MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 – DEPOSITS

Deposits are summarized as follows (in thousands):

	March 31, 2016		December 31, 2015
Noninterest-bearing demand	$	424,356	$	477,032
Interest bearing demand		320,250		358,306
Savings and money market accounts		511,325		512,980
Certificates of deposit		84,903		87,194
	$	1,340,834	$	1,435,512

Approximately $18.3 million and $17.1 million in certificates of deposit were in denominations of $250,000 or more at March 31, 2016 and December 31, 2015, respectively.

NOTE 7 - OTHER BORROWED FUNDS

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

Federal Home Loan Bank Advances

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

Principal Terms		Advance Amount	Range of Maturities	Weighted Average Interest Rate
March 31, 2016
Single maturity fixed rate advances	$	90,000	August 2016 to March 2020	1.69	%
Amortizable mortgage advances		4,840	March 2018 to July 2018	3.76	%
	$	94,840

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

Each advance is subject to a prepayment fee if paid prior to its maturity date. Fixed rate advances are payable at maturity. Amortizable mortgage advances are fixed rate advances with scheduled repayments based upon amortization to maturity. These advances were collateralized by residential and commercial real estate loans totaling $435,348,000 and $440,660,000 under a blanket lien arrangement at March 31, 2016 and December 31, 2015, respectively.

- 31 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 - OTHER BORROWED FUNDS

Scheduled repayments of FHLB advances as of March 31, 2016 were as follows (in thousands):

2016	$	20,667
2017		2,055
2018		52,118
2019		10,000
2020		10,000
Thereafter		---
	$	94,840

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank. There were no borrowings outstanding at March 31, 2016 and December 31, 2015, and the Company had approximately $18.2 million and $18.5 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $21.1 million and $21.6 million at March 31, 2016 and December 31, 2015, respectively.

NOTE 8 - EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three month periods ended March 31, 2016 and 2015 are as follows (dollars in thousands, except per share data):

	Three Months Ended March 31, 2016		Three Months Ended March 31, 2015
Net income available to common shares	$	3,495	$	2,840

Weighted average shares outstanding, including participating stock awards - Basic		33,925,113		33,866,789

Dilutive potential common shares:
Stock options		---		---
Stock warrants		---		---
Weighted average shares outstanding - Diluted		33,925,113		33,866,789

Basic earnings per common share	$	0.10	$	0.08
Diluted earnings per common share	$	0.10	$	0.08

Stock options for 101,473 and 260,261 shares of common stock for the three month periods ended March 31, 2016 and 2015, respectively, were not considered in computing diluted earnings per share because they were antidilutive.

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Index

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, 2016			Three Months Ended March 31, 2015
Current	$	1,468		$	653
Deferred		(68	)		592
	$	1,400		$	1,245

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, 2016			Three Months Ended March 31, 2015
Statutory rate		35	%		35	%
Statutory rate applied to income before taxes	$	1,713		$	1,430
Add (deduct)
Tax-exempt interest income		(148	)		(117	)
Bank-owned life insurance		(155	)		(57	)
Other, net		(10	)		(11	)
	$	1,400		$	1,245

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, 2016 or December 31, 2015.

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Index

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, 2016			December31, 2015
Deferred tax assets
Allowance for loan losses	$	5,995		$	5,978
Nonaccrual loan interest		830			850
Valuation allowance on other real estate owned		3,739			3,782
Unrealized loss on securities available for sale		---			---
Other		704			647
Gross deferred tax assets		11,268			11,257
Valuation allowance		---			---
Total net deferred tax assets		11,268			11,257

Deferred tax liabilities
Depreciation		(1,682	)		(1,739	)
Prepaid expenses		(191	)		(191	)
Unrealized gain on securities available for sale		(528	)		(187	)
Other		(321	)		(321	)
Gross deferred tax liabilities		(2,722	)		(2,438	)
Net deferred tax asset	$	8,546		$	8,819

There were no unrecognized tax benefits at March 31, 2016 or December 31, 2015 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2012.

NOTE 10 – COMMITMENTS AND OFF BALANCE-SHEET RISK

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

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

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

	March 31, 2016		December 31, 2015
Commitments to make loans	$	90,346	$	97,991
Letters of credit		14,379		12,976
Unused lines of credit		416,720		426,080

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $17.2 million and $19.8 million at March 31, 2016 and December 31, 2015, respectively.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

At March 31, 2016, approximately 41% 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, 2016, there were no material pending legal proceedings to which the Company or any of its subsidiaries are a party or which any of its properties are the subject.

NOTE 12 – SHAREHOLDERS' EQUITY

Regulatory Capital

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

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

In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. The capital conservation buffer requirement is 0.625% for 2016, increasing to 1.25% for 2017, 1.875% for 2018 and 2.50% for 2019 and thereafter. 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. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – SHAREHOLDERS' EQUITY (Continued)

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

	Actual					Minimum Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2016
CET1 capital (to risk weighted assets)
Consolidated	$	154,260		11.0	%	$	63,378		4.5	%		N/A		N/A
Bank		188,872		13.4			63,370		4.5		$	91,535		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		194,260		13.8			84,504		6.0			N/A		N/A
Bank		188,872		13.4			84,494		6.0			112,658		8.0
Total capital (to risk weighted assets)
Consolidated		211,396		15.0			112,672		8.0			N/A		N/A
Bank		206,008		14.6			112,658		8.0			140,823		10.0
Tier 1 capital (to average assets)
Consolidated		194,260		11.7			66,489		4.0			N/A		N/A
Bank		188,872		11.4			66,412		4.0			83,015		5.0

December 31, 2015
CET1 capital (to risk weighted assets)
Consolidated	$	151,630		10.8	%	$	63,479		4.5	%		N/A		N/A
Bank		186,930		13.2			63,463		4.5		$	91,668		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		191,630		13.6			84,638		6.0			N/A		N/A
Bank		186,930		13.2			84,617		6.0			112,822		8.0
Total capital (to risk weighted assets)
Consolidated		208,711		14.8			112,851		8.0			N/A		N/A
Bank		203,471		14.4			112,822		8.0			141,028		10.0
Tier 1 capital (to average assets)
Consolidated		191,630		11.5			66,400		4.0			N/A		N/A
Bank		186,930		11.2			66,332		4.0			82,915		5.0

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

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

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Index

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

At March 31, 2016, we had total assets of $1.64 billion, total loans of $1.22 billion, total deposits of $1.34 billion and shareholders' equity of $155.2 million. During the first quarter of 2016, we recognized net income of $3.5 million compared to net income of $2.8 million in the first quarter of 2015. The Bank was categorized as “well capitalized” under regulatory capital standards at March 31, 2016.

After a hiatus of over five years, 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 the first quarter of 2016.

RESULTS OF OPERATIONS

Summary: Net income for the quarter ended March 31, 2016 was $3.5 million, compared to net income of $2.8 million in the first quarter of 2015. Net income per common share on a diluted basis was $0.10 for the first quarter of 2016 and $0.08 for the first quarter of 2015.

