarter of 2017.  Our commercial and industrial portfolio increased by $4.0 million and our commercial real estate loans decreased by $9.2 million.  Considering our pipeline of commercial credits at March 31, 2017, we expect to return to continued, measured, high quality loan portfolio growth throughout the remainder of 2017.

Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 76% of the total loan portfolio at March 31, 2017 and December 31, 2016. Residential mortgage and consumer loans comprised approximately 24% of total loans at March 31, 2017 and December 31, 2016.

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

	March 31, 2017					December 31, 2016
	Balance		Percent of Total Loans			Balance		Percent of Total Loans
Commercial real estate: (1)
Residential developed	$	10,188		0.8	%	$	11,970		0.9	%
Unsecured to residential developers		4,785		0.4			4,734		0.4
Vacant and unimproved		44,950		3.5			40,286		3.1
Commercial development		499		---			378		---
Residential improved		73,064		5.8			75,348		5.9
Commercial improved		277,898		22.0			289,478		22.6
Manufacturing and industrial		97,424		7.7			95,787		7.5
Total commercial real estate		508,808		40.2			517,981		40.4
Commercial and industrial		453,311		35.8			449,342		35.1
Total commercial		962,119		76.0			967,323		75.5
Consumer
Residential mortgage		212,949		16.8			217,614		17.0
Unsecured		343		---			396		---
Home equity		83,666		6.6			88,113		6.9
Other secured		7,051		0.6			7,366		0.6
Total consumer		304,009		24.0			313,489		24.5
Total loans	$	1,266,128		100.0	%	$	1,280,812		100.0	%

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

Commercial real estate loans accounted for approximately 40% of the total loan portfolio at March 31, 2017 and consisted primarily of loans to business owners and developers of owner and non-owner occupied commercial properties and loans to developers of single and multi-family residential properties. In the table above, we show our commercial real estate portfolio by loans secured by residential and commercial real estate, and by stage of development. Improved loans are generally secured by properties that are under construction or completed and placed in use. Development loans are secured by properties that are in the process of development or fully developed. Vacant and unimproved loans are secured by raw land for which development has not yet begun and agricultural land.

Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised approximately 17% of portfolio loans at March 31, 2017 and December 31, 2016.  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 quarter of 2017 decreased from the first quarter of 2016 as a result of interest rate conditions.  We are also experiencing a shift in production to financing new home purchases versus refinancings.

Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. Consumer loans decreased by $4.8 million to $91.1 million at March 31, 2017 from $95.9 million at December 31, 2016, due primarily to a decrease in home equity loans.  Consumer loans comprised approximately 7% of our portfolio loans at March 31, 2017 and 8% at December 31, 2016.

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The following table shows our loan origination activity for portfolio loans during the first three months of 2017 and 2016, broken out by loan type and also shows average originated loan size (dollars in thousands):

	Three months ended March 31, 2017							Three months ended March 31, 2016
	Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size
Commercial real estate:
Residential developed	$	969		1.3	%	$	323	$	5,227		6.8	%	$	871
Unsecured to residential developers		---		---			---		---		---			---
Vacant and unimproved		491		0.6			123		---		---			---
Commercial development		---		---			---		2,200		2.9			2,200
Residential improved		10,289		13.2			264		28,113		36.8			541
Commercial improved		8,043		10.3			1,005		9,802		12.8			700
Manufacturing and industrial		2,406		3.1			401		778		1.0			389
Total commercial real estate		22,198		28.5			370		46,120		60.3			615
Commercial and industrial		38,158		48.9			1,004		8,553		11.2			231
Total commercial		60,356		77.4			616		54,673		71.5			488
Consumer
Residential mortgage		9,141		11.7			229		14,086		18.4			181
Unsecured		---		---			---		12		---			12
Home equity		8,037		10.3			77		7,155		9.4			86
Other secured		452		0.6			13		525		0.7			21
Total consumer		17,630		22.6			99		21,778		28.5			116
Total loans	$	77,986		100.0	%		283	$	76,451		100.0	%		255

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

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Commercial loans originated	$	60,356		$	54,673
Repayments of commercial loans		(58,600	)		(43,347	)
Change in undistributed - available credit		(6,960	)		8,045
Net increase/(decrease) in total commercial loans	$	(5,204	)	$	19,371

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

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

Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At March 31, 2017, nonperforming assets totaled $12.5 million compared to $12.6 million at December 31, 2016. Additions to other real estate owned in the first quarter of 2017 were $56,000, compared to $102,000 in the first quarter of 2016.  At March 31, 2017, there were no loans in redemption, so we expect there to be few additions to other real estate owned in 2017.  Proceeds from sales of foreclosed properties were $320,000 in the first quarter of 2017, resulting in a net realized gain on sale of $149,000.  Proceeds from sales of foreclosed properties were $1.5 million in the first quarter of 2016 resulting in a net realized gain on sale of $92,000.    Based upon purchase agreements in place at March 31, 2017, we expect the level of sales of foreclosed properties to be higher in the second quarter of 2017 than experienced in the first quarter of 2017.

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Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of March 31, 2017, nonperforming loans totaled $401,000, or 0.03% of total portfolio loans, compared to $300,000, or 0.02% of total portfolio loans, at December 31, 2016.

Nonperforming loans at March 31, 2017 consisted of $252,000 of commercial real estate loans, $127,000 of commercial and industrial loans, and $22,000 of consumer and residential mortgage loans.

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $12.1 million at March 31, 2017 and $12.3 million at December 31, 2016. Of this balance at March 31, 2017, there were 32 commercial real estate properties totaling approximately $11.5 million. The remaining balance was comprised of 7 residential properties totaling approximately $574,000.  One commercial real estate property comprised $3.4 million, or 28% of total other real estate owned at March 31, 2017.  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 March 31, 2017, our foreclosed asset portfolio had a weighted average age held in portfolio of 5.55 years. Below is a breakout of our foreclosed asset portfolio at March 31, 2017 and December 31, 2016 by property type and the percentages the property has been written down since taken into our possession and the combined writedown percentage, including losses taken when the property was loan collateral (dollars in thousands):

	March 31, 2017								December 31, 2016
Foreclosed Asset Property Type	Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)			Carrying Value at Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)
Single Family	$	190		1.0	%		16.0	%	$	136		---	%		20.3	%
Residential Lot		384		26.8			48.1			438		30.1			48.0
Multi-Family		---		---			---			---		---			---
Vacant Land		2,969		48.2			57.7			3,096		47.2			58.3
Residential Development		2,498		34.8			74.4			2,570		36.2			74.2
Commercial Office		240		49.3			51.1			240		49.3			51.1
Commercial Industrial		---		---			---			---		---			---
Commercial Improved		5,793		48.6			51.1			5,773		48.7			51.2
	$	12,074		45.2			59.9		$	12,253		45.2			60.1

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

	March 31, 2017			December 31, 2016
Nonaccrual loans	$	401		$	300
Loans 90 days or more delinquent and still accruing		---			---
Total nonperforming loans (NPLs)		401			300
Foreclosed assets		12,074			12,253
Repossessed assets		---			---
Total nonperforming assets (NPAs)	$	12,475		$	12,553
NPLs to total loans		0.03	%		0.02	%
NPAs to total assets		0.71	%		0.73	%

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The following table shows the composition and amount of our troubled debt restructurings (TDRs) at March 31, 2017 and December 31, 2016 (dollars in thousands):

	March 31, 2017							December 31, 2016
		Commercial		Consumer		Total		Commercial		Consumer		Total
Performing TDRs	$	17,240	$	11,775	$	29,015	$	17,786	$	12,051	$	29,837
Nonperforming TDRs (1)		135		7		142		141		8		149
Total TDRs	$	17,375	$	11,782	$	29,157	$	17,927	$	12,059	$	29,986

(1) Included in nonperforming asset table above

We had a total of $29.2 million and $30.0 million of loans whose terms have been modified in troubled debt restructurings (“TDRs”) as of March 31, 2017 and December 31, 2016, respectively.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.  In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be removed.

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

Allowance for loan losses: The allowance for loan losses at March 31, 2017 was $16.7 million, a decrease of $266,000 from $17.0 million at December 31, 2016.  The balance of the allowance for loan losses represented 1.32% of total portfolio loans at March 31, 2017 and at December 31, 2016.  The allowance for loan losses to nonperforming loan coverage ratio decreased from 5,654% at December 31, 2016 to 4,163% at March 31, 2017.

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

(Dollars in millions)	Quarter Ended March 31, 2017			Quarter Ended December 31, 2016			Quarter Ended September 30, 2016			Quarter Ended June 30, 2016			Quarter Ended March 31 2016
Commercial loans	$	962.1		$	967.3		$	923.2		$	894.4		$	905.3
Nonperforming loans		0.4			0.3			0.2			0.3			0.4
Other real estate owned and repo assets		12.1			12.3			13.1			14.1			16.2
Total nonperforming assets		12.5			12.6			13.3			14.4			16.6
Net charge-offs (recoveries)		(0.2	)		(1.2	)		(0.1	)		(0.6	)		(0.1	)
Total delinquencies		0.9			1.4			0.3			1.0			0.8

Nonperforming loans continually declined since 2012 to $401,000 at March 31, 2017.  As discussed earlier, we have had net loan recoveries in eleven of the last twelve quarters and in each of the last nine quarters.  Our total delinquencies have continued to be negligible and were $915,000 at March 31, 2017 and $1.4 million at December 31, 2016.  Our delinquency percentage at March 31, 2017 was just 0.07%, well below the Bank’s peers.

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These factors all impact our necessary level of allowance for loan losses and our provision for loan losses. The allowance for loan losses decreased $266,000 in the first quarter of 2017.  We recorded a negative provision for loan losses of $500,000 for the three months ended March 31, 2017 compared to a negative $100,000 for the same period of 2016.  Net loan recoveries were $234,000 for the three months ended March 31, 2017, compared to net recoveries of $148,000 for the same period in 2016. The ratio of net charge-offs to average loans was (0.07)% on an annualized basis for the first quarter of 2017, compared to (0.12)% for the fourth quarter of 2016 and (0.05)% for the first quarter of 2016.

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 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 were stable at $28.8 million at March 31, 2017 compared to $29.7 million at December 31, 2016.  The specific allowance for impaired loans decreased $48,000 to $1.6 million, compared to $1.7 million at December 31, 2016.  The specific allowance for impaired loans represented 5.7% of total impaired loans at March 31, 2017 and December 31, 2016.  The overall balance of impaired loans remained elevated partially due to an accounting rule (ASU 2011-02) adopted in 2011 that requires us to identify classified loans that renew at existing contractual rates as 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 few years, the 18 month period computations have reflected sizeable decreases in net chargeoff experience.  We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. Adjustments to the qualitative factors also involved consideration of different loss periods for the Bank, including 12, 24, 36, 48 and 60 month periods. We also considered the extended period of improved asset quality in assessing the overall qualitative component.  Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was unchanged at $12.1 million at March 31, 2017 and December 31, 2016.  This resulted in a general reserve percentage allocated at March 31, 2017 of 1.28% of commercial loans, an increase from 1.27% at December 31, 2016.  The qualitative component of our allowance allocated to commercial loans was $12.3 million at March 31, 2017 (down from $12.4 million at December 31, 2016).

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 $2.9 million at March 31, 2017 and $3.1 million at December 31, 2016.

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 $49.8 million at March 31, 2017, down $194,000 from $50.0 million at December 31, 2016 as depreciation more than offset capital additions of current facilities and equipment during the first quarter of 2017.

Deposits and Other Borrowings: Total deposits decreased $15.6 million to $1.43 billion at March 31, 2017, as compared to $1.45 billion at December 31, 2016.  Non-interest checking account balances decreased $35.1 million during the first quarter of 2017.  Interest bearing demand account balances increased $2.1 million and savings and money market account balances increased $15.9 million in the first quarter of 2017.  Certificates of deposits increased by $1.5 million in the first quarter of 2017.  We believe our success in maintaining the balances of personal and business checking and savings accounts was primarily attributable to our focus on quality customer service, the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our sophisticated product line.

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Noninterest bearing demand accounts comprised 33% of total deposits at March 31, 2017 and 35% at December 31, 2016.  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 62% of total deposits at March 31, 2017 and 60% at December 31, 2016. Time accounts as a percentage of total deposits were 5% at March 31, 2017 and December 31, 2016.

Borrowed funds totaled $144.0 million at March 31, 2017, including $102.8 million of Federal Home Loan Bank (“FHLB”) advances and $41.2 million in long-term debt associated with trust preferred securities.  Borrowed funds totaled $125.4 million at December 31, 2016, including $84.2 million of FHLB advances and $41.2 million in long-term debt associated with trust preferred securities.  Borrowed funds increased by $18.6 million in the first quarter of 2017 due to obtaining a new short-term $20 million FHLB advance early in the quarter partially offset by an annual payment on an amortizing FHLB advance.

CAPITAL RESOURCES

Total shareholders' equity of $166.1 million at March 31, 2017 increased $3.9 million from $162.2 million at December 31, 2016. The increase was primarily a result of net income of $4.5 million earned in the first quarter of 2017 and an increase of $689,000 in accumulated other comprehensive income, partially offset by the payment of $1.4 million in cash dividends to shareholders on February 28, 2017.  The Bank was categorized as “well capitalized” at March 31, 2017.

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), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a 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.

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

Macatawa Bank Corporation	March 31, 2017			Dec 31, 2016			Sept 30, 2016			June 30, 2016			March 31, 2016
Total capital to risk weighted assets		15.1	%		14.9	%		15.2	%		15.2	%		15.0	%
Common Equity Tier 1 to risk weighted assets		11.3			11.0			11.3			11.1			11.1
Tier 1 capital to risk weighted assets		14.0			13.7			14.1			14.0			13.8
Tier 1 capital to average assets		12.1			12.0			12.0			11.9			11.7

Approximately $40.0 million of trust preferred securities outstanding at March 31, 2017 qualified as Tier 1 capital.

LIQUIDITY

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

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

We have actively pursued initiatives to maintain a strong liquidity position.  The Bank reduced its reliance on non-core funding sources, including brokered deposits, and focused on achieving a non-core funding dependency ratio below its peer group average.  We have had no brokered deposits on our balance sheet since December 2011.  We continue to maintain significant on-balance sheet liquidity.  At March 31, 2017, the Bank held $83.1 million of federal funds sold and other short-term investments.  In addition, the Bank has available borrowing capacity from correspondent banks of approximately $288.6 million as of March 31, 2017.

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 March 31, 2017 (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		39,701		33,236		2,221		---
Other borrowed funds		32,118		60,667		10,000		---
Operating lease obligations		234		458		81		---
Total	$	72,053	$	94,361	$	12,302	$	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 March 31, 2017, we had a total of $446.3 million in unused lines of credit, $95.7 million in unfunded loan commitments and $13.4 million in standby letters of credit.

Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises.  Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year.  Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings.  In 2016, the Bank paid dividends to the Company totaling $6.2 million.  In the same period, the Company paid dividends to its shareholders totaling $4.0 million.  On February 27, 2017, the Bank paid a dividend totaling $1.8 million to the Company in anticipation of the common share cash dividend of $0.04 per share paid on February 28, 2017 to shareholders of record on February 13, 2017.  The Company retained the remaining balance in each period for general corporate purposes.  At March 31, 2017, the Bank had a retained earnings balance of $40.2 million.

During 2016, the Company received payments from the Bank totaling $7.1 million, representing the Bank’s intercompany tax liability for the 2016 tax year, in accordance with the Company’s tax allocation agreement.

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 March 31, 2017 was $5.4 million.  The Company believes that it has sufficient liquidity to meet its cash flow obligations.

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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 quarter of 2017.