The increase in earnings in the first quarter of 2016 compared to the first quarter of 2015 was due primarily to increased net interest income, earnings on bank owned life insurance and reduced nonperforming asset expenses, partially offset by reduced level of mortgage loan sale gains and a reduced negative provision for loan losses. Net interest income increased to $11.7 million in the first quarter of 2016 compared to $10.7 million in the same period in 2015. Bank owned life insurance income increased to $444,000 in the first quarter of 2016 compared to $163,000 in the first quarter of 2015. The provision for loan losses was a negative $100,000 for the first quarter of 2016, compared to a negative $1.0 million for the first quarter of 2015. We realized a lower level of income from gains on sales of residential mortgages, which decreased from $723,000 in the first quarter of 2015 to $487,000 in the first quarter of 2016. Nonperforming asset expenses (including administration costs and losses) were $411,000 for the first quarter of 2016 compared to $827,000 for the first quarter of 2015, primarily as a result of a decrease of $10.9 million in other real estate owned. We again were in a net loan recovery position for the first quarter of 2016, with $148,000 in net loan recoveries, compared to $718,000 in net loan recoveries in the first quarter of 2015. Lost interest from elevated levels of nonperforming assets was approximately $197,000 for the three months ended March 31, 2016 compared to $415,000 for the three months ended March 31, 2015. Each of these items is discussed more fully below.

Net Interest Income: Net interest income totaled $11.7 million for the first quarter of 2016 and $10.7 million for the first quarter of 2015.

Net interest income was positively impacted in the first quarter of 2016 by an increase in average earning assets of $123.5 million compared to the first quarter of 2015. Our average yield on earning assets for the first quarter of 2016 decreased 4 basis points compared to the same period in 2015 from 3.46% to 3.42 %. Average interest earning assets totaled $1.54 billion for the first quarter of 2016 compared to $1.42 billion for the first quarter of 2015. The net interest margin was 3.09% for the first quarter of 2016 compared to 3.07% for the first quarter of 2015. An increase of $23.7 million in average securities between periods and an increase of $82.3 million in loans mitigated the impact of reduction in average loan yield from 3.91% in the first quarter of 2015 to 3.87% in the first quarter of 2016. The late 2015 increase in federal funds rate had a net positive impact on our net interest margin position as more loans repriced at the higher rate than our funding sources.

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

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Index

The cost of funds decreased 6 basis points to 0.47% in the first quarter of 2016 from 0.53% in the same period in 2015. A decrease in the rates paid on our savings and money market accounts in response to declining market rates within the current rate environment caused a reduction in our cost of funds. Also contributing to the reduction was a shift in our deposit mix from higher costing time deposits to lower costing demand and savings accounts. Partially offsetting this was the full quarter effect of a $10.0 million FHLB advance taken out on March 27, 2015.

The following table shows an analysis of net interest margin for the three month periods ended March 31, 2016 and 2015 (dollars in thousands):

	For the three months ended March 31,
	2016								2015
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost

Assets
Taxable securities	$	129,541		$	550		1.69	%	$	119,711		$	501		1.67	%
Tax-exempt securities (1)		84,635			433		3.20			70,770			344		3.14
Commercial loans (2)		891,238			8,892		3.95			818,201			8,147		3.98
Residential mortgage loans		213,063			1,884		3.54			195,680			1,771		3.62
Consumer loans		99,667			980		3.95			108,012			1,045		3.92
Federal Home Loan Bank stock		11,558			124		4.24			11,238			117		4.15
Federal funds sold and other short-term investments		109,464			145		0.53			92,031			86		0.38
Total interest earning assets (1)		1,539,166			13,008		3.42			1,415,643			12,011		3.46

Noninterest earning assets:
Cash and due from banks		25,031								24,269
Other		99,393								110,465
Total assets	$	1,663,590							$	1,550,377

Liabilities
Deposits:
Interest bearing demand	$	334,726		$	85		0.10	%	$	324,848		$	97		0.12	%
Savings and money market accounts		513,243			238		0.19			464,359			216		0.19
Time deposits		90,278			140		0.62			121,119			306		1.02
Borrowings:
Other borrowed funds		95,921			442		1.83			88,437			415		1.88
Long-term debt		41,238			365		3.51			41,238			325		3.16
Total interest bearing liabilities		1,075,406			1,270		0.47			1,040,001			1,359		0.53

Noninterest bearing liabilities:
Noninterest bearing demand accounts		427,634								360,901
Other noninterest bearing liabilities		6,306								5,413
Shareholders' equity		154,244								144,062
Total liabilities and shareholders' equity	$	1,663,590							$	1,550,377

Net interest income				$	11,738							$	10,652

Net interest spread (1)							2.95	%							2.93	%
Net interest margin (1)							3.09	%							3.07	%
Ratio of average interest earning assets to average interest bearing liabilities		143.12	%							136.12	%

(1)	Yield adjusted to fully tax equivalent.

(2)	Includes average nonaccrual loans of approximately $426,000 and $11.3 million for the three months ended March 31, 2016 and 2015.

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Index

Provision for Loan Losses: The provision for loan losses for the first quarter of 2016 was a negative $100,000 compared to a negative $1.0 million for the first quarter of 2015. The negative provision for loan losses for both periods was caused by stabilizing real estate values on problem credits, continued improvement in asset quality metrics and net loan recoveries of $148,000 in the first quarter of 2016 and $718,000 in the first quarter of 2015. At March 31, 2016, we had experienced net loan recoveries in ten of the past twelve quarters, and in each of the past five quarters.

Gross loan recoveries were $224,000 for the first quarter of 2016 and $796,000 for the same period in 2015. In the first quarter of 2016, we had $76,000 in charge-offs, compared to $78,000 in the first quarter of 2015. We continue to experience positive results from our collection efforts as evidenced by our net loan recoveries. While we expect our collection efforts to produce further recoveries, they may not continue at the same level we have experienced the past several quarters.

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

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

Noninterest Income: Noninterest income for the three month period ended March 31, 2016 increased to $4.6 million compared to $4.3 million for the same period in 2015. The components of noninterest income are shown in the table below (in thousands):

	Three Months Ended March 31, 2016		Three Months Ended March 31, 2015
Service charges and fees on deposit accounts	$	1,047	$	1,001
Net gains on mortgage loans		487		723
Trust fees		708		734
Gain as sales of securities		89		83
ATM and debit card fees		1,186		1,110
Bank owned life insurance (“BOLI”) income		444		163
Investment services fees		304		283
Other income		343		198
Total noninterest income	$	4,608	$	4,295

Net gains on mortgage loans were down $236,000 in the first quarter of 2016 compared to the first quarter of 2015 as a result of our strategic decision to retain a higher percentage of current production in portfolio and partially due to an overall lower level of volume. The mortgage loans retained in portfolio are typically loans that conform to secondary market requirements and have a term of fifteen years or less. Mortgage loans originated for sale in the first quarter of 2016 were $18.9 million, compared to $23.4 million in the first quarter of 2015. Mortgage loans originated for portfolio in the first quarter of 2016 were $14.1 million, compared to $18.0 million in the first quarter of 2015. BOLI income was up $281,000 in the first quarter of 2016 due to distribution of a death claim on a covered former employee. Trust fees and investment service fees were down in the first quarter of 2016 due to investment market volatility in the quarter, particularly at the beginning of the year.

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Index

Noninterest Expense: Noninterest expense decreased to $11.6 million for the three month period ended March 31, 2016, from $11.9 million for the same period in 2015. The components of noninterest expense are shown in the table below (in thousands):

	Three Months Ended March 31, 2016		Three Months Ended March 31, 2015
Salaries and benefits	$	6,187	$	6,182
Occupancy of premises		982		972
Furniture and equipment		865		783
Legal and professional		159		239
Marketing and promotion		275		305
Data processing		659		577
FDIC assessment		251		281
Interchange and other card expense		286		276
Bond and D&O insurance		132		145
Administration and disposition of problem assets		411		827
Outside services		370		394
Other noninterest expense		974		881
Total noninterest expense	$	11,551	$	11,862

Many categories of noninterest expense had reductions compared to the first quarter of 2015 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased slightly in the first quarter of 2016 from the first quarter of 2015. This increase is largely due to a higher level of costs associated with medical insurance, which was up $100,000 compared to the first quarter of 2015. We had 338 full-time equivalent employees at March 31, 2016 compared to 351 at March 31, 2015.

Costs associated with administration and disposition of problem assets remain elevated, but have decreased significantly over the past few years. These expenses include legal costs, repossessed and foreclosed property administration expense and losses on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. Losses on repossessed and foreclosed properties include both net gains and losses on the sale of properties and unrealized losses from value declines for outstanding properties. We experienced decreases in two of these three expense categories in the first quarter of 2016 compared to the same period in the prior year.

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

	Three Months Ended March 31, 2016		Three Months Ended March 31, 2015
Legal and professional – nonperforming assets	$	71	$	89
Repossessed and foreclosed property administration		304		287
Net losses on repossessed and foreclosed properties		36		451
Total	$	411	$	827

While the overall costs associated with nonperforming assets remain elevated in the first quarter of 2016, they are down significantly from recent year levels and from the prior year. These costs were driven by valuation writedowns and losses on sales of individual properties. We are encouraged that the overall holding costs continue to decline as we continue to decrease the level of our other real estate owned. Other real estate owned decreased from $27.0 million at March 31, 2015 to $16.2 million at March 31, 2016. As our level of problem loans and other real estate owned decreases, we believe we will experience more reductions in these costs going forward.

Losses on repossessed assets and foreclosed properties for the three month period ended March 31, 2016, decreased $415,000 from the same period in 2015. This decrease was primarily due to a lower level of writedowns of other real estate properties in the first quarter of 2016. In the first quarter of 2015, such writedowns totaled $519,000, compared to $128,000 in the first quarter of 2016. Also contributing to the decrease was an increase of $25,000 in net gains on sales of other real estate owned. In the first quarter of 2015, we recognized net gains totaling $67,000 on such sales, compared to $92,000 in the first quarter of 2016.

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Index

Federal Income Tax Expense: We recorded $1,400,000 in federal income tax expense for the three month period ended March 31, 2016 compared to $1,245,000 in the same period in 2015. At December 31, 2012 and since that time, we have concluded that a valuation allowance on our deferred tax asset was not required. As a result, the financial results for the first quarter of 2016 reflect federal income tax expense, at an effective tax rate of 28.61% compared to 30.48% for first quarter of 2015. The effective tax rate decreased in the first quarter of 2016 due to the elevated level of earnings on bank owned life insurance resulting from payment of a death benefit.

FINANCIAL CONDITION

Summary: Since the economic recession in 2008 and 2009, we had been focused on improving our loan portfolio, reducing exposure in higher loan concentration types, building our investment portfolio, and improving our financial condition 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 have turned our focus more recently to achieving high quality loan portfolio growth.

Total assets were $1.640 billion at March 31, 2016, a decrease of $89.7 million from $1.730 billion at December 31, 2015. This change reflected increases of $18.3 million in our loan portfolio and $1.2 million in securities available for sale, offset by decreases of $86.9 million in cash and cash equivalents and $1.4 million in other real estate owned. Total deposits decreased by $94.5 million and other borrowed funds decreased by $1.3 million at March 31, 2016 compared to December 31, 2015.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $94.6 million at March 31, 2016 compared to $181.5 million at December 31, 2015. The $86.9 million decrease was primarily the result of a lower level of deposit balances at March 31, 2016 by some of our larger commercial customers. We expect declines in our balances of short term investments as loan demand continues to increase and seasonal deposits return to more normal levels.

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

Securities: Securities available for sale were $168.0 million at March 31, 2016 compared to $166.8 million at December 31, 2015. The balance at March 31, 2016 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio decreased from $51.9 million at December 31, 2015 to $51.3 million at March 31, 2016. Our held to maturity portfolio is comprised of state and municipal bonds.

Portfolio Loans and Asset Quality: Total portfolio loans increased by $18.3 million in the first quarter of 2016 and were $1.22 billion at March 31, 2016 compared to $1.20 billion at December 31, 2015. During the first quarter of 2016, our commercial portfolio increased by $19.4 million, while our consumer portfolio decreased by $5.2 million and our residential mortgage portfolio increased by $4.1 million. We have been focusing efforts to increase our consumer and residential mortgage portfolio segments to further diversify our credit risk.

The volume of residential mortgage loans originated for sale in the first quarter of 2016 decreased $4.5 compared to the same period in 2015 due to the mortgage rate environment and our decision to hold a higher percentage of current production in portfolio. Residential mortgage loans originated for sale were $18.9 million in the first quarter of 2016 compared to $23.4 million in the first quarter of 2015. Mortgage loans originated for portfolio in the first quarter of 2016 were $14.1 million, compared to $18.0 million in the first quarter of 2015.

Our commercial loan portfolio balances declined in recent years leading up to 2014 reflecting the continued soft economic conditions in west Michigan and our interest in improving the quality of our loan portfolio through reducing our exposure to these generally higher credit risk assets. We focused our efforts on reducing our exposure to residential land development loans, diversifying our commercial loan portfolio and improving asset quality. We believe our loan portfolio has stabilized and we experienced year over year growth in commercial loan balances for the first time in many years in 2014, increasing $71.8 million from December 31, 2013 and increasing another $67.8 million in 2015. We built on this further in the first quarter of 2016, with growth of $19.4 million in our commercial loan portfolio. This first quarter growth took place in our commercial and industrial portfolio, which grew by $11.3 million and in our commercial real estate loans, which grew by $8.1 million in the same period. We plan to continue measured, high quality loan portfolio growth throughout 2016.