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 March 31, 2017, we had gross deferred tax assets of $10.8 million, gross deferred tax liabilities of $2.4 million resulting in a net deferred tax asset of $8.3 million.  Accounting standards require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard.  Each reporting period we consider all reasonably available positive and negative evidence and determine whether it is “more likely than not” that we would be able to realize our deferred tax assets.  With the positive results in the first quarter of 2017, we concluded at March 31, 2017 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 March 31, 2017 (dollars in thousands):

Interest Rate Scenario	Economic Value of Equity		Percent Change			Net Interest Income		Percent Change
Interest rates up 200 basis points	$	212,093		(2.59	)%	$	54,363		4.33	%
Interest rates up 100 basis points		215,815		(0.88	)		53,208		2.11
No change		217,722		---			52,107		---
Interest rates down 100 basis points		202,314		(7.08	)		49,976		(4.09	)

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) as of March 31, 2017, 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)) 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 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 agreements between Macatawa Bank Corporation and its Chief Operating Officer.  Previously filed with the Commission on Form 8-K on February 1, 2017, Exhibit 10.1.  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: April 27, 2017

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EX-31.1

EXHIBIT 31.1

I, Ronald L. Haan, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2017 of Macatawa Bank Corporation;

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

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

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

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

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

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

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

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

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

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

Dated:  April 27, 2017
	/s/ Ronald L. Haan
	Ronald L. Haan
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

I, Jon W. Swets, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2017 of Macatawa Bank Corporation;

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

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

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

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

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

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

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

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

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

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

Dated: April 27, 2017
	/s/ Jon W. Swets
	Jon W. Swets
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32.1

EXHIBIT 32.1

Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his capacity as an officer of Macatawa Bank Corporation (the "Company") that the Quarterly Report of the Company on Form 10-Q for the quarter ended March 31, 2017 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

	/s/ Ronald L. Haan
	Ronald L. Haan
	Chief Executive Officer
	(Principal Executive Officer)
	/s/ Jon W. Swets
	Jon W. Swets
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)
Dated: April 27, 2017

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2017	Apr. 27, 2017
Document and Entity Information [Abstract]
Entity Registrant Name	MACATAWA BANK CORP
Entity Central Index Key	0001053584
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		33,944,789
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2017

XML

CONSOLIDATED BALANCE SHEETS (unaudited) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
ASSETS
Cash and due from banks	$ 30,631	$ 27,690
Federal funds sold and other short -term investments	83,118	62,129
Cash and cash equivalents	113,749	89,819
Securities available for sale, at fair value	184,605	184,433
Securities held to maturity (fair value 2017 - $69,079 and 2016 - $69,849)	68,473	69,378
Federal Home Loan Bank (FHLB) stock	11,558	11,558
Loans held for sale, at fair value	2,767	2,181
Total loans	1,266,128	1,280,812
Allowance for loan losses	(16,696)	(16,962)
Net loans	1,249,432	1,263,850
Premises and equipment - net	49,832	50,026
Accrued interest receivable	4,204	4,092
Bank-owned life insurance	39,524	39,274
Other real estate owned - net	12,074	12,253
Net deferred tax asset	8,330	8,863
Other assets	4,305	5,286
Total assets	1,748,853	1,741,013
Deposits
Noninterest-bearing	466,415	501,478
Interest-bearing	966,731	947,246
Total deposits	1,433,146	1,448,724
Other borrowed funds	102,785	84,173
Long-term debt	41,238	41,238
Accrued expenses and other liabilities	5,539	4,639
Total liabilities	1,582,708	1,578,774
Commitments and contingent liabilities
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 33,944,788 and 33,940,788 shares issued and outstanding at March 31, 2017 and December 31, 2016	216,845	216,731
Retained deficit	(49,905)	(53,008)
Accumulated other comprehensive income (loss)	(795)	(1,484)
Total shareholders' equity	166,145	162,239
Total liabilities and shareholders' equity	$ 1,748,853	$ 1,741,013

XML

CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
ASSETS
Securities held to maturity, fair value	$ 69,079	$ 69,849
Shareholders' equity
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	200,000,000	200,000,000
Common stock, shares issued (in shares)	33,944,788	33,940,788
Common stock, shares outstanding (in shares)	33,944,788	33,940,788

XML

CONSOLIDATED STATEMENTS OF INCOME (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Interest income
Loans, including fees	$ 12,455	$ 11,756
Securities
Taxable	639	550
Tax-exempt	538	433
FHLB Stock	124	124
Federal funds sold and other short-term investments	92	145
Total interest income	13,848	13,008
Interest expense
Deposits	481	463
Other borrowings	382	442
Long-term debt	402	365
Total interest expense	1,265	1,270
Net interest income	12,583	11,738
Provision for loan losses	(500)	(100)
Net interest income after provision for loan losses	13,083	11,838
Noninterest income
Service charges and fees	1,060	1,047
Net gains on mortgage loans	428	487
Trust fees	778	708
ATM and debit card fees	1,201	1,186
Gain on sales of securities	3	89
Bank owned life insurance ("BOLI") income	238	444
Other	523	647
Total noninterest income	4,231	4,608
Noninterest expense
Salaries and benefits	5,999	6,187
Occupancy of premises	1,026	982
Furniture and equipment	732	865
Legal and professional	225	159
Marketing and promotion	227	275
Data processing	682	659
FDIC assessment	136	251
Interchange and other card expense	313	286
Bond and D&O Insurance	117	132
Net losses (gains) on repossessed and foreclosed properties	(85)	36
Administration and disposition of problem assets	180	375
Other	1,336	1,344
Total noninterest expenses	10,888	11,551
Income before income tax	6,426	4,895
Income tax expense	1,966	1,400
Net income	$ 4,460	$ 3,495
Basic earnings per common share (in dollars per share)	$ 0.13	$ 0.10
Diluted earnings per common share (in dollars per share)	0.13	0.10
Cash dividends per common share (in dollars per share)	$ 0.04	$ 0.03

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) [Abstract]
Net income	$ 4,460	$ 3,495
Unrealized gains (losses):
Net change in unrealized gains (losses) on securities available for sale	1,063	1,064
Tax effect	(372)	(372)
Net change in unrealized gains (losses) on securities available for sale, net of tax	691	692
Less: reclassification adjustments:
Reclassification for gains included in net income	3	89
Tax effect	(1)	(31)
Reclassification for gains included in net income, net of tax	2	58
Other comprehensive income (loss), net of tax	689	634
Comprehensive income	$ 5,149	$ 4,129

XML

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) - USD ($) $ in Thousands	Common Stock [Member]	Retained Deficit [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance at Dec. 31, 2015	$ 216,540	$ (64,910)	$ 347	$ 151,977
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	0	3,495	0	3,495
Cash dividends	0	(1,012)	0	(1,012)
Net change in unrealized gain (loss) on securities available for sale, net of tax	0	0	634	634
Stock compensation expense	147	0	0	147
Balance at Mar. 31, 2016	216,687	(62,427)	981	155,241
Balance at Dec. 31, 2016	216,731	(53,008)	(1,484)	162,239
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	0	4,460	0	4,460
Cash dividends	0	(1,357)	0	(1,357)
Net change in unrealized gain (loss) on securities available for sale, net of tax	0	0	689	689
Stock compensation expense	114	0	0	114
Balance at Mar. 31, 2017	$ 216,845	$ (49,905)	$ (795)	$ 166,145

XML

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (Parenthetical) - $ / shares	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividend per share (in dollars per share)	$ 0.04	$ 0.03

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash flows from operating activities
Net income	$ 4,460	$ 3,495
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	537	659
Stock compensation expense	114	147
Provision for loan losses	(500)	(100)
Origination of loans for sale	(16,960)	(18,883)
Proceeds from sales of loans originated for sale	16,802	19,887
Net gains on mortgage loans	(428)	(487)
Gain on sales of securities	(3)	(89)
Write-down of other real estate	64	129
Net gain on sales of other real estate	(149)	(92)
Deferred income tax expense	162	(68)
Change in accrued interest receivable and other assets	869	(1,124)
Earnings in bank-owned life insurance	(238)	(444)
Change in accrued expenses and other liabilities	664	2,073
Net cash from operating activities	5,394	5,103
Cash flows from investing activities
Loan originations and payments, net	14,862	(18,206)
Change in interest-bearing deposits in other financial institutions	0	20,000
Purchases of securities available for sale	(8,867)	(21,802)
Proceeds from:
Maturities and calls of securities	6,457	12,883
Sales of securities available for sale	3,440	9,418
Principal paydowns on securities	1,109	911
Sales of other real estate	320	1,475
Death benefit from bank-owned life insurance	0	518
Additions to premises and equipment	(462)	(154)
Net cash from investing activities	16,859	5,043
Cash flows from financing activities
Change in deposits	(15,578)	(94,678)
Repayments and maturities of other borrowed funds	(1,388)	(1,329)
Proceeds from other borrowed funds	20,000	0
Cash dividends paid	(1,357)	(1,012)
Net cash from financing activities	1,677	(97,019)
Net change in cash and cash equivalents	23,930	(86,873)
Cash and cash equivalents at beginning of period	89,819	181,476
Cash and cash equivalents at end of period	113,749	94,603
Supplemental cash flow information
Interest paid	1,272	1,270
Income taxes paid	0	0
Supplemental noncash disclosures:
Transfers from loans to other real estate	56	102
Security settlement	$ 236	$ 1,012

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2017

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Operating results for the three month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

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 March 31, 2017, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

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

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 March 31, 2017 and December 31, 2016, the total notional amount of such agreements was $43.5 million and $48.1 million and resulted in a derivative asset with a fair value of $383,000 and $494,000, respectively, which were included in other assets and a derivative liability of $383,000 and $494,000, respectively, which were included in other liabilities.

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

Adoption of New Accounting Standards:  The Financial Accounting Standards Board “FASB” issued Accounting Standards Update (“ASU”) ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.  This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes.  The amendments are effective for annual periods beginning after December 15, 2016, and for interim periods within those annual periods.  The impact of adoption of this ASU by the Company was not material as no stock awards vested in the three months ended March 31, 2017, but could cause some volatility in income tax expense in future periods where stock awards vest.

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

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

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

FASB issued ASU No. 2016-13, 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.

FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force).  This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.  The amendments are effective for annual periods beginning after December 15, 2017, and for interim periods within those annual periods.  The impact of adoption of this ASU by the Company is not expected to be material.

XML

SECURITIES

3 Months Ended

Mar. 31, 2017

SECURITIES [Abstract]

SECURITIES

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
March 31, 2017
Available for Sale:
U.S. Treasury and federal agency securities	$	86,517	$	61	$	(900	)	$	85,678
U.S. Agency MBS and CMOs		11,306		16		(157	)		11,165
Tax-exempt state and municipal bonds		39,746		411		(348	)		39,809
Taxable state and municipal bonds		34,757		82		(342	)		34,497
Corporate bonds and other debt securities		12,002		16		(32	)		11,986
Other equity securities		1,500		---		(30	)		1,470
	$	185,828	$	586	$	(1,809	)	$	184,605
Held to Maturity
Tax-exempt state and municipal bonds	$	68,473	$	683	$	(77	)	$	69,079

December 31, 2016
Available for Sale:
U.S. Treasury and federal agency securities	$	85,582	$	49	$	(1,281	)	$	84,350
U. S. Agency MBS and CMOs		12,037		11		(231	)		11,817
Tax-exempt state and municipal bonds		39,578		212		(603	)		39,187
Taxable state and municipal bonds		34,255		65		(437	)		33,883
Corporate bonds and other debt securities		13,765		16		(55	)		13,726
Other equity securities		1,500		---		(30	)		1,470
	$	186,717	$	353	$	(2,637	)	$	184,433
Held to Maturity:
Tax-exempt state and municipal bonds	$	69,378	$	573	$	(102	)	$	69,849

Proceeds from the sale of securities available for sale were $3.4 million and $9.4 million, respectively, in the three month periods ended March 31, 2017 and 2016 resulting in net gain on sale of $3,000 and $89,000, respectively, as reported in the Consolidated Statements of Income.  This resulted in a reclassification of $3,000 ($2,000 net of tax) for the three months ended March 31, 2017 and $89,000 ($58,000 net of tax) for the three months ended March 31, 2016 from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income.

Contractual maturities of debt securities at March 31, 2017 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	$	24,552	$	24,519	$	18,210	$	18,212
Due from one to five years		14,710		15,048		96,325		95,760
Due from five to ten years		8,279		8,471		54,895		54,526
Due after ten years		20,932		21,041		14,898		14,637
	$	68,473	$	69,079	$	184,328	$	183,135

Securities with unrealized losses at March 31, 2017 and December 31, 2016, 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
March 31, 2017	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	60,493	$	(890	)	$	3,039	$	(10	)	$	63,532	$	(900	)
U.S. Agency MBS and CMOs		10,114		(157	)		---		---			10,114		(157	)
Tax-exempt state and municipal bonds		37,802		(412	)		397		(8	)		38,199		(420	)
Taxable state and municipal bonds		19,139		(347	)		---		---			19,139		(347	)
Corporate bonds and other debt securities		5,628		(28	)		500		(4	)		6,128		(32	)
Other equity securities		1,470		(30	)		---		---			1,470		(30	)
Total temporarily impaired	$	134,646	$	(1,864	)	$	3,936	$	(22	)	$	138,582	$	(1,886	)

	Less than 12 Months					12 Months or More					Total
December 31, 2016	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	59,129	$	(1,271	)	$	3,053	$	(10	)	$	62,182	$	(1,281	)
U.S. Agency MBS and CMOs		10,702		(231	)		---		---			10,702		(231	)
Tax-exempt state and municipal bonds		49,508		(698	)		1,672		(7	)		51,180		(705	)
Taxable state and municipal bonds		22,633		(437	)		---		---			22,633		(437	)
Corporate bonds and other debt securities		5,745		(50	)		500		(5	)		6,245		(55	)
Other equity securities		1,470		(30	)		---		---			1,470		(30	)
Total temporarily impaired	$	149,187	$	(2,717	)	$	5,225	$	(22	)	$	154,412	$	(2,739	)

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 month periods ended March 31, 2017 and 2016.

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 March 31, 2017 and December 31, 2016.

XML

LOANS

3 Months Ended

Mar. 31, 2017

LOANS [Abstract]

LOANS

NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

	March 31, 2017			December 31, 2016
Commercial and industrial	$	453,311		$	449,342
Commercial real estate:
Residential developed		10,188			11,970
Unsecured to residential developers		4,785			4,734
Vacant and unimproved		44,950			40,286
Commercial development		499			378
Residential improved		73,064			75,348
Commercial improved		277,898			289,478
Manufacturing and industrial		97,424			95,787
Total commercial real estate		508,808			517,981
Consumer
Residential mortgage		212,949			217,614
Unsecured		343			396
Home equity		83,666			88,113
Other secured		7,051			7,366
Total consumer		304,009			313,489
Total loans		1,266,128			1,280,812
Allowance for loan losses		(16,696	)		(16,962	)
	$	1,249,432		$	1,263,850

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

Three months ended March 31, 2017	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,345	$	6,703		$	3,871		$	43		$	16,962
Charge-offs		---		---			(26	)		---			(26	)
Recoveries		23		162			75			---			260
Provision for loan losses		101		(267	)		(329	)		(5	)		(500	)
Ending Balance	$	6,469	$	6,598		$	3,591		$	38		$	16,696

Three months ended March 31, 2016	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	4,826	$	8,457		$	3,761		$	37		$	17,081
Charge-offs		---		---			(76	)		---			(76	)
Recoveries		49		121			54			---			224
Provision for loan losses		70		(129	)		(40	)		(1	)		(100	)
Ending Balance	$	4,945	$	8,449		$	3,699		$	36		$	17,129

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):

March 31, 2017	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	642	$	304	$	702	$	---	$	1,648
Collectively evaluated for impairment		5,827		6,294		2,889		38		15,048
Total ending allowance balance	$	6,469	$	6,598	$	3,591	$	38	$	16,696
Loans:
Individually reviewed for impairment	$	7,445	$	9,931	$	11,400	$	---	$	28,776
Collectively evaluated for impairment		445,866		498,877		292,609		---		1,237,352
Total ending loans balance	$	453,311	$	508,808	$	304,009	$	---	$	1,266,128

December 31, 2016	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	605	$	368	$	723	$	---	$	1,696
Collectively evaluated for impairment		5,740		6,335		3,148		43		15,266
Total ending allowance balance	$	6,345	$	6,703	$	3,871	$	43	$	16,962
Loans:
Individually reviewed for impairment	$	5,994	$	11,934	$	11,726	$	---	$	29,654
Collectively evaluated for impairment		443,348		506,047		301,763		---		1,251,158
Total ending loans balance	$	449,342	$	517,981	$	313,489	$	---	$	1,280,812