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

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

	March 31, 2016					December 31, 2015
	Balance		Percent of Total Loans			Balance		Percent of Total Loans
Commercial real estate: (1)
Residential developed	$	13,141		1.1	%	$	10,448		0.9	%
Unsecured to residential developers		7,491		0.6			7,372		0.6
Vacant and unimproved		45,429		3.7			42,881		3.6
Commercial development		658		0.1			559		---
Residential improved		68,858		5.7			67,922		5.7
Commercial improved		294,392		24.2			289,651		24.2
Manufacturing and industrial		86,747		7.1			89,839		7.5
Total commercial real estate		516,716		42.5			508,672		42.5
Commercial and industrial		388,625		32.0	%		377,298		31.5	%
Total commercial		905,341		74.5			885,970		74.0

Consumer
Residential mortgage		214,104		17.6			209,972		17.5
Unsecured		577		---			637		0.1
Home equity		87,874		7.2			92,716		7.7
Other secured		8,288		0.7			8,637		0.7
Total consumer		310,843		25.5			311,962		26.0
Total loans	$	1,216,184		100.0	%	$	1,197,932		100.0	%

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

Commercial real estate loans accounted for approximately 42% of the total loan portfolio at March 31, 2016 and consisted primarily of loans to business owners and developers of owner and non-owner occupied commercial properties and loans to developers of single and multi-family residential properties. In the table above, we show our commercial real estate portfolio by loans secured by residential and commercial real estate, and by stage of development. Improved loans are generally secured by properties that are under construction or completed and placed in use. Development loans are secured by properties that are in the process of development or fully developed. Vacant and unimproved loans are secured by raw land for which development has not yet begun and agricultural land.

Total commercial real estate loans increased $8.0 million since December 31, 2015. Our commercial and industrial loan portfolio increased by $11.3 million to $388.6 million at March 31, 2016 and represented 32% of our commercial portfolio.

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

The volume of residential mortgage loans originated for sale during the first quarter of 2016 decreased from the first quarter of 2015 as a result of interest rate conditions and our decision to increase the percentage of current production to be held in portfolio. We are also experiencing a shift in production to financing new home purchases versus refinancings. We have not yet had to repurchase any residential mortgage loans sold to historical purchasers; however, due to market conditions many banks are being required to repurchase loans resulting from actual or alleged failure to strictly conform to the investor’s purchase criteria.

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 $5.2 million to $96.7 million at March 31, 2016 from $102.0 million at December 31, 2015, due primarily to a decrease in home equity loans. Consumer loans comprised approximately 8% of our portfolio loans at March 31, 2016 and 9% at December 31, 2015.

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

	Three Months Ended March 31, 2016							Three Months Ended March 31, 2015
	Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size
Commercial real estate:
Residential developed	$	5,227		6.8	%	$	871	$	484		0.7	%	$	97
Unsecured to residential developers		---		---			---		---		---			---
Vacant and unimproved		---		---			---		1,051		1.6			175
Commercial development		2,200		2.9			2,200		---		---			---
Residential improved		28,113		36.8			541		12,414		19.3			226
Commercial improved		9,802		12.8			700		6,573		10.2			299
Manufacturing and industrial		778		1.0			389		1,584		2.5			317
Total commercial real estate		46,120		60.3			615		22,106		34.3			238
Commercial and industrial		8,553		11.2			231		16,743		26.0			266
Total commercial		54,673		71.5			488		38,849		60.3			249

Consumer
Residential mortgage		14,086		18.4			181		17,748		27.5			183
Unsecured		12		---			12		28		---			7
Home equity		7,155		9.4			86		5,959		9.3			67
Other secured		525		0.7			21		1,847		2.9			39
Total consumer		21,778		28.5			116		25,582		39.7			108
Total loans	$	76,451		100.0	%		255	$	64,431		100.0	%		164

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

	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015
Commercial loans originated	$	54,673		$	38,849
Repayments of commercial loans		(43,347	)		(40,378	)
Change in undistributed - available credit		8,045			12,926
Commercial and business lending	$	19,371		$	11,397

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, 2016, nonperforming assets totaled $16.6 million compared to $18.3 million at December 31, 2015. Additions to other real estate owned in the first quarter of 2016 were $102,000, compared to $699,000 in the first quarter of 2015. At March 31, 2016, there were no loans in redemption, so we expect there to be fewer additions to other real estate owned in 2016 than there were in 2015. 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. Proceeds from sales of foreclosed properties were $1.5 million in the first quarter of 2015 resulting in a net realized gain on sale of $67,000.

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We expect the level of sales of foreclosed properties to be higher in the second quarter of 2016 than experienced in the first quarter of 2016.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of March 31, 2016, nonperforming loans totaled $427,000, or 0.04% of total portfolio loans, compared to $756,000, or 0.06% of total portfolio loans, at December 31, 2015.

Nonperforming loans at March 31, 2016 consisted of $343,000 of commercial real estate loans secured by various types of non-residential real estate, $48,000 of commercial and industrial loans, and $36,000 of consumer and residential mortgage loans.

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $16.2 million at March 31, 2016 and $17.6 million at December 31, 2015. Of this balance at March 31, 2016, there were 47 commercial real estate properties totaling approximately $15.6 million. The remaining balance was comprised of eight residential properties totaling approximately $572,000. One commercial real estate property comprised $4.0 million, or 24% of total other real estate owned at March 31, 2016. All properties acquired through or in lieu of foreclosure are initially transferred at their fair value less estimated costs to sell and then evaluated monthly for impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least annually on all foreclosed assets.

At March 31, 2016, our foreclosed asset portfolio had a weighted average age held in portfolio of 4.32 years. Below is a breakout of our foreclosed asset portfolio at March 31, 2016 and December 31, 2015 by property type and the percentages the property has been written down since taken into our possession and the combined writedown percentage, including losses taken when the property was loan collateral (dollars in thousands):

	March 31, 2016								December 31, 2015
Foreclosed Asset Property Type	Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)			Carrying Value at Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)
Single Family	$	297		---	%		13.0	%	$	736		---	%		13.2	%
Residential Lot		275		34.6			59.7			277		34.0			59.4
Multi-Family		---		---			---			---		---			---
Vacant Land		3,846		44.6			55.8			3,887		44.0			55.4
Residential Development		3,711		30.5			69.8			3,859		28.7			68.7
Commercial Office		962		26.6			45.4			1,002		25.4			44.1
Commercial Industrial		---		---			---			---		---			---
Commercial Improved		7,071		41.3			44.2			7,811		40.1			44.1
	$	16,162		38.7			55.6		$	17,572		37.0			54.2

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

	March 31, 2016			December 31, 2015
Nonaccrual loans	$	396		$	739
Loans 90 days or more delinquent and still accruing		31			17
Total nonperforming loans (NPLs)		427			756
Foreclosed assets		16,162			17,572
Repossessed assets		---			---
Total nonperforming assets (NPAs)		16,589			18,328

NPLs to total loans		0.04	%		0.06	%
NPAs to total assets		1.01	%		1.06	%

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

	March 31, 2016						December 31, 2015
	Commercial		Consumer		Total		Commercial		Consumer		Total
Performing TDRs	$	24,343	$	13,376	$	37,719	$	24,932	$	13,543	$	38,475
Nonperforming TDRs (1)		311		9		320		550		27		577
Total TDRs	$	24,654	$	13,385	$	38,039	$	25,482	$	13,570	$	39,052

(1)	Included in nonperforming asset table above

We had a total of $38.0 million and $39.1 million of loans whose terms have been modified in troubled debt restructurings (“TDRs”) as of March 31, 2016 and December 31, 2015, respectively. These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. 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, 2016 and December 31, 2015 was $17.1 million. The balance of the allowance for loan losses represented 1.41% of total portfolio loans at March 31, 2016 compared to 1.43% of total portfolio loans at December 31, 2015. The allowance for loan losses to nonperforming loan coverage ratio increased from 2259.39% at December 31, 2015 to 4011.48% at March 31, 2016.