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2017 (dollars in thousands):

March 31, 2017	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	3,921	$	3,921	$	---
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		27		27		---
Commercial improved		---		---		---
Manufacturing and industrial		---		---		---
		27		27		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
Total with no related allowance recorded	$	3,948	$	3,948	$	---
With an allowance recorded:
Commercial and industrial	$	3,524	$	3,524	$	642
Commercial real estate:
Residential developed		185		185		3
Unsecured to residential developers		---		---		---
Vacant and unimproved		375		375		10
Commercial development		189		189		6
Residential improved		2,815		2,815		149
Commercial improved		6,116		6,116		132
Manufacturing and industrial		224		224		4
		9,904		9,904		304
Consumer:
Residential mortgage		7,467		7,467		460
Unsecured		---		---		---
Home equity		3,933		3,933		242
Other secured		---		---		---
		11,400		11,400		702
Total with an allowance recorded	$	24,828	$	24,828	$	1,648
Total	$	28,776	$	28,776	$	1,648

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

December 31, 2016	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	2,298	$	2,298	$	---
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		27		27		---
Commercial improved		350		350		---
Manufacturing and industrial		---		---		---
		377		377		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
Total with no related allowance recorded	$	2,675	$	2,675	$	---
With an allowance recorded:
Commercial and industrial	$	3,696	$	3,696	$	605
Commercial real estate:
Residential developed		187		187		4
Unsecured to residential developers		---		---		---
Vacant and unimproved		387		387		9
Commercial development		189		189		6
Residential improved		4,687		4,687		216
Commercial improved		5,879		5,879		128
Manufacturing and industrial		228		228		5
		11,557		11,557		368
Consumer:
Residential mortgage		7,523		7,523		464
Unsecured		---		---		---
Home equity		4,203		4,203		259
Other secured		---		---		---
		11,726		11,726		723
Total with an allowance recorded	$	26,979	$	26,979	$	1,696
Total	$	29,654	$	29,654	$	1,696

The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three month periods ended March 31, 2017 and 2016 (dollars in thousands):

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Average of impaired loans during the period:
Commercial and industrial	$	6,843	$	8,265
Commercial real estate:
Residential developed		185		---
Unsecured to residential developers		---		---
Vacant and unimproved		379		446
Commercial development		189		192
Residential improved		4,086		5,543
Commercial improved		6,158		9,537
Manufacturing and industrial		225		239
Consumer		11,495		13,140
Interest income recognized during impairment:
Commercial and industrial		278		298
Commercial real estate		126		201
Consumer		109		122
Cash-basis interest income recognized
Commercial and industrial		265		288
Commercial real estate		123		200
Consumer		107		123

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 March 31, 2017 and December 31, 2016:

March 31, 2017	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	127	$	---
Commercial real estate:
Residential developed		---		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		79		---
Commercial improved		124		---
Manufacturing and industrial		---		---
		252		---
Consumer:
Residential mortgage		2		---
Unsecured		13		---
Home equity		7		---
Other secured		---		---
		22		---
Total	$	401	$	---

December 31, 2016	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	36	$	---
Commercial real estate:
Residential developed		---		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		6		---
Commercial improved		128		---
Manufacturing and industrial		---		---
		183		---
Consumer:
Residential mortgage		58		---
Unsecured		16		---
Home equity		7		---
Other secured		---		---
		81		---
Total	$	300	$	---

The following table presents the aging of the recorded investment in past due loans as of March 31, 2017 and December 31, 2016 by class of loans (dollars in thousands):

March 31, 2017	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	30	$	121	$	151	$	453,160	$	453,311
Commercial real estate:
Residential developed		---		---		---		10,188		10,188
Unsecured to residential developers		---		---		---		4,785		4,785
Vacant and unimproved		---		---		---		44,950		44,950
Commercial development		189		49		238		261		499
Residential improved		92		79		171		72,893		73,064
Commercial improved		124		---		124		277,774		277,898
Manufacturing and industrial		---		---		---		97,424		97,424
		405		128		533		508,275		508,808
Consumer:
Residential mortgage		204		---		204		212,745		212,949
Unsecured		12		---		12		331		343
Home equity				---		---		83,666		83,666
Other secured		15		---		15		7,036		7,051
		231		---		231		303,778		304,009
Total	$	666	$	249	$	915	$	1,265,213	$	1,266,128

December 31, 2016	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	425	$	28	$	453	$	448,889	$	449,342
Commercial real estate:
Residential developed		---		---		---		11,970		11,970
Unsecured to residential developers		---		---		---		4,734		4,734
Vacant and unimproved		---		---		---		40,286		40,286
Commercial development		---		49		49		329		378
Residential improved		74		5		79		75,269		75,348
Commercial improved		478		---		478		289,000		289,478
Manufacturing and industrial		---		---		---		95,787		95,787
		552		54		606		517,375		517,981
Consumer:
Residential mortgage		64		56		120		217,494		217,614
Unsecured		---		---		---		396		396
Home equity		187		---		187		87,926		88,113
Other secured		81		---		81		7,285		7,366
		332		56		388		313,101		313,489
Total	$	1,309	$	138	$	1,447	$	1,279,365	$	1,280,812

The Company had allocated $1,648,000 and $1,696,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of March 31, 2017 and December 31, 2016, respectively.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  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 March 31, 2017 and December 31, 2016 (dollars in thousands):

	March 31, 2017				December 31, 2016
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		24	$	7,444		25	$	5,994
Commercial real estate		43		9,931		49		11,933
Consumer		111		11,782		116		12,059
		178	$	29,157		190	$	29,986

The following table presents information related to accruing troubled debt restructurings as of March 31, 2017 and December 31, 2016.  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):

	March 31, 2017		December 31, 2016
Accruing TDR - nonaccrual at restructuring	$	---	$	---
Accruing TDR - accruing at restructuring		23,215		25,665
Accruing TDR - upgraded to accruing after six consecutive payments		5,800		4,172
	$	29,015	$	29,837

The following tables present information regarding troubled debt restructurings executed during the three month periods ended March 31, 2017 and 2016 (dollars in thousands):

	Three Months Ended March 31, 2017						Three Months Ended March 31, 2016
	# of Loans		Pre-TDR Balance		Writedown Upon TDR		# of Loans		Pre-TDR Balance		Writedown Upon TDR
Commercial and industrial		---	$	---	$	---		---	$	---	$	---
Commercial real estate		---		---		---		---		---		---
Consumer		---		---		---		4		238		---
		---		---	$	---		4	$	238	$	---

According to the accounting standards, not all loan modifications are TDRs.  TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress.  The Company reviews all modifications and renewals for determination of TDR status.  In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession.  These modifications are not considered TDRs.  In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress.  This could be the case if the Company is matching a competitor’s interest rate.  These modifications would also not be considered TDRs.  Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.  As with other loans not considered TDR or impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.

Payment defaults on TDRs have been minimal and during the three months ended March 31, 2017 and 2016, the balance of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.

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.

As of March 31, 2017 and December 31, 2016, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

March 31, 2017		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	---	$	24,690	$	111,044	$	297,713	$	12,063	$	7,674	$	127	$	---	$	453,311
Commercial real estate:
Residential developed		---		---		1,703		7,640		845		---		---		---		10,188
Unsecured to residential developers		---		---		---		4,785		---		---		---		---		4,785
Vacant and unimproved		---		---		21,257		20,157		3,536		---		---		---		44,950
Commercial development		---		---		121		139		---		190		49		---		499
Residential improved		---		---		6,132		62,688		2,572		1,593		79		---		73,064
Commercial improved		---		3,656		58,960		206,827		7,233		1,098		124		---		277,898
Manufacturing & industrial		---		1,587		37,797		55,153		2,308		579		---		---		97,424
	$	---	$	29,933	$	237,014	$	655,102	$	28,557	$	11,134	$	379	$	---	$	962,119

December 31, 2016		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	---	$	27,619	$	118,243	$	282,527	$	14,610	$	6,307	$	36	$	---	$	449,342
Commercial real estate:
Residential developed		---		---		2,328		8,786		856		---		---		---		11,970
Unsecured to residential developers		---		---		---		4,734		---		---		---		---		4,734
Vacant and unimproved		---		---		17,672		19,028		3,586		---		---		---		40,286
Commercial development		---		---		---		140		---		189		49		---		378
Residential improved		---		---		7,100		63,957		2,628		1,657		6		---		75,348
Commercial improved		---		2,433		66,259		210,449		9,084		1,125		128		---		289,478
Manufacturing & industrial		---		1,665		38,719		51,718		3,076		609		---		---		95,787
	$	---	$	31,717	$	250,321	$	641,339	$	33,840	$	9,887	$	219	$	---	$	967,323

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):

	March 31, 2017		December 31, 2016
Not classified as impaired	$	2,434	$	2,608
Classified as impaired		9,079		7,498
Total commercial loans classified substandard or worse	$	11,513	$	10,106

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):

 

March 31, 2017	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	212,949	$	343	$	83,666	$	7,051
Nonperforming		---		---		---		---
Total	$	212,949	$	343	$	83,666	$	7,051

December 31, 2016	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	217,558	$	396	$	88,113	$	7,366
Nonperforming		56		---		---		---
Total	$	217,614	$	396	$	88,113	$	7,366

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OTHER REAL ESTATE OWNED

3 Months Ended

Mar. 31, 2017

OTHER REAL ESTATE OWNED [Abstract]

OTHER REAL ESTATE OWNED

NOTE 4 – OTHER REAL ESTATE OWNED

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

	Three Months Ended March 31, 2017			Year Ended December 31, 2016			Three Months Ended March 31, 2016
Beginning balance	$	22,864		$	28,377		$	28,377
Additions, transfers from loans		56			339			102
Proceeds from sales of other real estate owned		(320	)		(5,339	)		(1,475	)
Valuation allowance reversal upon sale		(250	)		(1,158	)		(251	)
Gain on sales of other real estate owned		149			645			92
		22,499			22,864			26,845
Less: valuation allowance		(10,425	)		(10,611	)		(10,683	)
Ending balance	$	12,074		$	12,253		$	16,162

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

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Beginning balance	$	10,611		$	10,805
Additions charged to expense		64			129
Reversals upon sale		(250	)		(251	)
Ending balance	$	10,425		$	10,683

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FAIR VALUE

3 Months Ended

Mar. 31, 2017

FAIR VALUE [Abstract]

FAIR VALUE

NOTE 5 – FAIR VALUE

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

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

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

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

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

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

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

Other Real Estate Owned: Other real estate owned (OREO) properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis.  Adjustments to OREO are measured at fair value, less 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.

Assets 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)
March 31, 2017
U.S. Treasury and federal agency securities	$	85,678		$	---	$	85,678	$	---
U.S. Agency MBS and CMOs		11,165			---		11,165		---
Tax-exempt state and municipal bonds		39,809			---		39,809		---
Taxable state and municipal bonds		34,497			---		34,497		---
Corporate bonds and other debt securities		11,986			---		11,986		---
Other equity securities		1,470			---		1,470		---
Loans held for sale		2,767			---		2,767		---
Interest rate swaps		383			---		---		383
Interest rate swaps		(383	)		---		---		(383	)

December 31, 2016
U.S. Treasury and federal agency securities	$	84,350		$	---	$	84,350	$	---
U.S. Agency MBS and CMOs		11,817			---		11,817		---
Tax-exempt state and municipal bonds		39,187			---		39,187		---
Taxable state and municipal bonds		33,883			---		33,883		---
Corporate bonds and other debt securities		13,726			---		13,726		---
Other equity securities		1,470			---		1,470		---
Loans held for sale		2,181			---		2,181		---
Interest rate swaps		494			---		---		494
Interest rate swaps		(494	)		---		---		(494	)

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)
March 31, 2017
Impaired loans	$	3,282	$	---	$	---	$	3,282
Other real estate owned		9,400		---		---		9,400
December 31, 2016
Impaired loans	$	3,436	$	---	$	---	$	3,436
Other real estate owned		9,542		---		---		9,542

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

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
March 31, 2017
Impaired Loans	$	3,282	Sales comparison approach	Adjustment for differences between comparable sales		1.0 to 35.0
			Income approach	Capitalization rate		9.5 to 11.0
Other real estate owned		9,400	Sales comparison approach	Adjustment for differences between comparable sales		2.0 to 42.0
			Income approach	Capitalization rate		9.5 to 11.5

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
December 31, 2016
Impaired Loans	$	3,436	Sales comparison approach	Adjustment for differences between comparable sales		1.0 to35.0
			Income approach	Capitalization rate		9.5 to 11.5
Other real estate owned		9,542	Sales comparison approach	Adjustment for differences between comparable sales		2.0 to 32.5
			Income approach	Capitalization rate		9.5 to 11.5

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

Financial assets	Level in Fair Value Hierarchy	March 31, 2017						December 31, 2016
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and due from banks	Level 1	$	30,631		$	30,631		$	27,690		$	27,690
Cash equivalents	Level 2		83,118			83,118			62,129			62,129
Securities held to maturity	Level 3		68,473			69,079			69,378			69,849
FHLB stock			11,558		NA				11,558		NA
Loans, net	Level 2		1,245,996			1,234,716			1,260,414			1,247,842
Bank owned life insurance	Level 3		39,524			39,524			39,274			39,274
Accrued interest receivable	Level 2		4,204			4,204			4,092			4,092
Financial liabilities
Deposits	Level 2		(1,433,146	)		(1,433,068	)		(1,448,724	)		(1,448,692	)
Other borrowed funds	Level 2		(102,785	)		(102,595	)		(84,173	)		(84,051	)
Long-term debt	Level 2		(41,238	)		(36,277	)		(41,238	)		(36,112	)
Accrued interest payable	Level 2		(275	)		(275	)		(282	)		(282	)
Off-balance sheet credit-related items
Loan commitments			---			---			---			---

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

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

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DEPOSITS

3 Months Ended

Mar. 31, 2017

DEPOSITS [Abstract]

DEPOSITS

NOTE 6 – DEPOSITS

Deposits are summarized as follows (in thousands):

	March 31, 2017		December 31, 2016
Noninterest-bearing demand	$	466,415	$	501,478
Interest bearing demand		342,812		340,715
Savings and money market accounts		548,761		532,853
Certificates of deposit		75,158		73,678
	$	1,433,146	$	1,448,724

Time deposits that exceed the FDIC insurance limit of $250,000 were approximately $18.1 million at March 31, 2017 and $17.4 million at December 31, 2016.

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OTHER BORROWED FUNDS

3 Months Ended

Mar. 31, 2017

OTHER BORROWED FUNDS [Abstract]

OTHER BORROWED FUNDS

NOTE 7 - OTHER BORROWED FUNDS

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

Federal Home Loan Bank Advances

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

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
March 31, 2017
Single maturity fixed rate advances	$	100,000	April 2017 to April 2021		1.41	%
Amortizable mortgage advances		2,785	March 2018 to July 2018		3.75	%
	$	102,785

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
December 31, 2016
Single maturity fixed rate advances	$	80,000	February 2018 to April 2021		1.60	%
Amortizable mortgage advances		4,173	March 2018 to July 2018		3.78	%
	$	84,173

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 $464,498,000 and $424,951,000 under a blanket lien arrangement at March 31, 2017 and December 31, 2016, respectively.

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

2017	$	20,667
2018		52,118
2019		10,000
2020		10,000
2021		10,000
Thereafter		---
	$	102,785

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank.  There were no borrowings outstanding at March 31, 2017 and December 31, 2016, and the Company had approximately $16.3 million and $18.1 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $20.4 million and $20.7 million at March 31, 2017 and December 31, 2016, respectively.

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EARNINGS PER COMMON SHARE

3 Months Ended

Mar. 31, 2017

EARNINGS PER COMMON SHARE [Abstract]

EARNINGS PER COMMON SHARE

NOTE 8 - EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three month periods ended March 31, 2017 and 2016 are as follows (dollars in thousands, except per share data):

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Net income available to common shares	$	4,460	$	3,495
Weighted average shares outstanding, including participating stock awards - Basic		33,941,010		33,925,113
Dilutive potential common shares:
Stock options		7,574		---
Stock warrants		---		---
Weighted average shares outstanding - Diluted		33,948,584		33,925,113
Basic earnings per common share	$	0.13	$	0.10
Diluted earnings per common share	$	0.13	$	0.10

Stock options for 101,473 shares of common stock for the three month period ended March 31, 2016, were not considered in computing diluted earnings per share because they were antidilutive. There were no antidilutive shares of common stock at March 31, 2017.

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FEDERAL INCOME TAXES

3 Months Ended

Mar. 31, 2017

FEDERAL INCOME TAXES [Abstract]

FEDERAL INCOME TAXES

NOTE 9 - FEDERAL INCOME TAXES

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

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Current	$	1,804	$	1,468
Deferred		162		(68	)
	$	1,966	$	1,400

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 March 31, 2017			Three Months Ended March 31, 2016
Statutory rate		35	%		35	%
Statutory rate applied to income before taxes	$	2,249		$	1,713
Deduct
Tax-exempt interest income		(183	)		(148	)
Bank-owned life insurance		(83	)		(155	)
Other, net		(17	)		(10	)
	$	1,966		$	1,400

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 March 31, 2017 or December 31, 2016.

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

	March 31, 2017			December 31, 2016
Deferred tax assets
Allowance for loan losses	$	5,844		$	5,937
Nonaccrual loan interest		642			718
Valuation allowance on other real estate owned		3,649			3,714
Unrealized loss on securities available for sale		428			799
Other		216			176
Gross deferred tax assets		10,779			11,344
Valuation allowance		---			---
Total net deferred tax assets		10,779			11,344
Deferred tax liabilities
Depreciation		(1,655	)		(1,705	)
Prepaid expenses		(399	)		(399	)
Unrealized gain on securities available for sale		---			---
Other		(395	)		(377	)
Gross deferred tax liabilities		(2,449	)		(2,481	)
Net deferred tax asset	$	8,330		$	8,863

There were no unrecognized tax benefits at March 31, 2017 or December 31, 2016 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2013.

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COMMITMENTS AND OFF BALANCE-SHEET RISK

3 Months Ended

Mar. 31, 2017

COMMITMENTS AND OFF BALANCE-SHEET RISK [Abstract]

COMMITMENTS AND OFF BALANCE-SHEET RISK

NOTE 10 – COMMITMENTS AND OFF BALANCE-SHEET RISK

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

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

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

	March 31, 2017		December 31, 2016
Commitments to make loans	$	95,653	$	90,293
Letters of credit		13,598		13,823
Unused lines of credit		446,346		437,435

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $16.8 million and $19.8 million at March 31, 2017 and December 31, 2016, respectively.

At March 31, 2017, approximately 37.5% 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.

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CONTINGENCIES

3 Months Ended

Mar. 31, 2017

CONTINGENCIES [Abstract]

CONTINGENCIES

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 March 31, 2017, 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.

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SHAREHOLDERS' EQUITY

3 Months Ended

Mar. 31, 2017

SHAREHOLDERS' EQUITY [Abstract]

SHAREHOLDERS' EQUITY

NOTE 12 – SHAREHOLDERS' EQUITY

Regulatory Capital

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

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

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), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures.

At March 31, 2017 and December 31, 2016, 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
March 31, 2017
CET1 capital (to risk weighted assets)
Consolidated	$	166,880		11.3	%	$	66,557		4.5	%	$	85,045		5.8	%		N/A		N/A
Bank		201,129		13.6			66,552		4.5			85,038		5.8		$	96,130		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		206,880		14.0			88,742		6.0			107,230		7.3			N/A		N/A
Bank		201,129		13.6			88,736		6.0			107,222		7.3			118,314		8.0
Total capital (to risk weighted assets)
Consolidated		223,575		15.1			118,323		8.0			136,811		9.3			N/A		N/A
Bank		217,825		14.7			118,314		8.0			136,801		9.3			147,893		10.0
Tier 1 capital (to average assets)
Consolidated		206,880		12.1			68,329		4.0			N/A		N/A			N/A		N/A
Bank		201,129		11.8			68,264		4.0			N/A		N/A			85,330		5.0
December 31, 2016
CET1 capital (to risk weighted assets)
Consolidated	$	163,663		11.0	%	$	66,743		4.5	%	$	76,013		5.1	%		N/A		N/A
Bank		197,972		13.4			66,737		4.5			76,006		5.1		$	96,398		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		203,663		13.7			88,991		6.0			98,261		6.6			N/A		N/A
Bank		197,972		13.4			88,983		6.0			98,252		6.6			118,644		8.0
Total capital (to risk weighted assets)
Consolidated		220,625		14.9			118,655		8.0			127,925		8.6			N/A		N/A
Bank		214,934		14.5			118,644		8.0			127,913		8.6			148,305		10.0
Tier 1 capital (to average assets)
Consolidated		203,663		12.0			67,810		4.0			N/A		N/A			N/A		N/A
Bank		197,972		11.7			67,742		4.0			N/A		N/A			84,677		5.0

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

The Bank was categorized as "well capitalized" at March 31, 2017 and December 31, 2016.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2017

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Principles of Consolidation

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

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

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

Basis of Presentation

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

Operating results for the three month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

Use of Estimates

Use of Estimates:  To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.  The allowance for loan losses, valuation of deferred tax assets, loss contingencies, fair value of other real estate owned and fair values of financial instruments are particularly subject to change.

Allowance for Loan Losses

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

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. At March 31, 2017, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

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

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

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

Foreclosed Assets

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

Income Taxes

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

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

Derivatives

Derivatives:  Certain of our commercial loan customers have entered into interest rate swap agreements directly with the Bank.  At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer.   This is known as a back-to-back swap agreement.  Under this arrangement the Bank has two freestanding interest rate swaps, both of which are carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At March 31, 2017 and December 31, 2016, the total notional amount of such agreements was $43.5 million and $48.1 million and resulted in a derivative asset with a fair value of $383,000 and $494,000, respectively, which were included in other assets and a derivative liability of $383,000 and $494,000, respectively, which were included in other liabilities.

Reclassifications

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

Adoption of New Accounting Standards

Adoption of New Accounting Standards:  The Financial Accounting Standards Board “FASB” issued Accounting Standards Update (“ASU”) ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.  This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes.  The amendments are effective for annual periods beginning after December 15, 2016, and for interim periods within those annual periods.  The impact of adoption of this ASU by the Company was not material as no stock awards vested in the three months ended March 31, 2017, but could cause some volatility in income tax expense in future periods where stock awards vest.

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

Newly Issued Not Yet Effective Standards

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

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

FASB issued ASU No. 2016-13, 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.

FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force).  This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.  The amendments are effective for annual periods beginning after December 15, 2017, and for interim periods within those annual periods.  The impact of adoption of this ASU by the Company is not expected to be material.

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SECURITIES (Tables)

3 Months Ended

Mar. 31, 2017

SECURITIES [Abstract]

Amortized Cost and Fair Value of Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2017
Available for Sale:
U.S. Treasury and federal agency securities	$	86,517	$	61	$	(900	)	$	85,678
U.S. Agency MBS and CMOs		11,306		16		(157	)		11,165
Tax-exempt state and municipal bonds		39,746		411		(348	)		39,809
Taxable state and municipal bonds		34,757		82		(342	)		34,497
Corporate bonds and other debt securities		12,002		16		(32	)		11,986
Other equity securities		1,500		---		(30	)		1,470
	$	185,828	$	586	$	(1,809	)	$	184,605
Held to Maturity
Tax-exempt state and municipal bonds	$	68,473	$	683	$	(77	)	$	69,079

December 31, 2016
Available for Sale:
U.S. Treasury and federal agency securities	$	85,582	$	49	$	(1,281	)	$	84,350
U. S. Agency MBS and CMOs		12,037		11		(231	)		11,817
Tax-exempt state and municipal bonds		39,578		212		(603	)		39,187
Taxable state and municipal bonds		34,255		65		(437	)		33,883
Corporate bonds and other debt securities		13,765		16		(55	)		13,726
Other equity securities		1,500		---		(30	)		1,470
	$	186,717	$	353	$	(2,637	)	$	184,433
Held to Maturity:
Tax-exempt state and municipal bonds	$	69,378	$	573	$	(102	)	$	69,849

Contractual Maturities of Debt Securities

Contractual maturities of debt securities at March 31, 2017 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	$	24,552	$	24,519	$	18,210	$	18,212
Due from one to five years		14,710		15,048		96,325		95,760
Due from five to ten years		8,279		8,471		54,895		54,526
Due after ten years		20,932		21,041		14,898		14,637
	$	68,473	$	69,079	$	184,328	$	183,135

Securities in Continuous Unrealized Loss Position

Securities with unrealized losses at March 31, 2017 and December 31, 2016, 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
March 31, 2017	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	60,493	$	(890	)	$	3,039	$	(10	)	$	63,532	$	(900	)
U.S. Agency MBS and CMOs		10,114		(157	)		---		---			10,114		(157	)
Tax-exempt state and municipal bonds		37,802		(412	)		397		(8	)		38,199		(420	)
Taxable state and municipal bonds		19,139		(347	)		---		---			19,139		(347	)
Corporate bonds and other debt securities		5,628		(28	)		500		(4	)		6,128		(32	)
Other equity securities		1,470		(30	)		---		---			1,470		(30	)
Total temporarily impaired	$	134,646	$	(1,864	)	$	3,936	$	(22	)	$	138,582	$	(1,886	)

	Less than 12 Months					12 Months or More					Total
December 31, 2016	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	59,129	$	(1,271	)	$	3,053	$	(10	)	$	62,182	$	(1,281	)
U.S. Agency MBS and CMOs		10,702		(231	)		---		---			10,702		(231	)
Tax-exempt state and municipal bonds		49,508		(698	)		1,672		(7	)		51,180		(705	)
Taxable state and municipal bonds		22,633		(437	)		---		---			22,633		(437	)
Corporate bonds and other debt securities		5,745		(50	)		500		(5	)		6,245		(55	)
Other equity securities		1,470		(30	)		---		---			1,470		(30	)
Total temporarily impaired	$	149,187	$	(2,717	)	$	5,225	$	(22	)	$	154,412	$	(2,739	)

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LOANS (Tables)

3 Months Ended

Mar. 31, 2017

LOANS [Abstract]

Portfolio Loans

Portfolio loans were as follows (dollars in thousands):

	March 31, 2017			December 31, 2016
Commercial and industrial	$	453,311		$	449,342
Commercial real estate:
Residential developed		10,188			11,970
Unsecured to residential developers		4,785			4,734
Vacant and unimproved		44,950			40,286
Commercial development		499			378
Residential improved		73,064			75,348
Commercial improved		277,898			289,478
Manufacturing and industrial		97,424			95,787
Total commercial real estate		508,808			517,981
Consumer
Residential mortgage		212,949			217,614
Unsecured		343			396
Home equity		83,666			88,113
Other secured		7,051			7,366
Total consumer		304,009			313,489
Total loans		1,266,128			1,280,812
Allowance for loan losses		(16,696	)		(16,962	)
	$	1,249,432		$	1,263,850

Activity in Allowance for Loan Losses by Portfolio Segment

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

Three months ended March 31, 2017	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,345	$	6,703		$	3,871		$	43		$	16,962
Charge-offs		---		---			(26	)		---			(26	)
Recoveries		23		162			75			---			260
Provision for loan losses		101		(267	)		(329	)		(5	)		(500	)
Ending Balance	$	6,469	$	6,598		$	3,591		$	38		$	16,696

Three months ended March 31, 2016	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	4,826	$	8,457		$	3,761		$	37		$	17,081
Charge-offs		---		---			(76	)		---			(76	)
Recoveries		49		121			54			---			224
Provision for loan losses		70		(129	)		(40	)		(1	)		(100	)
Ending Balance	$	4,945	$	8,449		$	3,699		$	36		$	17,129

Allowance for Loan Losses and Recorded Investment in Loans by Portfolio Segment Based on Impairment Method

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

March 31, 2017	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	642	$	304	$	702	$	---	$	1,648
Collectively evaluated for impairment		5,827		6,294		2,889		38		15,048
Total ending allowance balance	$	6,469	$	6,598	$	3,591	$	38	$	16,696
Loans:
Individually reviewed for impairment	$	7,445	$	9,931	$	11,400	$	---	$	28,776
Collectively evaluated for impairment		445,866		498,877		292,609		---		1,237,352
Total ending loans balance	$	453,311	$	508,808	$	304,009	$	---	$	1,266,128

December 31, 2016	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	605	$	368	$	723	$	---	$	1,696
Collectively evaluated for impairment		5,740		6,335		3,148		43		15,266
Total ending allowance balance	$	6,345	$	6,703	$	3,871	$	43	$	16,962
Loans:
Individually reviewed for impairment	$	5,994	$	11,934	$	11,726	$	---	$	29,654
Collectively evaluated for impairment		443,348		506,047		301,763		---		1,251,158
Total ending loans balance	$	449,342	$	517,981	$	313,489	$	---	$	1,280,812

Loans Individually Evaluated for Impairment by Class of Loans

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2017 (dollars in thousands):

March 31, 2017	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	3,921	$	3,921	$	---
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		27		27		---
Commercial improved		---		---		---
Manufacturing and industrial		---		---		---
		27		27		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
Total with no related allowance recorded	$	3,948	$	3,948	$	---
With an allowance recorded:
Commercial and industrial	$	3,524	$	3,524	$	642
Commercial real estate:
Residential developed		185		185		3
Unsecured to residential developers		---		---		---
Vacant and unimproved		375		375		10
Commercial development		189		189		6
Residential improved		2,815		2,815		149
Commercial improved		6,116		6,116		132
Manufacturing and industrial		224		224		4
		9,904		9,904		304
Consumer:
Residential mortgage		7,467		7,467		460
Unsecured		---		---		---
Home equity		3,933		3,933		242
Other secured		---		---		---
		11,400		11,400		702
Total with an allowance recorded	$	24,828	$	24,828	$	1,648
Total	$	28,776	$	28,776	$	1,648

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

December 31, 2016	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	2,298	$	2,298	$	---
Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		27		27		---
Commercial improved		350		350		---
Manufacturing and industrial		---		---		---
		377		377		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
Total with no related allowance recorded	$	2,675	$	2,675	$	---
With an allowance recorded:
Commercial and industrial	$	3,696	$	3,696	$	605
Commercial real estate:
Residential developed		187		187		4
Unsecured to residential developers		---		---		---
Vacant and unimproved		387		387		9
Commercial development		189		189		6
Residential improved		4,687		4,687		216
Commercial improved		5,879		5,879		128
Manufacturing and industrial		228		228		5
		11,557		11,557		368
Consumer:
Residential mortgage		7,523		7,523		464
Unsecured		---		---		---
Home equity		4,203		4,203		259
Other secured		---		---		---
		11,726		11,726		723
Total with an allowance recorded	$	26,979	$	26,979	$	1,696
Total	$	29,654	$	29,654	$	1,696

Average Balances of Impaired Loans and Interest Recognized on Impaired Loans

The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three month periods ended March 31, 2017 and 2016 (dollars in thousands):

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Average of impaired loans during the period:
Commercial and industrial	$	6,843	$	8,265
Commercial real estate:
Residential developed		185		---
Unsecured to residential developers		---		---
Vacant and unimproved		379		446
Commercial development		189		192
Residential improved		4,086		5,543
Commercial improved		6,158		9,537
Manufacturing and industrial		225		239
Consumer		11,495		13,140
Interest income recognized during impairment:
Commercial and industrial		278		298
Commercial real estate		126		201
Consumer		109		122
Cash-basis interest income recognized
Commercial and industrial		265		288
Commercial real estate		123		200
Consumer		107		123

Recorded Investment in Nonaccrual and Loans Past Due Over 90 Days Still on Accrual by Class of Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2017 and December 31, 2016:

March 31, 2017	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	127	$	---
Commercial real estate:
Residential developed		---		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		79		---
Commercial improved		124		---
Manufacturing and industrial		---		---
		252		---
Consumer:
Residential mortgage		2		---
Unsecured		13		---
Home equity		7		---
Other secured		---		---
		22		---
Total	$	401	$	---

December 31, 2016	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	36	$	---
Commercial real estate:
Residential developed		---		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		6		---
Commercial improved		128		---
Manufacturing and industrial		---		---
		183		---
Consumer:
Residential mortgage		58		---
Unsecured		16		---
Home equity		7		---
Other secured		---		---
		81		---
Total	$	300	$	---