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

(in millions)	Quarter Ended March 31, 2016			Quarter Ended December 31, 2015			Quarter Ended September 30, 2015			Quarter Ended June 30, 2015		Quarter Ended March 31, 2015
Commercial loans	$	905.3		$	886.0		$	882.1		$	824.6	$	829.6
Nonperforming loans		0.4			0.8			4.2			3.7		9.8
Other real estate owned and repo assets		16.2			17.6			25.7			26.3		27.1
Total nonperforming assets		16.6			18.3			29.9			30.0		36.9
Net charge-offs (recoveries)		(0.1	)		(1.6	)		(0.3	)		---		(0.7	)
Total delinquencies		0.8			1.4			2.9			1.9		2.5

Nonperforming loans continually declined since the first quarter of 2010 to $427,000 at March 31, 2016. As discussed earlier, we have had net loan recoveries in several quarters over the last two years and in each of the last five quarters. Our total delinquencies have continued to stabilize and were $796,000 at March 31, 2016 and $1.4 million at December 31, 2015. Our delinquency percentage at March 31, 2016 was 0.07%, a new quarterly low in Company history and 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 increased $78,000 in the first quarter of 2016. We recorded a negative provision for loan losses of $100,000 for the three months ended March 31, 2016 compared to a negative $1.0 million for the same period of 2015. Net loan recoveries were $148,000 for the three months ended March 31, 2016, compared to net recoveries of $718,000 for the same period in 2015. The ratio of net charge-offs to average loans was (0.05)% on an annualized basis for the first quarter of 2016, compared to (0.21%) for the fourth quarter of 2015 and (0.26)% for the first quarter of 2015.

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

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

Overall, impaired loans were stable at $37.6 million at March 31, 2016 compared to $38.8 million at December 31, 2015. The specific allowance for impaired loans decreased $59,000 to $1.88 million, compared to $1.94 million at December 31, 2015. The specific allowance for impaired loans represented 5.0% of total impaired loans at March 31, 2016 and December 31, 2015. The overall balance of impaired loans remained elevated partially due to an accounting rule (ASU 2011-02) adopted in 2011 that requires us to identify classified loans that renew at existing contractual rates as troubled debt restructurings (“TDRs”) if the contractual rate is less than market rates for similar loans at the time of renewal.

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

The determination of our loss factors is based upon our actual loss history by loan grade and adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. We use a rolling 18 month actual net chargeoff history as the base for our computation. Over the past two years, the 18 month period computations have reflected sizeable decreases in net chargeoff experience. We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. Adjustments to the qualitative factors also involved consideration of different loss periods for the Bank, including 12, 24, 36 and 48 month periods. Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans increased to $12.3 million at March 31, 2016 compared to $12.2 million at December 31, 2015. This resulted in a general reserve percentage allocated at March 31, 2016 of 1.40% of commercial loans, a slight decrease from 1.41% at December 31, 2015. The qualitative component of our allowance allocated to commercial loans was $12.3 million at March 31, 2016 (up from $12.2 million at December 31, 2015).

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, 2016 and December 31, 2015.

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

Premises and Equipment: Premises and equipment totaled $50.9 million at March 31, 2016, down $512,000 from $51.5 million at December 31, 2015 as depreciation more than offset capital additions of current facilities and equipment during the first quarter of 2016.

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Deposits and Other Borrowings: Total deposits decreased $94.7 million to $1.34 billion at March 31, 2016, as compared to $1.44 billion at December 31, 2015. Non-interest checking account balances decreased $52.7 million during the first quarter of 2016. Interest bearing demand account balances decreased $38.1 million and savings and money market account balances decreased $1.6 million in the first quarter of 2016. We also decreased higher costing certificates of deposits by $2.3 million in the first quarter of 2016. Most of the decrease in demand deposits and money market deposits in the first quarter of 2016 was due to the seasonal year end increase in deposits from many of our municipal and business customers. We believe our success in maintaining the balances of personal and business checking and savings accounts was primarily attributable to our focus on quality customer service, the desire of customers to deal with a local bank, the convenience of our maturing branch network and the breadth and depth of our sophisticated product line.

Noninterest bearing demand accounts comprised 32% of total deposits at March 31, 2016 and 33% at December 31, 2015. These balances typically increase at year end for many of our commercial customers, then decline in the first quarter. Because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types. Interest bearing demand, including money market and savings accounts, comprised 62% of total deposits at March 31, 2016 and 61% at December 31, 2015. Time accounts as a percentage of total deposits were 6% at March 31, 2016 and 6% at December 31, 2015.

Borrowed funds totaled $136.1 million at March 31, 2016, including $94.8 million of Federal Home Loan Bank advances and $41.2 million in long-term debt associated with trust preferred securities. Borrowed funds totaled $137.4 million at December 31, 2015, including $96.2 million of Federal Home Loan Bank advances and $41.2 million in long-term debt associated with trust preferred securities. Borrowed funds decreased by $1.3 million in the first quarter of 2016 due to an annual payment on an amortizing Federal Home Loan Bank advance.

CAPITAL RESOURCES

Total shareholders' equity of $155.2 million at March 31, 2016 increased $3.2 million from $152.0 million at December 31, 2015. The increase was primarily a result of net income of $3.5 million earned in the first quarter of 2016 and an increase of $633,000 in accumulated other comprehensive income, partially offset by the payment of $1.0 million in cash dividends to shareholders on February 26, 2016. The Bank was categorized as “well capitalized” at March 31, 2016.

In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), 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:

	March 31, 2016			Dec 31, 2015			Sept 30, 2015			June 30, 2015			March 31, 2015
Total capital to risk weighted assets		15.0	%		14.8	%		14.6	%		15.1	%		15.0	%
Common Equity Tier 1 to risk weighted assets		11.1			10.8			10.5			10.9			10.7
Tier 1 capital to risk weighted assets		13.8			13.6			13.4			13.8			13.7
Tier 1 capital to average assets		11.7			11.5			11.3			11.7			11.9

Approximately $40.0 million of trust preferred securities outstanding at March 31, 2016 qualified as Tier 1 capital.

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LIQUIDITY

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

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

We have actively pursued initiatives to maintain a strong liquidity position. The Bank reduced its reliance on non-core funding sources, including brokered deposits, and focused on achieving a non-core funding dependency ratio below its peer group average. We have had no brokered deposits on our balance sheet since December 2011. We also reduced other borrowed funds by $56.8 million in 2012, $1.8 million in 2013 and $1.9 million in 2014. We increased other borrowed funds by $8.1 million in 2015. We continue to maintain significant on-balance sheet liquidity. At March 31, 2016, the Bank held $72.1 million of federal funds sold and other short-term investments. In addition, the Bank has available borrowing capacity from correspondent banks of approximately $249.6 million as of March 31, 2016.

In the normal course of business, we enter into certain contractual obligations, including obligations which are considered in our overall liquidity management. The table below summarizes our significant contractual obligations at March 31, 2016 (dollars in thousands):

	Less than 1 year		1-3 years		3-5 years		More than 5 years
Long term debt	$	---	$	---	$	---	$	41,238
Time deposit maturities		58,451		21,940		4,512		---
Other borrowed funds		22,055		62,785		10,000		---
Operating lease obligations		230		459		299		---
Total	$	80,736	$	85,184	$	14,811	$	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, 2016, we had a total of $416.7 million in unused lines of credit, $90.3 million in unfunded loan commitments and $14.4 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 2014, the Company resumed payment of quarterly cash dividends to Company shareholders. In 2014, the Bank paid dividends to the Company totaling $4.1 million. In the same period, the Company paid dividends to its shareholders totaling $2.7 million. The Company retained the remaining balance for general corporate purposes. In 2015, the Bank paid dividends to the Company totaling $5.1 million. In the same period, the Company paid dividends to its shareholders totaling $3.7 million. The Company retained the remaining balance for general corporate purposes. On February 25, 2016, the Bank paid a dividend of $1.5 million to the Company in anticipation of the common share cash dividend of $0.03 per share paid on February 26, 2016 to shareholders of record on February 12, 2016. The cash distributed for this cash dividend payment totaled $1.0 million. The Company retained the remaining balance for general corporate purposes.

At March 31, 2016, the Bank had a retained earnings balance of $28.3 million.

- 48 -

Index

During 2015 and 2014, the Company received payments from the Bank totaling $3.2 million and $4.0 million, representing the Bank’s intercompany tax liability for the 2015 and 2014 tax years, respectively in accordance with the Company’s tax allocation agreement.

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, 2016 was $4.8 million. The Company believes that it has sufficient liquidity to meet its cash flow obligations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

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

Our methodology for determining the allowance for loan losses and the related provision for loan losses is described above in the "Allowance for Loan Losses" discussion. This area of accounting requires significant judgment due to the number of factors which can influence the collectability of a loan. Unanticipated changes in these factors could significantly change the level of the allowance for loan losses and the related provision for loan losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loan losses, there can be no assurance that our analysis has properly identified all of the probable losses in our loan portfolio. As a result, we could record future provisions for loan losses that may be significantly different than the levels that we recorded in the first quarter of 2016.

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

Loss contingencies are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. This, too, is an accounting area that involves significant judgment. Although, based upon our judgment, internal analysis, and consultations with legal counsel we believe that we have properly accounted for loss contingencies, future changes in the status of such contingencies could result in a significant change in the level of contingent liabilities and a related impact to operating earnings.

Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. At March 31, 2016, we had gross deferred tax assets of $11.3 million, gross deferred tax liabilities of $2.7 million resulting in a net deferred tax asset of $8.5 million. Accounting standards require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. From mid 2009 through the end of 2012, we had maintained a full valuation allowance on our net deferred tax asset. At December 31, 2012, we considered all reasonably available positive and negative evidence and determined that with completing our eleventh consecutive profitable quarter, continued significant improvement in asset quality measures for the third straight year, the termination of our previous regulatory orders and our moving to a cumulative income position in the most recent three year period, that it was “more likely than not” that we would be able to realize our deferred tax assets and, as such, the full $18.9 million valuation allowance was reversed as of December 31, 2012. With the positive results in the first quarter of 2016, we again concluded at March 31, 2016 that no valuation allowance on our net deferred tax asset was required. Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.

- 49 -

Index

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, 2016 (dollars in thousands):

Interest Rate Scenario	Economic Value of Equity		Percent Change			Net Interest Income		Percent Change
Interest rates up 200 basis points	$	185,077		(1.31	)%	$	49,294		3.08	%
Interest rates up 100 basis points		187,573		0.02			48,569		1.57
No change		187,593		---			47,819		---
Interest rates down 100 basis points		172,949		(7.78	)		46,392		(2.98	)
Interest rates down 200 basis points		172,949		(7.78	)		46,136		(3.52	)

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

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

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

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

- 50 -

Index

Item 4:

CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2016, the end of the period covered by this report.

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

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

(b)

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

- 51 -

Index

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 Agreement with Ronald L. Haan. Previously filed with the Commission as an exhibit to Macatawa Bank Corporation’s Form 8-K current report dated June 22, 2015. Here incorporated by reference.
10.2	Change in Control Agreement with Jon W. Swets. Previously filed with the Commission as an exhibit to Macatawa Bank Corporation’s Form 8-K current report dated June 22, 2015. Here incorporated by reference.
31.1	Certification of Chief Executive Officer.
31.2	Certification of Chief Financial Officer.
32.1	Certification pursuant to 18 U.S.C. Section 1350.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

- 52 -

Index

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 28, 2016

- 53 -

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

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

	March 31, 2016			December 31, 2015
ASSETS
Cash and due from banks	$	22,499		$	29,104
Federal funds sold and other short-term investments		72,104			152,372
Cash and cash equivalents		94,603			181,476
Interest-bearing time deposits in other financial institutions		---			20,000
Securities available for sale, at fair value		168,041			166,815
Securities held to maturity (fair value 2016 - $52,485 and 2015 - $52,837)		51,303			51,856
Federal Home Loan Bank (FHLB) stock		11,558			11,558
Loans held for sale, at fair value		2,259			2,776
Total loans		1,216,184			1,197,932
Allowance for loan losses		(17,129	)		(17,081	)
Net loans		1,199,055			1,180,851
Premises and equipment – net		50,944			51,456
Accrued interest receivable		3,929			3,622
Bank-owned life insurance		28,784			28,858
Other real estate owned - net		16,162			17,572
Net deferred tax asset		8,546			8,819
Other assets		4,801			3,984
Total assets	$	1,639,985		$	1,729,643

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	424,356		$	477,032
Interest-bearing		916,478			958,480
Total deposits		1,340,834			1,435,512
Other borrowed funds		94,840			96,169
Long-term debt		41,238			41,238
Accrued expenses and other liabilities		7,832			4,747
Total liabilities		1,484,744			1,577,666

Commitments and contingent liabilities		---			---

Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 33,925,113 shares issued and outstanding at March 31, 2016 and December 31, 2015		216,687			216,540
Retained deficit		(62,427	)		(64,910	)
Accumulated other comprehensive income		981			347
Total shareholders' equity		155,241			151,977
Total liabilities and shareholders' equity	$	1,639,985		$	1,729,643

	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015

Net income	$	3,495		$	2,840

Other comprehensive income:

Unrealized gains:
Net change in unrealized gains on securities available for sale		1,064			1,281
Tax effect		(372	)		(449	)
Net change in unrealized gains on securities available for sale, net of tax		692			832

Less: reclassification adjustments:
Reclassification for gains included in net income		89			83
Tax effect		(31	)		(29	)
Reclassification for gains included in net income, net of tax		58			54

Other comprehensive income, net of tax		634			778

Comprehensive income	$	4,129		$	3,618

	Common Stock		Retained Deficit			Accumulated Other Comprehensive Income (Loss)		Total Shareholders' Equity
Balance, January 1, 2015	$	216,460	$	(74,002	)	$	61	$	142,519
Net income for the three months ended March 31, 2015		---		2,840			---		2,840
Cash dividends at $.02 per share		---		(677	)		---		(677	)
Net change in unrealized gain on securities available for sale, net of tax		---		---			778		778
Stock compensation expense		121		---			---		121
Balance, March 31, 2015	$	216,581	$	(71,839	)	$	839	$	145,581