Aging of Recorded Investment in Past Due Loans by Class of Loans

The following table presents the aging of the recorded investment in past due loans as of March 31, 2017 and December 31, 2016 by class of loans (dollars in thousands):

March 31, 2017	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	30	$	121	$	151	$	453,160	$	453,311
Commercial real estate:
Residential developed		---		---		---		10,188		10,188
Unsecured to residential developers		---		---		---		4,785		4,785
Vacant and unimproved		---		---		---		44,950		44,950
Commercial development		189		49		238		261		499
Residential improved		92		79		171		72,893		73,064
Commercial improved		124		---		124		277,774		277,898
Manufacturing and industrial		---		---		---		97,424		97,424
		405		128		533		508,275		508,808
Consumer:
Residential mortgage		204		---		204		212,745		212,949
Unsecured		12		---		12		331		343
Home equity				---		---		83,666		83,666
Other secured		15		---		15		7,036		7,051
		231		---		231		303,778		304,009
Total	$	666	$	249	$	915	$	1,265,213	$	1,266,128

December 31, 2016	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	425	$	28	$	453	$	448,889	$	449,342
Commercial real estate:
Residential developed		---		---		---		11,970		11,970
Unsecured to residential developers		---		---		---		4,734		4,734
Vacant and unimproved		---		---		---		40,286		40,286
Commercial development		---		49		49		329		378
Residential improved		74		5		79		75,269		75,348
Commercial improved		478		---		478		289,000		289,478
Manufacturing and industrial		---		---		---		95,787		95,787
		552		54		606		517,375		517,981
Consumer:
Residential mortgage		64		56		120		217,494		217,614
Unsecured		---		---		---		396		396
Home equity		187		---		187		87,926		88,113
Other secured		81		---		81		7,285		7,366
		332		56		388		313,101		313,489
Total	$	1,309	$	138	$	1,447	$	1,279,365	$	1,280,812

Troubled Debt Restructurings

The following table presents information regarding troubled debt restructurings as of March 31, 2017 and December 31, 2016 (dollars in thousands):

	March 31, 2017				December 31, 2016
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		24	$	7,444		25	$	5,994
Commercial real estate		43		9,931		49		11,933
Consumer		111		11,782		116		12,059
		178	$	29,157		190	$	29,986

The following table presents information related to accruing troubled debt restructurings as of March 31, 2017 and December 31, 2016.  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):

	March 31, 2017		December 31, 2016
Accruing TDR - nonaccrual at restructuring	$	---	$	---
Accruing TDR - accruing at restructuring		23,215		25,665
Accruing TDR - upgraded to accruing after six consecutive payments		5,800		4,172
	$	29,015	$	29,837

The following tables present information regarding troubled debt restructurings executed during the three month periods ended March 31, 2017 and 2016 (dollars in thousands):

	Three Months Ended March 31, 2017						Three Months Ended March 31, 2016
	# of Loans		Pre-TDR Balance		Writedown Upon TDR		# of Loans		Pre-TDR Balance		Writedown Upon TDR
Commercial and industrial		---	$	---	$	---		---	$	---	$	---
Commercial real estate		---		---		---		---		---		---
Consumer		---		---		---		4		238		---
		---		---	$	---		4	$	238	$	---

Risk Grade Category of Loans by Class of Loans

As of March 31, 2017 and December 31, 2016, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

March 31, 2017		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	---	$	24,690	$	111,044	$	297,713	$	12,063	$	7,674	$	127	$	---	$	453,311
Commercial real estate:
Residential developed		---		---		1,703		7,640		845		---		---		---		10,188
Unsecured to residential developers		---		---		---		4,785		---		---		---		---		4,785
Vacant and unimproved		---		---		21,257		20,157		3,536		---		---		---		44,950
Commercial development		---		---		121		139		---		190		49		---		499
Residential improved		---		---		6,132		62,688		2,572		1,593		79		---		73,064
Commercial improved		---		3,656		58,960		206,827		7,233		1,098		124		---		277,898
Manufacturing & industrial		---		1,587		37,797		55,153		2,308		579		---		---		97,424
	$	---	$	29,933	$	237,014	$	655,102	$	28,557	$	11,134	$	379	$	---	$	962,119

December 31, 2016		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	---	$	27,619	$	118,243	$	282,527	$	14,610	$	6,307	$	36	$	---	$	449,342
Commercial real estate:
Residential developed		---		---		2,328		8,786		856		---		---		---		11,970
Unsecured to residential developers		---		---		---		4,734		---		---		---		---		4,734
Vacant and unimproved		---		---		17,672		19,028		3,586		---		---		---		40,286
Commercial development		---		---		---		140		---		189		49		---		378
Residential improved		---		---		7,100		63,957		2,628		1,657		6		---		75,348
Commercial improved		---		2,433		66,259		210,449		9,084		1,125		128		---		289,478
Manufacturing & industrial		---		1,665		38,719		51,718		3,076		609		---		---		95,787
	$	---	$	31,717	$	250,321	$	641,339	$	33,840	$	9,887	$	219	$	---	$	967,323

Commercial Loans Classified as Substandard or Worse

Commercial loans classified as substandard or worse were as follows at period-end (dollars in thousands):

	March 31, 2017		December 31, 2016
Not classified as impaired	$	2,434	$	2,608
Classified as impaired		9,079		7,498
Total commercial loans classified substandard or worse	$	11,513	$	10,106

Recorded Investment in Consumer Loans Based on Payment Activity

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

 

March 31, 2017	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	212,949	$	343	$	83,666	$	7,051
Nonperforming		---		---		---		---
Total	$	212,949	$	343	$	83,666	$	7,051

December 31, 2016	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	217,558	$	396	$	88,113	$	7,366
Nonperforming		56		---		---		---
Total	$	217,614	$	396	$	88,113	$	7,366

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OTHER REAL ESTATE OWNED (Tables)

3 Months Ended

Mar. 31, 2017

OTHER REAL ESTATE OWNED [Abstract]

Period-End Other Real Estate Owned

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

	Three Months Ended March 31, 2017			Year Ended December 31, 2016			Three Months Ended March 31, 2016
Beginning balance	$	22,864		$	28,377		$	28,377
Additions, transfers from loans		56			339			102
Proceeds from sales of other real estate owned		(320	)		(5,339	)		(1,475	)
Valuation allowance reversal upon sale		(250	)		(1,158	)		(251	)
Gain on sales of other real estate owned		149			645			92
		22,499			22,864			26,845
Less: valuation allowance		(10,425	)		(10,611	)		(10,683	)
Ending balance	$	12,074		$	12,253		$	16,162

Activity in Valuation Allowance

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

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Beginning balance	$	10,611		$	10,805
Additions charged to expense		64			129
Reversals upon sale		(250	)		(251	)
Ending balance	$	10,425		$	10,683

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FAIR VALUE (Tables)

3 Months Ended

Mar. 31, 2017

FAIR VALUE [Abstract]

Assets Measured at Fair Value on Recurring Basis

Assets 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)
March 31, 2017
U.S. Treasury and federal agency securities	$	85,678		$	---	$	85,678	$	---
U.S. Agency MBS and CMOs		11,165			---		11,165		---
Tax-exempt state and municipal bonds		39,809			---		39,809		---
Taxable state and municipal bonds		34,497			---		34,497		---
Corporate bonds and other debt securities		11,986			---		11,986		---
Other equity securities		1,470			---		1,470		---
Loans held for sale		2,767			---		2,767		---
Interest rate swaps		383			---		---		383
Interest rate swaps		(383	)		---		---		(383	)

December 31, 2016
U.S. Treasury and federal agency securities	$	84,350		$	---	$	84,350	$	---
U.S. Agency MBS and CMOs		11,817			---		11,817		---
Tax-exempt state and municipal bonds		39,187			---		39,187		---
Taxable state and municipal bonds		33,883			---		33,883		---
Corporate bonds and other debt securities		13,726			---		13,726		---
Other equity securities		1,470			---		1,470		---
Loans held for sale		2,181			---		2,181		---
Interest rate swaps		494			---		---		494
Interest rate swaps		(494	)		---		---		(494	)

Assets Measured at Fair Value on Non-Recurring Basis

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)
March 31, 2017
Impaired loans	$	3,282	$	---	$	---	$	3,282
Other real estate owned		9,400		---		---		9,400
December 31, 2016
Impaired loans	$	3,436	$	---	$	---	$	3,436
Other real estate owned		9,542		---		---		9,542

Quantitative Information about Level 3 Fair Value Measurements Measured on Non-Recurring Basis

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

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
March 31, 2017
Impaired Loans	$	3,282	Sales comparison approach	Adjustment for differences between comparable sales		1.0 to 35.0
			Income approach	Capitalization rate		9.5 to 11.0
Other real estate owned		9,400	Sales comparison approach	Adjustment for differences between comparable sales		2.0 to 42.0
			Income approach	Capitalization rate		9.5 to 11.5

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
December 31, 2016
Impaired Loans	$	3,436	Sales comparison approach	Adjustment for differences between comparable sales		1.0 to35.0
			Income approach	Capitalization rate		9.5 to 11.5
Other real estate owned		9,542	Sales comparison approach	Adjustment for differences between comparable sales		2.0 to 32.5
			Income approach	Capitalization rate		9.5 to 11.5

Carrying Amounts and Estimated Fair Values of Financial Instruments, Not Previously Presented

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

Financial assets	Level in Fair Value Hierarchy	March 31, 2017						December 31, 2016
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and due from banks	Level 1	$	30,631		$	30,631		$	27,690		$	27,690
Cash equivalents	Level 2		83,118			83,118			62,129			62,129
Securities held to maturity	Level 3		68,473			69,079			69,378			69,849
FHLB stock			11,558		NA				11,558		NA
Loans, net	Level 2		1,245,996			1,234,716			1,260,414			1,247,842
Bank owned life insurance	Level 3		39,524			39,524			39,274			39,274
Accrued interest receivable	Level 2		4,204			4,204			4,092			4,092
Financial liabilities
Deposits	Level 2		(1,433,146	)		(1,433,068	)		(1,448,724	)		(1,448,692	)
Other borrowed funds	Level 2		(102,785	)		(102,595	)		(84,173	)		(84,051	)
Long-term debt	Level 2		(41,238	)		(36,277	)		(41,238	)		(36,112	)
Accrued interest payable	Level 2		(275	)		(275	)		(282	)		(282	)
Off-balance sheet credit-related items
Loan commitments			---			---			---			---

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DEPOSITS (Tables)

3 Months Ended

Mar. 31, 2017

DEPOSITS [Abstract]

Summary of Deposits

Deposits are summarized as follows (in thousands):

	March 31, 2017		December 31, 2016
Noninterest-bearing demand	$	466,415	$	501,478
Interest bearing demand		342,812		340,715
Savings and money market accounts		548,761		532,853
Certificates of deposit		75,158		73,678
	$	1,433,146	$	1,448,724

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OTHER BORROWED FUNDS (Tables)

3 Months Ended

Mar. 31, 2017

OTHER BORROWED FUNDS [Abstract]

Advances from Federal Home Loan Bank

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

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
March 31, 2017
Single maturity fixed rate advances	$	100,000	April 2017 to April 2021		1.41	%
Amortizable mortgage advances		2,785	March 2018 to July 2018		3.75	%
	$	102,785

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
December 31, 2016
Single maturity fixed rate advances	$	80,000	February 2018 to April 2021		1.60	%
Amortizable mortgage advances		4,173	March 2018 to July 2018		3.78	%
	$	84,173

Scheduled Repayments of FHLB Advances

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

2017	$	20,667
2018		52,118
2019		10,000
2020		10,000
2021		10,000
Thereafter		---
	$	102,785

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EARNINGS PER COMMON SHARE (Tables)

3 Months Ended

Mar. 31, 2017

EARNINGS PER COMMON SHARE [Abstract]

Reconciliation of Numerators and Denominators of Basic and Diluted Earnings per Common Share

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three month periods ended March 31, 2017 and 2016 are as follows (dollars in thousands, except per share data):

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Net income available to common shares	$	4,460	$	3,495
Weighted average shares outstanding, including participating stock awards - Basic		33,941,010		33,925,113
Dilutive potential common shares:
Stock options		7,574		---
Stock warrants		---		---
Weighted average shares outstanding - Diluted		33,948,584		33,925,113
Basic earnings per common share	$	0.13	$	0.10
Diluted earnings per common share	$	0.13	$	0.10

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FEDERAL INCOME TAXES (Tables)

3 Months Ended

Mar. 31, 2017

FEDERAL INCOME TAXES [Abstract]

Income Tax Expense

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

	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Current	$	1,804	$	1,468
Deferred		162		(68	)
	$	1,966	$	1,400

Difference between Financial Statement Tax Expense and Amount Computed by Applying Statutory Federal Tax Rate to Pretax Income

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

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Statutory rate		35	%		35	%
Statutory rate applied to income before taxes	$	2,249		$	1,713
Deduct
Tax-exempt interest income		(183	)		(148	)
Bank-owned life insurance		(83	)		(155	)
Other, net		(17	)		(10	)
	$	1,966		$	1,400

Deferred Tax Assets and Liabilities

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

	March 31, 2017			December 31, 2016
Deferred tax assets
Allowance for loan losses	$	5,844		$	5,937
Nonaccrual loan interest		642			718
Valuation allowance on other real estate owned		3,649			3,714
Unrealized loss on securities available for sale		428			799
Other		216			176
Gross deferred tax assets		10,779			11,344
Valuation allowance		---			---
Total net deferred tax assets		10,779			11,344
Deferred tax liabilities
Depreciation		(1,655	)		(1,705	)
Prepaid expenses		(399	)		(399	)
Unrealized gain on securities available for sale		---			---
Other		(395	)		(377	)
Gross deferred tax liabilities		(2,449	)		(2,481	)
Net deferred tax asset	$	8,330		$	8,863

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COMMITMENTS AND OFF BALANCE-SHEET RISK (Tables)

3 Months Ended

Mar. 31, 2017

COMMITMENTS AND OFF BALANCE-SHEET RISK [Abstract]

Summary of Contractual Amounts of Financial Instruments with Off-Balance-Sheet Risk

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

	March 31, 2017		December 31, 2016
Commitments to make loans	$	95,653	$	90,293
Letters of credit		13,598		13,823
Unused lines of credit		446,346		437,435

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SHAREHOLDERS' EQUITY (Tables)

3 Months Ended

Mar. 31, 2017

SHAREHOLDERS' EQUITY [Abstract]

Actual Capital Levels and Minimum Required Levels

At March 31, 2017 and December 31, 2016, 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
March 31, 2017
CET1 capital (to risk weighted assets)
Consolidated	$	166,880		11.3	%	$	66,557		4.5	%	$	85,045		5.8	%		N/A		N/A
Bank		201,129		13.6			66,552		4.5			85,038		5.8		$	96,130		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		206,880		14.0			88,742		6.0			107,230		7.3			N/A		N/A
Bank		201,129		13.6			88,736		6.0			107,222		7.3			118,314		8.0
Total capital (to risk weighted assets)
Consolidated		223,575		15.1			118,323		8.0			136,811		9.3			N/A		N/A
Bank		217,825		14.7			118,314		8.0			136,801		9.3			147,893		10.0
Tier 1 capital (to average assets)
Consolidated		206,880		12.1			68,329		4.0			N/A		N/A			N/A		N/A
Bank		201,129		11.8			68,264		4.0			N/A		N/A			85,330		5.0
December 31, 2016
CET1 capital (to risk weighted assets)
Consolidated	$	163,663		11.0	%	$	66,743		4.5	%	$	76,013		5.1	%		N/A		N/A
Bank		197,972		13.4			66,737		4.5			76,006		5.1		$	96,398		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		203,663		13.7			88,991		6.0			98,261		6.6			N/A		N/A
Bank		197,972		13.4			88,983		6.0			98,252		6.6			118,644		8.0
Total capital (to risk weighted assets)
Consolidated		220,625		14.9			118,655		8.0			127,925		8.6			N/A		N/A
Bank		214,934		14.5			118,644		8.0			127,913		8.6			148,305		10.0
Tier 1 capital (to average assets)
Consolidated		203,663		12.0			67,810		4.0			N/A		N/A			N/A		N/A
Bank		197,972		11.7			67,742		4.0			N/A		N/A			84,677		5.0

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)	3 Months Ended
	Mar. 31, 2017 USD ($) Branch Grade InterestRateSwap shares	Dec. 31, 2016 USD ($)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]
Number of full service branch offices | Branch	26
Derivatives [Abstract]
Stock awards vested (in shares) | shares	0
Residential Mortgage [Member]
Allowance for Loan Losses [Abstract]
Period of historical loss experience applied to loans for estimating allowance for general component of non-classified loans	12 months
Commercial [Member]
Allowance for Loan Losses [Abstract]
Period of historical loss experience applied to loans for estimating allowance for general component of non-classified loans	18 months
Threshold balance of loans evaluated for impairment	$ 500,000
Commercial [Member] | Minimum [Member]
Allowance for Loan Losses [Abstract]
Internal risk grading of loans evaluated for impairment | Grade	6
Commercial Real Estate [Member]
Allowance for Loan Losses [Abstract]
Threshold balance of loans evaluated for impairment	$ 500,000
Commercial Real Estate [Member] | Minimum [Member]
Allowance for Loan Losses [Abstract]
Internal risk grading of loans evaluated for impairment | Grade	6
Consumer [Member]
Allowance for Loan Losses [Abstract]
Period of historical loss experience applied to loans for estimating allowance for general component of non-classified loans	12 months
Swap [Member] | Interest Rate Swap [Member]
Derivatives [Abstract]
Number of derivative instruments held | InterestRateSwap	2
Notional amount of agreements	$ 43,500,000	$ 48,100,000
Derivative asset fair value	383,000	494,000
Derivative liability fair value	$ 383,000	$ 494,000

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SECURITIES (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Available for Sale [Abstract]
Amortized cost	$ 185,828		$ 186,717
Gross unrealized gains	586		353
Gross unrealized losses	(1,809)		(2,637)
Fair value	184,605		184,433
Proceeds from sale of available-for-sale securities	3,440	$ 9,418
Gain on sale of securities	3	89
Reclassification adjustment for securities gain recognized in earnings, net of tax	2	$ 58
Held to Maturity [Abstract]
Amortized cost	68,473		69,378
Fair value	69,079		69,849
U.S. Treasury and Federal Agency Securities [Member]
Available for Sale [Abstract]
Amortized cost	86,517		85,582
Gross unrealized gains	61		49
Gross unrealized losses	(900)		(1,281)
Fair value	85,678		84,350
U.S. Agency MBS and CMOs [Member]
Available for Sale [Abstract]
Amortized cost	11,306		12,037
Gross unrealized gains	16		11
Gross unrealized losses	(157)		(231)
Fair value	11,165		11,817
Tax-Exempt State and Municipal Bonds [Member]
Available for Sale [Abstract]
Amortized cost	39,746		39,578
Gross unrealized gains	411		212
Gross unrealized losses	(348)		(603)
Fair value	39,809		39,187
Taxable State and Municipal Bonds [Member]
Available for Sale [Abstract]
Amortized cost	34,757		34,255
Gross unrealized gains	82		65
Gross unrealized losses	(342)		(437)
Fair value	34,497		33,883
Corporate Bonds and Other Debt Securities [Member]
Available for Sale [Abstract]
Amortized cost	12,002		13,765
Gross unrealized gains	16		16
Gross unrealized losses	(32)		(55)
Fair value	11,986		13,726
Other Equity Securities [Member]
Available for Sale [Abstract]
Amortized cost	1,500		1,500
Gross unrealized gains	0		0
Gross unrealized losses	(30)		(30)
Fair value	1,470		1,470
Tax-Exempt State and Municipal Bonds [Member]
Held to Maturity [Abstract]
Amortized cost	68,473		69,378
Gross unrealized gains	683		573
Gross unrealized losses	(77)		(102)
Fair value	$ 69,079		$ 69,849

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SECURITIES, Contractual Maturities of Debt Securities (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Held-to-Maturity Securities, Amortized Cost [Abstract]
Due in one year or less	$ 24,552
Due from one to five years	14,710
Due from five to ten years	8,279
Due after ten years	20,932
Amortized cost	68,473	$ 69,378
Held-to-Maturity Securities, Fair Value [Abstract]
Due in one year or less	24,519
Due from one to five years	15,048
Due from five to ten years	8,471
Due after ten years	21,041
Fair value	69,079	$ 69,849
Available-for-Sale Securities, Amortized Cost [Abstract]
Due in one year or less	18,210
Due from one to five years	96,325
Due from five to ten years	54,895
Due after ten years	14,898
Amortized cost	184,328
Available-for-Sale Securities, Fair Value [Abstract]
Due in one year or less	18,212
Due from one to five years	95,760
Due from five to ten years	54,526
Due after ten years	14,637
Fair value	$ 183,135

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SECURITIES, Continuous Unrealized Loss Position (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Securities in continuous unrealized losses position, fair value [Abstract]
Less than 12 months	$ 134,646	$ 149,187
12 months or more	3,936	5,225
Total	138,582	154,412
Securities in continuous unrealized loss position, unrealized losses [Abstract]
Less than 12 months	(1,864)	(2,717)
12 months or more	(22)	(22)
Total	(1,886)	(2,739)
U.S. Treasury and Federal Agency Securities [Member]
Securities in continuous unrealized losses position, fair value [Abstract]
Less than 12 months	60,493	59,129
12 months or more	3,039	3,053
Total	63,532	62,182
Securities in continuous unrealized loss position, unrealized losses [Abstract]
Less than 12 months	(890)	(1,271)
12 months or more	(10)	(10)
Total	(900)	(1,281)
U.S. Agency MBS and CMOs [Member]
Securities in continuous unrealized losses position, fair value [Abstract]
Less than 12 months	10,114	10,702
12 months or more	0	0
Total	10,114	10,702
Securities in continuous unrealized loss position, unrealized losses [Abstract]
Less than 12 months	(157)	(231)
12 months or more	0	0
Total	(157)	(231)
Tax-Exempt State and Municipal Bonds [Member]
Securities in continuous unrealized losses position, fair value [Abstract]
Less than 12 months	37,802	49,508
12 months or more	397	1,672
Total	38,199	51,180
Securities in continuous unrealized loss position, unrealized losses [Abstract]
Less than 12 months	(412)	(698)
12 months or more	(8)	(7)
Total	(420)	(705)
Taxable State and Municipal Bonds [Member]
Securities in continuous unrealized losses position, fair value [Abstract]
Less than 12 months	19,139	22,633
12 months or more	0	0
Total	19,139	22,633
Securities in continuous unrealized loss position, unrealized losses [Abstract]
Less than 12 months	(347)	(437)
12 months or more	0	0
Total	(347)	(437)
Corporate Bonds and Other Debt Securities [Member]
Securities in continuous unrealized losses position, fair value [Abstract]
Less than 12 months	5,628	5,745
12 months or more	500	500
Total	6,128	6,245
Securities in continuous unrealized loss position, unrealized losses [Abstract]
Less than 12 months	(28)	(50)
12 months or more	(4)	(5)
Total	(32)	(55)
Other Equity Securities [Member]
Securities in continuous unrealized losses position, fair value [Abstract]
Less than 12 months	1,470	1,470
12 months or more	0	0
Total	1,470	1,470
Securities in continuous unrealized loss position, unrealized losses [Abstract]
Less than 12 months	(30)	(30)
12 months or more	0	0
Total	$ (30)	$ (30)

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SECURITIES, Other-Than-Temporary-Impairment (Details) - USD ($) $ in Millions	Mar. 31, 2017	Dec. 31, 2016
SECURITIES [Abstract]
Securities pledged as security for public deposits, letters of credit and for other purposes required or permitted by law	$ 2.0	$ 2.0

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LOANS (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016	Dec. 31, 2015
Portfolio loans [Abstract]
Total loans	$ 1,266,128	$ 1,280,812
Allowance for loan losses	(16,696)	(16,962)	$ (17,129)	$ (17,081)
Net loans	1,249,432	1,263,850
Commercial and Industrial [Member]
Portfolio loans [Abstract]
Total loans	453,311	449,342
Allowance for loan losses	(6,469)	(6,345)	(4,945)	(4,826)
Commercial Real Estate [Member]
Portfolio loans [Abstract]
Total loans	508,808	517,981
Allowance for loan losses	(6,598)	(6,703)	(8,449)	(8,457)
Commercial Real Estate [Member] | Residential Developed [Member]
Portfolio loans [Abstract]
Total loans	10,188	11,970
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member]
Portfolio loans [Abstract]
Total loans	4,785	4,734
Commercial Real Estate [Member] | Vacant and Unimproved [Member]
Portfolio loans [Abstract]
Total loans	44,950	40,286
Commercial Real Estate [Member] | Commercial Development [Member]
Portfolio loans [Abstract]
Total loans	499	378
Commercial Real Estate [Member] | Residential Improved [Member]
Portfolio loans [Abstract]
Total loans	73,064	75,348
Commercial Real Estate [Member] | Commercial Improved [Member]
Portfolio loans [Abstract]
Total loans	277,898	289,478
Commercial Real Estate [Member] | Manufacturing and Industrial [Member]
Portfolio loans [Abstract]
Total loans	97,424	95,787
Consumer [Member]
Portfolio loans [Abstract]
Total loans	304,009	313,489
Allowance for loan losses	(3,591)	(3,871)	$ (3,699)	$ (3,761)
Consumer [Member] | Residential Mortgage [Member]
Portfolio loans [Abstract]
Total loans	212,949	217,614
Consumer [Member] | Unsecured [Member]
Portfolio loans [Abstract]
Total loans	343	396
Consumer [Member] | Home Equity [Member]
Portfolio loans [Abstract]
Total loans	83,666	88,113
Consumer [Member] | Other Secured [Member]
Portfolio loans [Abstract]
Total loans	$ 7,051	$ 7,366

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LOANS, Allowance for Loans Losses by Portfolio (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	$ 16,962	$ 17,081
Charge-offs	(26)	(76)
Recoveries	260	224
Provision for loan losses	(500)	(100)
Ending balance	16,696	17,129
Commercial and Industrial [Member]
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	6,345	4,826
Charge-offs	0	0
Recoveries	23	49
Provision for loan losses	101	70
Ending balance	6,469	4,945
Commercial Real Estate [Member]
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	6,703	8,457
Charge-offs	0	0
Recoveries	162	121
Provision for loan losses	(267)	(129)
Ending balance	6,598	8,449
Consumer [Member]
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	3,871	3,761
Charge-offs	(26)	(76)
Recoveries	75	54
Provision for loan losses	(329)	(40)
Ending balance	3,591	3,699
Unallocated [Member]
Allowance for loan losses by portfolio [Roll Forward]
Beginning balance	43	37
Charge-offs	0	0
Recoveries	0	0
Provision for loan losses	(5)	(1)
Ending balance	$ 38	$ 36

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LOANS, Allowance for Loans Losses and Recorded Investment in Loans by Portfolio Segment Based on Impairment Method (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016	Dec. 31, 2015
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	$ 1,648	$ 1,696
Collectively evaluated for impairment	15,048	15,266
Total ending allowance balance	16,696	16,962	$ 17,129	$ 17,081
Loans [Abstract]
Individually reviewed for impairment	28,776	29,654
Collectively evaluated for impairment	1,237,352	1,251,158
Total ending loans balance	1,266,128	1,280,812
Commercial and Industrial [Member]
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	642	605
Collectively evaluated for impairment	5,827	5,740
Total ending allowance balance	6,469	6,345	4,945	4,826
Loans [Abstract]
Individually reviewed for impairment	7,445	5,994
Collectively evaluated for impairment	445,866	443,348
Total ending loans balance	453,311	449,342
Commercial Real Estate [Member]
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	304	368
Collectively evaluated for impairment	6,294	6,335
Total ending allowance balance	6,598	6,703	8,449	8,457
Loans [Abstract]
Individually reviewed for impairment	9,931	11,934
Collectively evaluated for impairment	498,877	506,047
Total ending loans balance	508,808	517,981
Consumer [Member]
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	702	723
Collectively evaluated for impairment	2,889	3,148
Total ending allowance balance	3,591	3,871	3,699	3,761
Loans [Abstract]
Individually reviewed for impairment	11,400	11,726
Collectively evaluated for impairment	292,609	301,763
Total ending loans balance	304,009	313,489
Unallocated [Member]
Ending allowance attributable to loans [Abstract]
Individually reviewed for impairment	0	0
Collectively evaluated for impairment	38	43
Total ending allowance balance	38	43	$ 36	$ 37
Loans [Abstract]
Individually reviewed for impairment	0	0
Collectively evaluated for impairment	0	0
Total ending loans balance	$ 0	$ 0

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LOANS, Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
With no related allowance recorded [Abstract]
Unpaid principal balance	$ 3,948		$ 2,675
Recorded investment	3,948		2,675
With related allowance recorded [Abstract]
Unpaid principal balance	24,828		26,979
Recorded investment	24,828		26,979
Allowance allocated	1,648		1,696
Total [Abstract]
Unpaid principal balance	28,776		29,654
Recorded investment	28,776		29,654
Allowance allocated	1,648		1,696
Commercial and Industrial [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	3,921		2,298
Recorded investment	3,921		2,298
With related allowance recorded [Abstract]
Unpaid principal balance	3,524		3,696
Recorded investment	3,524		3,696
Allowance allocated	642		605
Total [Abstract]
Allowance allocated	642		605
Impaired loans [Abstract]
Average of impaired loans	6,843	$ 8,265
Interest income recognized during impairment	278	298
Cash-basis interest income recognized	265	288
Commercial Real Estate [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	27		377
Recorded investment	27		377
With related allowance recorded [Abstract]
Unpaid principal balance	9,904		11,557
Recorded investment	9,904		11,557
Allowance allocated	304		368
Total [Abstract]
Allowance allocated	304		368
Impaired loans [Abstract]
Interest income recognized during impairment	126	201
Cash-basis interest income recognized	123	200
Commercial Real Estate [Member] | Residential Developed [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	185		187
Recorded investment	185		187
Allowance allocated	3		4
Total [Abstract]
Allowance allocated	3		4
Impaired loans [Abstract]
Average of impaired loans	185	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
Allowance allocated	0		0
Total [Abstract]
Allowance allocated	0		0
Impaired loans [Abstract]
Average of impaired loans	0	0
Commercial Real Estate [Member] | Vacant and Unimproved [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	375		387
Recorded investment	375		387
Allowance allocated	10		9
Total [Abstract]
Allowance allocated	10		9
Impaired loans [Abstract]
Average of impaired loans	379	446
Commercial Real Estate [Member] | Commercial Development [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	189		189
Recorded investment	189		189
Allowance allocated	6		6
Total [Abstract]
Allowance allocated	6		6
Impaired loans [Abstract]
Average of impaired loans	189	192
Commercial Real Estate [Member] | Residential Improved [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	27		27
Recorded investment	27		27
With related allowance recorded [Abstract]
Unpaid principal balance	2,815		4,687
Recorded investment	2,815		4,687
Allowance allocated	149		216
Total [Abstract]
Allowance allocated	149		216
Impaired loans [Abstract]
Average of impaired loans	4,086	5,543
Commercial Real Estate [Member] | Commercial Improved [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		350
Recorded investment	0		350
With related allowance recorded [Abstract]
Unpaid principal balance	6,116		5,879
Recorded investment	6,116		5,879
Allowance allocated	132		128
Total [Abstract]
Allowance allocated	132		128
Impaired loans [Abstract]
Average of impaired loans	6,158	9,537
Commercial Real Estate [Member] | Manufacturing and Industrial [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	224		228
Recorded investment	224		228
Allowance allocated	4		5
Total [Abstract]
Allowance allocated	4		5
Impaired loans [Abstract]
Average of impaired loans	225	239
Consumer [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	11,400		11,726
Recorded investment	11,400		11,726
Allowance allocated	702		723
Total [Abstract]
Allowance allocated	702		723
Impaired loans [Abstract]
Average of impaired loans	11,495	13,140
Interest income recognized during impairment	109	122
Cash-basis interest income recognized	107	$ 123
Consumer [Member] | Residential Mortgage [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	7,467		7,523
Recorded investment	7,467		7,523
Allowance allocated	460		464
Total [Abstract]
Allowance allocated	460		464
Consumer [Member] | Unsecured [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
Allowance allocated	0		0
Total [Abstract]
Allowance allocated	0		0
Consumer [Member] | Home Equity [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	3,933		4,203
Recorded investment	3,933		4,203
Allowance allocated	242		259
Total [Abstract]
Allowance allocated	242		259
Consumer [Member] | Other Secured [Member]
With no related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
With related allowance recorded [Abstract]
Unpaid principal balance	0		0
Recorded investment	0		0
Allowance allocated	0		0
Total [Abstract]
Allowance allocated	$ 0		$ 0