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

		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

	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015
Interest income
Loans, including fees	$	11,756		$	10,963
Securities
Taxable		550			501
Tax-exempt		433			344
FHLB Stock		124			117
Federal funds sold and other short-term investments		145			86
Total interest income		13,008			12,011
Interest expense
Deposits		463			619
Other borrowings		442			415
Subordinated and long-term debt		365			325
Total interest expense		1,270			1,359
Net interest income		11,738			10,652
Provision for loan losses		(100	)		(1,000	)
Net interest income after provision for loan losses		11,838			11,652
Noninterest income
Service charges and fees		1,047			1,001
Net gains on mortgage loans		487			723
Trust fees		708			734
ATM and debit card fees		1,186			1,110
Gain on sales of securities		89			83
Bank owned life insurance ("BOLI") income		444			162
Other		647			482
Total noninterest income		4,608			4,295
Noninterest expense
Salaries and benefits		6,187			6,182
Occupancy of premises		982			972
Furniture and equipment		865			783
Legal and professional		159			239
Marketing and promotion		275			305
Data processing		659			577
FDIC assessment		251			281
Interchange and other card expense		286			276
Bond and D&O Insurance		132			145
Net losses on repossessed and foreclosed properties		36			451
Administration and disposition of problem assets		375			376
Other		1,344			1,275
Total noninterest expenses		11,551			11,862
Income before income tax		4,895			4,085
Income tax expense		1,400			1,245
Net income	$	3,495		$	2,840

Basic earnings per common share	$	0.10		$	0.08
Diluted earnings per common share	$	0.10		$	0.08
Cash dividends per common share	$	0.03		$	0.02

	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015
Cash flows from operating activities
Net income	$	3,495		$	2,840
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		659			684
Stock compensation expense		147			121
Provision for loan losses		(100	)		(1,000	)
Origination of loans for sale		(18,883	)		(23,438	)
Proceeds from sales of loans originated for sale		19,887			24,140
Net gains on mortgage loans		(487	)		(723	)
Gain on sales of securities		(89	)		(83	)
Write-down of other real estate		129			518
Net (gain) loss on sales of other real estate		(92	)		(67	)
Change in net deferred tax asset		(68	)		592
Change in accrued interest receivable and other assets		(1,124	)		(1,826	)
Earnings in bank-owned life insurance		(444	)		(162	)
Change in accrued expenses and other liabilities		2,073			(869	)
Net cash from operating activities		5,103			727

Cash flows from investing activities
Loan originations and payments, net		(18,206	)		(16,809	)
Change in interest-bearing deposits in other financial institutions		20,000			---
Purchases of securities available for sale		(21,802	)		(10,590	)
Purchases of securities held to maturity		---			(10,326	)
Proceeds from:
Maturities and calls of securities		12,883			5,195
Sales of securities available for sale		9,418			12,063
Principal paydowns on securities		911			919
Sales of other real estate		1,475			1,452
Death benefit from bank-owned life insurance		518			---
Additions to premises and equipment		(154	)		(250	)
Net cash from investing activities		5,043			(18,346	)

Cash flows from financing activities
Change in deposits		(94,678	)		14,191
Repayments of other borrowed funds		(1,329	)		(1,271	)
Proceeds from other borrowed funds		---			10,000
Cash dividends paid		(1,012	)		(677	)
Net cash from financing activities		(97,019	)		22,243
Net change in cash and cash equivalents		(86,873	)		4,624
Cash and cash equivalents at beginning of period		181,476			129,455
Cash and cash equivalents at end of period	$	94,603		$	134,079

	Three Months Ended March 31, 2016		Three Months Ended March 31, 2015
Supplemental cash flow information
Interest paid	$	1,270	$	1,347
Income taxes paid		---		1,575
Supplemental noncash disclosures:
Transfers from loans to other real estate		102		699
Security settlement		1,012		1,250

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2016
Available for Sale:
U.S. Treasury and federal agency securities	$	76,689		327		(43	)	$	76,973
U.S. Agency MBS and CMOs		11,719		73		(30	)		11,762
Tax-exempt state and municipal bonds		35,557		835		(51	)		36,341
Taxable state and municipal bonds		26,093		345		(4	)		26,434
Corporate bonds and other debt securities		14,974		56		(14	)		15,016
Other equity securities		1,500		15		---			1,515
	$	166,532	$	1,651	$	(142	)	$	168,041
Held to Maturity
Tax-exempt state and municipal bonds	$	51,303	$	1,182	$	---		$	52,485

December 31, 2015
Available for Sale:
U.S. Treasury and federal agency securities	$	74,618		48		(274	)	$	74,392
U. S. Agency MBS and CMOs		13,828		35		(108	)		13,755
Tax-exempt state and municipal bonds		32,943		692		(37	)		33,598
Taxable state and municipal bonds		28,554		246		(37	)		28,763
Corporate bonds and other debt securities		14,838		19		(44	)		14,813
Other equity securities		1,500		---		(6	)		1,494
	$	166,281	$	1,040	$	(506	)	$	166,815
Held to Maturity:
Tax-exempt state and municipal bonds	$	51,856	$	986	$	(5	)	$	52,837

	Held–to-Maturity Securities				Available-for-Sale Securities
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	14,655	$	14,673	$	12,213	$	12,256
Due from one to five years		9,704		9,873		98,184		98,805
Due from five to ten years		14,744		15,556		41,794		42,559
Due after ten years		12,200		12,383		12,841		12,906
	$	51,303	$	52,485	$	165,032	$	166,526

	Less than 12 Months					12 Months or More					Total
March 31, 2016	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	12,335	$	(33	)	$	3,107	$	(10	)	$	15,442	$	(43	)
U.S. Agency MBS and CMOs		1,937		(9	)		1,828		(21	)		3,765		(30	)
Tax-exempt state and municipal bonds		11,652		(36	)		860		(15	)		12,512		(51	)
Taxable state and municipal bonds		529		(2	)		643		(2	)		1,172		(4	)
Corporate bonds and other debt securities		3,570		(12	)		502		(2	)		4,072		(14	)
Other equity securities		---		---			---		---			---		---
Total temporarily impaired	$	30,023	$	(92	)	$	6,940	$	(50	)	$	36,963	$	(142	)

	March 31, 2016			December 31, 2015
Commercial and industrial	$	388,625		$	377,298

Commercial real estate:
Residential developed		13,141			10,448
Unsecured to residential developers		7,491			7,372
Vacant and unimproved		45,429			42,881
Commercial development		658			559
Residential improved		68,858			67,922
Commercial improved		294,392			289,651
Manufacturing and industrial		86,747			89,839
Total commercial real estate		516,716			508,672

Consumer
Residential mortgage		214,104			209,972
Unsecured		577			637
Home equity		87,874			92,716
Other secured		8,288			8,637
Total consumer		310,843			311,962

Total loans		1,216,184			1,197,932
Allowance for loan losses		(17,129	)		(17,081	)
	$	1,199,055		$	1,180,851