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LOANS, Past Due Loans (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) Payment	Dec. 31, 2016 USD ($)
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	$ 401	$ 300
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	915	1,447
Loans Not Past Due	1,265,213	1,279,365
Total ending loans balance	1,266,128	1,280,812
Specific reserves allocated to customers with modified term loans in troubled debt restructurings	$ 1,648	1,696
Number of consecutive payment before nonaccrual restructured loan is upgraded | Payment	6
Number of months of performance before a loan is removed from TDR	6 months
30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	$ 666	1,309
Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	249	138
Commercial and Industrial [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	127	36
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	151	453
Loans Not Past Due	453,160	448,889
Total ending loans balance	453,311	449,342
Commercial and Industrial [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	30	425
Commercial and Industrial [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	121	28
Commercial Real Estate [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	252	183
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	533	606
Loans Not Past Due	508,275	517,375
Total ending loans balance	508,808	517,981
Commercial Real Estate [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	405	552
Commercial Real Estate [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	128	54
Commercial Real Estate [Member] | Residential Developed [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Loans Not Past Due	10,188	11,970
Total ending loans balance	10,188	11,970
Commercial Real Estate [Member] | Residential Developed [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Commercial Real Estate [Member] | Residential Developed [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Loans Not Past Due	4,785	4,734
Total ending loans balance	4,785	4,734
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Commercial Real Estate [Member] | Vacant and Unimproved [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Loans Not Past Due	44,950	40,286
Total ending loans balance	44,950	40,286
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Commercial Real Estate [Member] | Commercial Development [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	49	49
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	238	49
Loans Not Past Due	261	329
Total ending loans balance	499	378
Commercial Real Estate [Member] | Commercial Development [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	189	0
Commercial Real Estate [Member] | Commercial Development [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	49	49
Commercial Real Estate [Member] | Residential Improved [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	79	6
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	171	79
Loans Not Past Due	72,893	75,269
Total ending loans balance	73,064	75,348
Commercial Real Estate [Member] | Residential Improved [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	92	74
Commercial Real Estate [Member] | Residential Improved [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	79	5
Commercial Real Estate [Member] | Commercial Improved [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	124	128
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	124	478
Loans Not Past Due	277,774	289,000
Total ending loans balance	277,898	289,478
Commercial Real Estate [Member] | Commercial Improved [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	124	478
Commercial Real Estate [Member] | Commercial Improved [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Commercial Real Estate [Member] | Manufacturing and Industrial [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Loans Not Past Due	97,424	95,787
Total ending loans balance	97,424	95,787
Commercial Real Estate [Member] | Manufacturing and Industrial [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Commercial Real Estate [Member] | Manufacturing and Industrial [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Consumer [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	22	81
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	231	388
Loans Not Past Due	303,778	313,101
Total ending loans balance	304,009	313,489
Consumer [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	231	332
Consumer [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	56
Consumer [Member] | Residential Mortgage [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	2	58
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	204	120
Loans Not Past Due	212,745	217,494
Total ending loans balance	212,949	217,614
Consumer [Member] | Residential Mortgage [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	204	64
Consumer [Member] | Residential Mortgage [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	56
Consumer [Member] | Unsecured [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	13	16
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	12	0
Loans Not Past Due	331	396
Total ending loans balance	343	396
Consumer [Member] | Unsecured [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	12	0
Consumer [Member] | Unsecured [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Consumer [Member] | Home Equity [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	7	7
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	187
Loans Not Past Due	83,666	87,926
Total ending loans balance	83,666	88,113
Consumer [Member] | Home Equity [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	187
Consumer [Member] | Home Equity [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	0	0
Consumer [Member] | Other Secured [Member]
Recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans [Abstract]
Nonaccrual	0	0
Over 90 days Accruing	0	0
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	15	81
Loans Not Past Due	7,036	7,285
Total ending loans balance	7,051	7,366
Consumer [Member] | Other Secured [Member] | 30-90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	15	81
Consumer [Member] | Other Secured [Member] | Greater Than 90 Days [Member]
Aging of recorded investment in past due loans by class of loans [Abstract]
Total Past Due	$ 0	$ 0

XML

LOANS, Troubled Debt Restructuring (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) Note Loan	Mar. 31, 2016 USD ($) Loan	Dec. 31, 2016 USD ($) Loan
Troubled debt restructurings [Abstract]
Number of Loans | Loan	178		190
Outstanding Recorded Balance	$ 29,157		$ 29,986
Accruing troubled debt restructurings [Abstract]
Accruing TDR - nonaccrual at restructuring	0		0
Accruing TDR - accruing at restructuring	23,215		25,665
Accruing TDR - upgraded to accruing after six consecutive payments	5,800		4,172
Total	$ 29,015		$ 29,837
Troubled debt restructurings executed during current period [Abstract]
Number of Loans | Loan	0	4
Pre-TDR balance	$ 0	$ 238
Writedown upon TDR	$ 0	$ 0
Commercial Loans [Member] | A-B Note Structure [Member]
Financing Receivable, Modifications [Line Items]
Number of notes into which original note is separated in modification | Note	2
Commercial and Industrial [Member]
Troubled debt restructurings [Abstract]
Number of Loans | Loan	24		25
Outstanding Recorded Balance	$ 7,444		$ 5,994
Troubled debt restructurings executed during current period [Abstract]
Number of Loans | Loan	0	0
Pre-TDR balance	$ 0	$ 0
Writedown upon TDR	$ 0	$ 0
Commercial Real Estate [Member]
Troubled debt restructurings [Abstract]
Number of Loans | Loan	43		49
Outstanding Recorded Balance	$ 9,931		$ 11,933
Troubled debt restructurings executed during current period [Abstract]
Number of Loans | Loan	0	0
Pre-TDR balance	$ 0	$ 0
Writedown upon TDR	$ 0	$ 0
Consumer [Member]
Troubled debt restructurings [Abstract]
Number of Loans | Loan	111		116
Outstanding Recorded Balance	$ 11,782		$ 12,059
Troubled debt restructurings executed during current period [Abstract]
Number of Loans | Loan	0	4
Pre-TDR balance	$ 0	$ 238
Writedown upon TDR	$ 0	$ 0

XML

LOANS, Credit Quality Indicators (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) Grade	Dec. 31, 2016 USD ($)
Risk grade category of commercial loans by class of loans [Abstract]
Number point grading system used for loan quality | Grade	8
Total loans	$ 1,266,128	$ 1,280,812
Commercial Loans [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	$ 962,119	967,323
Internal risk grade category of loans considered substandard, doubtful or loss | Grade	6
Commercial Loans [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	$ 0	0
Commercial Loans [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	29,933	31,717
Commercial Loans [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	237,014	250,321
Commercial Loans [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	655,102	641,339
Commercial Loans [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	28,557	33,840
Commercial Loans [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	11,134	9,887
Commercial Loans [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	379	219
Commercial Loans [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial and Industrial [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	453,311	449,342
Commercial and Industrial [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial and Industrial [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	24,690	27,619
Commercial and Industrial [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	111,044	118,243
Commercial and Industrial [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	297,713	282,527
Commercial and Industrial [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	12,063	14,610
Commercial and Industrial [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	7,674	6,307
Commercial and Industrial [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	127	36
Commercial and Industrial [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	508,808	517,981
Commercial Real Estate [Member] | Residential Developed [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	10,188	11,970
Commercial Real Estate [Member] | Residential Developed [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Residential Developed [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Residential Developed [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	1,703	2,328
Commercial Real Estate [Member] | Residential Developed [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	7,640	8,786
Commercial Real Estate [Member] | Residential Developed [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	845	856
Commercial Real Estate [Member] | Residential Developed [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Residential Developed [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Residential Developed [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	4,785	4,734
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	4,785	4,734
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Unsecured to Residential Developers [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Vacant and Unimproved [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	44,950	40,286
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	21,257	17,672
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	20,157	19,028
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	3,536	3,586
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Vacant and Unimproved [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Commercial Development [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	499	378
Commercial Real Estate [Member] | Commercial Development [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Commercial Development [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Commercial Development [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	121	0
Commercial Real Estate [Member] | Commercial Development [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	139	140
Commercial Real Estate [Member] | Commercial Development [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Commercial Development [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	190	189
Commercial Real Estate [Member] | Commercial Development [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	49	49
Commercial Real Estate [Member] | Commercial Development [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Residential Improved [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	73,064	75,348
Commercial Real Estate [Member] | Residential Improved [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Residential Improved [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Residential Improved [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	6,132	7,100
Commercial Real Estate [Member] | Residential Improved [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	62,688	63,957
Commercial Real Estate [Member] | Residential Improved [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	2,572	2,628
Commercial Real Estate [Member] | Residential Improved [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	1,593	1,657
Commercial Real Estate [Member] | Residential Improved [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	79	6
Commercial Real Estate [Member] | Residential Improved [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Commercial Improved [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	277,898	289,478
Commercial Real Estate [Member] | Commercial Improved [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Commercial Improved [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	3,656	2,433
Commercial Real Estate [Member] | Commercial Improved [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	58,960	66,259
Commercial Real Estate [Member] | Commercial Improved [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	206,827	210,449
Commercial Real Estate [Member] | Commercial Improved [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	7,233	9,084
Commercial Real Estate [Member] | Commercial Improved [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	1,098	1,125
Commercial Real Estate [Member] | Commercial Improved [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	124	128
Commercial Real Estate [Member] | Commercial Improved [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Manufacturing & Industrial [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	97,424	95,787
Commercial Real Estate [Member] | Manufacturing & Industrial [Member] | Excellent [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Manufacturing & Industrial [Member] | Above Average [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	1,587	1,665
Commercial Real Estate [Member] | Manufacturing & Industrial [Member] | Good Quality [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	37,797	38,719
Commercial Real Estate [Member] | Manufacturing & Industrial [Member] | Acceptable Risk [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	55,153	51,718
Commercial Real Estate [Member] | Manufacturing & Industrial [Member] | Marginally Acceptable [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	2,308	3,076
Commercial Real Estate [Member] | Manufacturing & Industrial [Member] | Substandard [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	579	609
Commercial Real Estate [Member] | Manufacturing & Industrial [Member] | Doubtful [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	0	0
Commercial Real Estate [Member] | Manufacturing & Industrial [Member] | Loss [Member]
Risk grade category of commercial loans by class of loans [Abstract]
Total loans	$ 0	$ 0

XML

LOANS, Commercial Loans Classified as Substandard or Worse (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment [Line Items]
Classified as impaired	$ 28,776	$ 29,654
Total ending loans balance	1,266,128	1,280,812
Commercial Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Total ending loans balance	962,119	967,323
Commercial Loans [Member] | Substandard or Worse [Member]
Financing Receivable, Recorded Investment [Line Items]
Not classified as impaired	2,434	2,608
Classified as impaired	9,079	7,498
Total ending loans balance	$ 11,513	$ 10,106

XML

LOANS, Recorded Investment in Consumer Loans Based on Payment Activity (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment [Line Items]
Total loans	$ 1,266,128	$ 1,280,812
Consumer Loan [Member] | Residential Mortgage [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	212,949	217,614
Consumer Loan [Member] | Residential Mortgage [Member] | Performing [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	212,949	217,558
Consumer Loan [Member] | Residential Mortgage [Member] | Nonperforming [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	0	56
Consumer Loan [Member] | Consumer Unsecured [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	343	396
Consumer Loan [Member] | Consumer Unsecured [Member] | Performing [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	343	396
Consumer Loan [Member] | Consumer Unsecured [Member] | Nonperforming [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	0	0
Consumer Loan [Member] | Home Equity [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	83,666	88,113
Consumer Loan [Member] | Home Equity [Member] | Performing [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	83,666	88,113
Consumer Loan [Member] | Home Equity [Member] | Nonperforming [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	0	0
Consumer Loan [Member] | Consumer Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	7,051	7,366
Consumer Loan [Member] | Consumer Other [Member] | Performing [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	7,051	7,366
Consumer Loan [Member] | Consumer Other [Member] | Nonperforming [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans	$ 0	$ 0

XML

OTHER REAL ESTATE OWNED (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Other real estate owned [Roll Forward]
Beginning balance	$ 22,864	$ 28,377	$ 28,377
Additions, transfers from loans	56	102	339
Proceeds from sales of other real estate owned	(320)	(1,475)	(5,339)
Valuation allowance reversal upon sale	(250)	(251)	(1,158)
Gain on sales of other real estate owned	149	92	645
Ending balance, gross	22,499	26,845	22,864
Less: valuation allowance	(10,425)	(10,683)	(10,611)
Ending balance	12,074	16,162	12,253
Valuation Allowance, Real Estate Owned [Member]
Activity in valuation allowance [Roll Forward]
Beginning balance	10,611	10,805	10,805
Additions charged to expense	64	129
Reversals upon sale	(250)	(251)
Ending balance	$ 10,425	$ 10,683	$ 10,611

XML

FAIR VALUE, Assets Measured at Fair Value on Recurring and Nonrecurring Basis (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	$ 184,605	$ 184,433
U.S. Treasury and Federal Agency Securities [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	85,678	84,350
U.S. Agency MBS and CMOs [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	11,165	11,817
Tax-Exempt State and Municipal Bonds [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	39,809	39,187
Taxable State and Municipal Bonds [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	34,497	33,883
Corporate Bonds and Other Debt Securities [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	11,986	13,726
Other Equity Securities [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	1,470	1,470
Recurring Basis [Member]
Asset measured at fair value on recurring basis [Abstract]
Loans held for sale	2,767	2,181
Interest rate swaps	383	494
Interest rate swaps	(383)	(494)
Recurring Basis [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Asset measured at fair value on recurring basis [Abstract]
Loans held for sale	0	0
Interest rate swaps	0	0
Interest rate swaps	0	0
Recurring Basis [Member] | Significant Other Observable Inputs (Level 2) [Member]
Asset measured at fair value on recurring basis [Abstract]
Loans held for sale	2,767	2,181
Interest rate swaps	0	0
Interest rate swaps	0	0
Recurring Basis [Member] | Significant Unobservable Inputs (Level 3) [Member]
Asset measured at fair value on recurring basis [Abstract]
Loans held for sale	0	0
Interest rate swaps	383	494
Interest rate swaps	(383)	(494)
Recurring Basis [Member] | U.S. Treasury and Federal Agency Securities [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	85,678	84,350
Recurring Basis [Member] | U.S. Treasury and Federal Agency Securities [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | U.S. Treasury and Federal Agency Securities [Member] | Significant Other Observable Inputs (Level 2) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	85,678	84,350
Recurring Basis [Member] | U.S. Treasury and Federal Agency Securities [Member] | Significant Unobservable Inputs (Level 3) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | U.S. Agency MBS and CMOs [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	11,165	11,817
Recurring Basis [Member] | U.S. Agency MBS and CMOs [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | U.S. Agency MBS and CMOs [Member] | Significant Other Observable Inputs (Level 2) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	11,165	11,817
Recurring Basis [Member] | U.S. Agency MBS and CMOs [Member] | Significant Unobservable Inputs (Level 3) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | Tax-Exempt State and Municipal Bonds [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	39,809	39,187
Recurring Basis [Member] | Tax-Exempt State and Municipal Bonds [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | Tax-Exempt State and Municipal Bonds [Member] | Significant Other Observable Inputs (Level 2) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	39,809	39,187
Recurring Basis [Member] | Tax-Exempt State and Municipal Bonds [Member] | Significant Unobservable Inputs (Level 3) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | Taxable State and Municipal Bonds [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	34,497	33,883
Recurring Basis [Member] | Taxable State and Municipal Bonds [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | Taxable State and Municipal Bonds [Member] | Significant Other Observable Inputs (Level 2) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	34,497	33,883
Recurring Basis [Member] | Taxable State and Municipal Bonds [Member] | Significant Unobservable Inputs (Level 3) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | Corporate Bonds and Other Debt Securities [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	11,986	13,726
Recurring Basis [Member] | Corporate Bonds and Other Debt Securities [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | Corporate Bonds and Other Debt Securities [Member] | Significant Other Observable Inputs (Level 2) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	11,986	13,726
Recurring Basis [Member] | Corporate Bonds and Other Debt Securities [Member] | Significant Unobservable Inputs (Level 3) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | Other Equity Securities [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	1,470	1,470
Recurring Basis [Member] | Other Equity Securities [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Recurring Basis [Member] | Other Equity Securities [Member] | Significant Other Observable Inputs (Level 2) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	1,470	1,470
Recurring Basis [Member] | Other Equity Securities [Member] | Significant Unobservable Inputs (Level 3) [Member]
Asset measured at fair value on recurring basis [Abstract]
Available-for-sale securities	0	0
Nonrecurring Basis [Member]
Asset measured at fair value on non-recurring basis [Abstract]
Impaired loans	3,282	3,436
Other real estate owned	9,400	9,542
Nonrecurring Basis [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Asset measured at fair value on non-recurring basis [Abstract]
Impaired loans	0	0
Other real estate owned	0	0
Nonrecurring Basis [Member] | Significant Other Observable Inputs (Level 2) [Member]
Asset measured at fair value on non-recurring basis [Abstract]
Impaired loans	0	0
Other real estate owned	0	0
Nonrecurring Basis [Member] | Significant Unobservable Inputs (Level 3) [Member]
Asset measured at fair value on non-recurring basis [Abstract]
Impaired loans	3,282	3,436
Other real estate owned	$ 9,400	$ 9,542