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

March 31, 2016	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	4,094	$	4,094	$	---

Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		206		206		---
Commercial development		---		---		---
Residential improved		87		87		---
Commercial improved		---		---		---
Manufacturing and industrial		---		---		---
		293		293		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	4,387	$	4,387	$	---

With an allowance recorded:
Commercial and industrial	$	4,528	$	4,528	$	574

Commercial real estate:
Residential developed		---		---		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		237		237		6
Commercial development		192		192		6
Residential improved		5,423		5,423		260
Commercial improved		9,457		9,457		214
Manufacturing and industrial		238		238		9
		15,547		15,547		495
Consumer:
Residential mortgage		8,579		8,579		529
Unsecured		---		---		---
Home equity		4,570		4,570		281
Other secured		---		---		---
		13,149		13,149		810
	$	33,224	$	33,224	$	1,879

Total	$	37,611	$	37,611	$	1,879

	Three Months Ended March 31, 2016		Three Months Ended March 31, 2015
Average of impaired loans during the period:
Commercial and industrial	$	8,265	$	9,703

Commercial real estate:
Residential developed		---		937
Unsecured to residential developers		---		---
Vacant and unimproved		446		1,490
Commercial development		192		198
Residential improved		5,543		7,661
Commercial improved		9,537		16,759
Manufacturing and industrial		239		2,706

Consumer		13,140		14,784


Interest income recognized during impairment:
Commercial and industrial		298		326
Commercial real estate		201		356
Consumer		122		137

Cash-basis interest income recognized
Commercial and industrial		288		328
Commercial real estate		200		351
Consumer		123		140

March 31, 2016	Nonaccrual		Over 90 days Accruing

Commercial and industrial	$	48	$	31

Commercial real estate:
Residential developed		---		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		49		---
Residential improved		115		---
Commercial improved		148		---
Manufacturing and industrial		---		---
		312		---
Consumer:
Residential mortgage		2		---
Unsecured		25		---
Home equity		9		---
Other secured		---		---
		36		---
Total	$	396	$	31

March 31, 2016	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	344	$	31	$	375	$	388,250	$	388,625

Commercial real estate:
Residential developed		---		---		---		13,141		13,141
Unsecured to residential developers		---		---		---		7,491		7,491
Vacant and unimproved		---		---		---		45,429		45,429
Commercial development		192		49		241		417		658
Residential improved		122		6		128		68,730		68,858
Commercial improved		52		---		52		294,340		294,392
Manufacturing and industrial		---		---		---		86,747		86,747
		366		55		421		516,295		516,716
Consumer:
Residential mortgage		---		---		---		214,104		214,104
Unsecured		---		---		---		577		577
Home equity		---		---		---		87,874		87,874
Other secured		---		---		---		8,288		8,288
		---		---		---		310,843		310,843
Total	$	710	$	86	$	796	$	1,215,388	$	1,216,184

	March 31, 2016				December 31, 2015
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		31	$	8,522		33	$	7,611
Commercial real estate		55		16,132		56		17,871
Consumer		123		13,385		124		13,570
		209	$	38,039		213	$	39,052

	March 31, 2016		December 31, 2015
Accruing TDR - nonaccrual at restructuring	$	---	$	---
Accruing TDR - accruing at restructuring		31,400		33,691
Accruing TDR - upgraded to accruing after six consecutive payments		6,319		4,784
	$	37,719	$	38,475

Three Months Ended March 31, 2016	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		---	$	---	$	---
Commercial real estate		---		---		---
Consumer		4		238		---
		4	$	238	$	---

	March 31, 2016		December 31, 2015
Not classified as impaired	$	1,828	$	1,986
Classified as impaired		9,938		8,782
Total commercial loans classified substandard or worse	$	11,766	$	10,768

March 31, 2016	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	214,104	$	577	$	87,874	$	8,288
Nonperforming		---		---		---		---
Total	$	214,104	$	577	$	87,874	$	8,288

	Three Months Ended March 31, 2016			Year Ended December 31, 2015			Three Months Ended March 31, 2015
Beginning balance	$	28,377		$	43,071		$	43,071
Additions, transfers from loans		102			2,520			699
Proceeds from sales of other real estate owned		(1,475	)		(11,540	)		(1,452	)
Valuation allowance reversal upon sale		(251	)		(4,748	)		(447	)
Gain (loss) on sales of other real estate owned		92			(926	)		67
		26,845			28,377			41,938
Less: valuation allowance		(10,683	)		(10,805	)		(14,900	)
Ending balance	$	16,162		$	17,572		$	27,038

	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, 2016
U.S. Treasury and federal agency securities	$	76,973		$	---	$	76,973	$	---
U.S. Agency MBS and CMOs		11,762			---		11,762		---
Tax-exempt state and municipal bonds		36,341			---		36,341		---
Taxable state and municipal bonds		26,434			---		26,434		---
Corporate bonds and other debt securities		15,016			---		15,016		---
Other equity securities		1,515			---		1,515		---
Loans held for sale		2,259			---		2,259		---
Interest rate swaps		1,220			---		---		1,220
Interest rate swaps		(1,220	)		---		---		(1,220	)

December 31, 2015
U.S. Treasury and federal agency securities	$	74,392		$	---	$	74,392	$	---
U.S. Agency MBS and CMOs		13,755			---		13,755		---
Tax-exempt state and municipal bonds		33,598			---		33,598		---
Taxable state and municipal bonds		28,763			---		28,763		---
Corporate bonds and other debt securities		14,813			---		14,813		---
Other equity securities		1,494			---		1,494		---
Loans held for sale		2,776			---		2,776		---
Interest rate swaps		790			---		---		790
Interest rate swaps		(790	)		---		---		(790	)

	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, 2016
Impaired loans	$	6,306	$	---	$	---	$	6,306
Other real estate owned		12,590		---		---		12,590

December 31, 2015
Impaired loans	$	6,573	$	---	$	---	$	6,573
Other real estate owned		13,602		---		---		13,602

	Level in	March 31, 2016						December 31, 2015
	Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and due from banks	Level 1	$	22,499			22,499		$	29,104			29,104
Cash equivalents	Level 2		72,104			72,104			152,372			152,372
Interest-bearing time deposits in other financial institutions	Level 2		---			---			20,000			20,008
Securities held to maturity	Level 3		51,303			52,485			51,856			52,837
FHLB stock			11,558		NA				11,558		NA
Loans, net	Level 2		1,192,749			1,190,050			1,187,423			1,177,527
Bank owned life insurance	Level 3		28,784			28,784			28,858			28,858
Accrued interest receivable	Level 2		3,929			3,929			3,622			3,622

Financial liabilities
Deposits	Level 2		(1,340,834	)		(1,340,799	)		(1,435,512	)		(1,435,473	)
Other borrowed funds	Level 2		(94,840	)		(95,917	)		(96,169	)		(96,465	)
Long-term debt	Level 2		(41,238	)		(35,876	)		(41,238	)		(35,757	)
Accrued interest payable	Level 2		(273	)		(273	)		(273	)		(273	)

Off-balance sheet credit-related items
Loan commitments			---			---			---			---