XML

FAIR VALUE, Quantitative Information about Level 3 Fair Value Measurements (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Impaired Loans [Member] | Sales Comparison Approach [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Asset fair value	$ 3,282	$ 3,436
Impaired Loans [Member] | Sales Comparison Approach [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Adjustment for differences between comparable sales	1.00%	1.00%
Impaired Loans [Member] | Sales Comparison Approach [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Adjustment for differences between comparable sales	35.00%	35.00%
Impaired Loans [Member] | Income Approach [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Capitalization rate	9.50%	9.50%
Impaired Loans [Member] | Income Approach [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Capitalization rate	11.00%	11.50%
Other Real Estate Owned [Member] | Sales Comparison Approach [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Asset fair value	$ 9,400	$ 9,542
Other Real Estate Owned [Member] | Sales Comparison Approach [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Adjustment for differences between comparable sales	2.00%	2.00%
Other Real Estate Owned [Member] | Sales Comparison Approach [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Adjustment for differences between comparable sales	42.00%	32.50%
Other Real Estate Owned [Member] | Income Approach [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Capitalization rate	9.50%	9.50%
Other Real Estate Owned [Member] | Income Approach [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Capitalization rate	11.50%	11.50%

XML

FAIR VALUE, Carrying Amounts and Estimated Fair Values of Financial Instruments, Not Previously Presented (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Financial assets [Abstract]
Cash and due from banks	$ 30,631	$ 27,690
Securities held to maturity	69,079	69,849
Bank owned life insurance	39,524	39,274
Carrying Amount [Member]
Financial assets [Abstract]
FHLB stock	11,558	11,558
Loan Commitments [Member] | Carrying Amount [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Off-balance sheet credit-related items	0	0
Loan Commitments [Member] | Fair Value [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Off-balance sheet credit-related items	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Carrying Amount [Member]
Financial assets [Abstract]
Cash and due from banks	30,631	27,690
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Fair Value [Member]
Financial assets [Abstract]
Cash and due from banks	30,631	27,690
Significant Other Observable Inputs (Level 2) [Member] | Carrying Amount [Member]
Financial assets [Abstract]
Cash equivalents	83,118	62,129
Loans, net	1,245,996	1,260,414
Accrued interest receivable	4,204	4,092
Financial liabilities [Abstract]
Deposits	(1,433,146)	(1,448,724)
Other borrowed funds	(102,785)	(84,173)
Long-term debt	(41,238)	(41,238)
Accrued interest payable	(275)	(282)
Significant Other Observable Inputs (Level 2) [Member] | Fair Value [Member]
Financial assets [Abstract]
Cash equivalents	83,118	62,129
Loans, net	1,234,716	1,247,842
Accrued interest receivable	4,204	4,092
Financial liabilities [Abstract]
Deposits	(1,433,068)	(1,448,692)
Other borrowed funds	(102,595)	(84,051)
Long-term debt	(36,277)	(36,112)
Accrued interest payable	(275)	(282)
Significant Unobservable Inputs (Level 3) [Member] | Carrying Amount [Member]
Financial assets [Abstract]
Securities held to maturity	68,473	69,378
Bank owned life insurance	39,524	39,274
Significant Unobservable Inputs (Level 3) [Member] | Fair Value [Member]
Financial assets [Abstract]
Securities held to maturity	69,079	69,849
Bank owned life insurance	$ 39,524	$ 39,274

XML

DEPOSITS (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Summary of deposit [Abstract]
Noninterest-bearing demand	$ 466,415	$ 501,478
Interest bearing demand	342,812	340,715
Savings and money market accounts	548,761	532,853
Certificates of deposit	75,158	73,678
Total deposits	1,433,146	1,448,724
FDIC insurance limit on deposit accounts	250	250
Time deposits that exceed FDIC insurance limit	$ 18,100	$ 17,400

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OTHER BORROWED FUNDS, Federal Home Loan Bank Advances (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Advances from Federal Home Loan Bank [Abstract]
Advance amount	$ 102,785	$ 84,173
Residential and commercial real estate loans pledged as collateral for Federal Home Loan Bank advances	464,498	424,951
Federal Home Loan Bank Advances [Member]
Advances from Federal Home Loan Bank [Abstract]
Advance amount	102,785	84,173
Federal Home Loan Bank Advances [Member] | Single Maturity Fixed Rate Advances [Member]
Advances from Federal Home Loan Bank [Abstract]
Advance amount	$ 100,000	$ 80,000
Range of maturities, earliest	2017	2018
Range of maturities, last	2021	2021
Federal Home Loan Bank Advances [Member] | Single Maturity Fixed Rate Advances [Member] | Weighted Average [Member]
Advances from Federal Home Loan Bank [Abstract]
Interest rate	1.41%	1.60%
Federal Home Loan Bank Advances [Member] | Amortizable Mortgage Advances [Member]
Advances from Federal Home Loan Bank [Abstract]
Advance amount	$ 2,785	$ 4,173
Range of maturities, earliest	2018	2018
Range of maturities, last	2018	2018
Federal Home Loan Bank Advances [Member] | Amortizable Mortgage Advances [Member] | Weighted Average [Member]
Advances from Federal Home Loan Bank [Abstract]
Interest rate	3.75%	3.78%

XML

OTHER BORROWED FUNDS, Scheduled Repayments of FHLB Advances (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Scheduled repayments of FHLB advances [Abstract]
2017	$ 20,667
2018	52,118
2019	10,000
2020	10,000
2021	10,000
Thereafter	0
Total	$ 102,785	$ 84,173

XML

OTHER BORROWED FUNDS, Federal Reserve Bank Borrowings (Details) - Federal Reserve Bank Borrowings [Member] - USD ($) $ in Millions	Mar. 31, 2017	Dec. 31, 2016
Debt Instrument [Line Items]
Borrowings outstanding	$ 0.0	$ 0.0
Unused borrowing capacity	16.3	18.1
Commercial and mortgage loans pledged to the Federal Reserve Bank	$ 20.4	$ 20.7

XML

EARNINGS PER COMMON SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Reconciliation of numerators and denominators of basic and diluted earnings per common share [Abstract]
Net income available to common shares	$ 4,460	$ 3,495
Weighted average shares outstanding, including participating stock awards - Basic (in shares)	33,941,010	33,925,113
Dilutive potential common shares [Abstract]
Stock options (in shares)	7,574	0
Stock warrants (in shares)	0	0
Weighted average shares outstanding - Diluted (in shares)	33,948,584	33,925,113
Basic earnings per common share (in dollars per share)	$ 0.13	$ 0.10
Diluted earnings per common share (in dollars per share)	$ 0.13	$ 0.10
Stock Options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share amount (in shares)	0	101,473

XML

FEDERAL INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Income tax expense [Abstract]
Current	$ 1,804	$ 1,468
Deferred	162	(68)
Income tax expense	$ 1,966	$ 1,400
Difference between financial statement tax expense and amount computed by applying the statutory federal tax rate to pretax income [Abstract]
Statutory rate	35.00%	35.00%
Statutory rate applied to income before taxes	$ 2,249	$ 1,713
Deduct [Abstract]
Tax-exempt interest income	(183)	(148)
Bank-owned life insurance	(83)	(155)
Other, net	(17)	(10)
Income tax expense	1,966	$ 1,400
Deferred tax assets [Abstract]
Allowance for loan losses	5,844		$ 5,937
Nonaccrual loan interest	642		718
Valuation allowance on other real estate owned	3,649		3,714
Unrealized loss on securities available for sale	428		799
Other	216		176
Gross deferred tax assets	10,779		11,344
Valuation allowance	0		0
Total net deferred tax assets	10,779		11,344
Deferred tax liabilities [Abstract]
Depreciation	(1,655)		(1,705)
Prepaid expenses	(399)		(399)
Unrealized gain on securities available for sale	0		0
Other	(395)		(377)
Gross deferred tax liabilities	(2,449)		(2,481)
Net deferred tax asset	8,330		8,863
Unrecognized tax benefits	$ 0		$ 0
Period when unrecognized tax benefits is not expected to significantly increase or decrease	12 months

XML

COMMITMENTS AND OFF BALANCE-SHEET RISK (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Summary of the contractual amounts of financial instruments with off-balance-sheet risk [Abstract]
Notional amount of commitments to fund mortgage loans to be sold into the secondary market	$ 16,800	$ 19,800
Commitments to make loans at fixed rates	37.50%
Expiration period of commitment to make variable rate loan	30 days
Commitments to Make Loans [Member]
Summary of the contractual amounts of financial instruments with off-balance-sheet risk [Abstract]
Contractual amounts of financial instruments with off-balance-sheet risk	$ 95,653	90,293
Letters of Credit [Member]
Summary of the contractual amounts of financial instruments with off-balance-sheet risk [Abstract]
Contractual amounts of financial instruments with off-balance-sheet risk	13,598	13,823
Unused Lines of Credit [Member]
Summary of the contractual amounts of financial instruments with off-balance-sheet risk [Abstract]
Contractual amounts of financial instruments with off-balance-sheet risk	$ 446,346	$ 437,435

XML

SHAREHOLDERS' EQUITY (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) Category	Dec. 31, 2016 USD ($)
SHAREHOLDERS' EQUITY [Abstract]
Number of classification of prompt corrective action regulations | Category	5
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
CET1 capital (to risk weighted assets), actual amount	$ 166,880	$ 163,663
CET1 capital (to risk weighted assets), actual ratio	11.30%	11.00%
Tier 1 capital (to risk weighted assets), actual amount	$ 206,880	$ 203,663
Tier 1 capital (to risk weighted assets), actual ratio	14.00%	13.70%
Total capital (to risk weighted assets), actual amount	$ 223,575	$ 220,625
Total capital (to risk weighted assets), actual ratio	15.10%	14.90%
Tier 1 capital (to average assets), actual amount	$ 206,880	$ 203,663
Tier 1 capital (to average assets), actual ratio	12.10%	12.00%
CET1 capital (to risk weighted assets), minimum capital adequacy, amount	$ 66,557	$ 66,743
CET1 capital (to risk weighted assets), minimum capital adequacy, ratio	4.50%	4.50%
Tier 1 capital (to risk weighted assets), minimum capital adequacy, amount	$ 88,742	$ 88,991
Tier 1 capital (to risk weighted assets), minimum capital adequacy, ratio	6.00%	6.00%
Total capital (to risk weighted assets), minimum capital adequacy, amount	$ 118,323	$ 118,655
Total capital (to risk weighted assets), minimum capital adequacy, ratio	8.00%	8.00%
Tier 1 capital (to average assets), minimum capital adequacy, amount	$ 68,329	$ 67,810
Tier 1 capital (to average assets), minimum capital adequacy, ratio	4.00%	4.00%
CET1 capital (to risk weighted assets), minimum capital adequacy with capital buffer, amount	$ 85,045	$ 76,013
CET1 capital (to risk weighted assets), minimum capital adequacy with capital buffer, ratio	5.80%	5.10%
Tier 1 capital (to risk weighted assets), minimum capital adequacy with capital buffer, amount	$ 107,230	$ 98,261
Tier 1 capital (to risk weighted assets), minimum capital adequacy with capital buffer, ratio	7.30%	6.60%
Total capital (to risk weighted assets), minimum capital adequacy with capital buffer, amount	$ 136,811	$ 127,925
Total capital (to risk weighted assets), minimum capital adequacy with capital buffer, ratio	9.30%	8.60%
Trust preferred securities that qualified as Tier one risk based capital	$ 40,000	$ 40,000
Bank [Member]
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
CET1 capital (to risk weighted assets), actual amount	$ 201,129	$ 197,972
CET1 capital (to risk weighted assets), actual ratio	13.60%	13.40%
Tier 1 capital (to risk weighted assets), actual amount	$ 201,129	$ 197,972
Tier 1 capital (to risk weighted assets), actual ratio	13.60%	13.40%
Total capital (to risk weighted assets), actual amount	$ 217,825	$ 214,934
Total capital (to risk weighted assets), actual ratio	14.70%	14.50%
Tier 1 capital (to average assets), actual amount	$ 201,129	$ 197,972
Tier 1 capital (to average assets), actual ratio	11.80%	11.70%
CET1 capital (to risk weighted assets), minimum capital adequacy, amount	$ 66,552	$ 66,737
CET1 capital (to risk weighted assets), minimum capital adequacy, ratio	4.50%	4.50%
Tier 1 capital (to risk weighted assets), minimum capital adequacy, amount	$ 88,736	$ 88,983
Tier 1 capital (to risk weighted assets), minimum capital adequacy, ratio	6.00%	6.00%
Total capital (to risk weighted assets), minimum capital adequacy, amount	$ 118,314	$ 118,644
Total capital (to risk weighted assets), minimum capital adequacy, ratio	8.00%	8.00%
Tier 1 capital (to average assets), minimum capital adequacy, amount	$ 68,264	$ 67,742
Tier 1 capital (to average assets), minimum capital adequacy, ratio	4.00%	4.00%
CET1 capital (to risk weighted assets), minimum capital adequacy with capital buffer, amount	$ 85,038	$ 76,006
CET1 capital (to risk weighted assets), minimum capital adequacy with capital buffer, ratio	5.80%	5.10%
Tier 1 capital (to risk weighted assets), minimum capital adequacy with capital buffer, amount	$ 107,222	$ 98,252
Tier 1 capital (to risk weighted assets), minimum capital adequacy with capital buffer, ratio	7.30%	6.60%
Total capital (to risk weighted assets), minimum capital adequacy with capital buffer, amount	$ 136,801	$ 127,913
Total capital (to risk weighted assets), minimum capital adequacy with capital buffer, ratio	9.30%	8.60%
CET1 capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, amount	$ 96,130	$ 96,398
CET1 capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, ratio	6.50%	6.50%
Tier 1 capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, amount	$ 118,314	$ 118,644
Tier 1 capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, ratio	8.00%	8.00%
Total capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, amount	$ 147,893	$ 148,305
Total capital (to risk weighted assets) to be well capitalized under prompt corrective action regulations, ratio	10.00%	10.00%
Tier 1 capital (to average assets) to be well capitalized under prompt corrective action regulations, amount	$ 85,330	$ 84,677
Tier 1 capital (to average assets) to be well capitalized under prompt corrective action regulations, ratio	5.00%	5.00%