MACATAWA BANK CORP - Quarter Report: 2015 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2015

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

For the transition period from _______ to _______

Commission file number: 000-25927

MACATAWA BANK CORPORATION

(Exact name of registrant as specified in its charter)

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

10753 Macatawa Drive, Holland, Michigan 49424

(Address of principal executive offices) (Zip Code)

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

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

Yes ☒ No ☐

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

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

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

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

The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 33,866,789 shares of the Company's Common Stock (no par value) were outstanding as of April 23, 2015.

Forward-Looking Statements

This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as "outlook", "plan" or "strategy" that an event or trend "may", "should", "will", "is likely", or is "probable" to occur or "continue", has "begun" or "is scheduled" or "on track" or that the Company or its management "anticipates", "believes", "estimates", "plans", "forecasts", "intends", "predicts", "projects", or "expects" a particular result, or is "committed", "confident", "optimistic" or has an "opinion" that an event will occur, or other words or phrases such as "ongoing", "future", "signs", "efforts", "tend", "exploring", "appearing", "until", "near term", "going forward", "focus", "starting", "initiative," "trend" and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, future levels of earning assets, statements related to stabilization of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, including the impact of Basel III, real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for loan losses, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future FDIC assessment levels, future net interest margin levels, building and improving our investment portfolio, diversifying our credit risk, the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, future balances of short-term investments, future loan demand and loan growth, future levels of mortgage banking revenue and the future level of other revenue sources. Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Our ability to sell other real estate owned at its carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, maintain our current levels of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, increase loan volume, originate high quality loans, maintain or improve mortgage banking income, realize the benefit of our deferred tax assets, continue payment of dividends and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2014. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

INDEX

		Page
		Number

Part I.	Financial Information:

	Item 1.
	Consolidated Financial Statements	4

	Notes to Consolidated Financial Statements	10

	Item 2.
	Management's Discussion and Analysis of Financial Condition and Results of Operations	37

	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	50

	Item 4.
	Controls and Procedures	51

Part II.	Other Information:

	Item 6.
	Exhibits	52

Signatures		53

Index

Part I Financial Information

Item 1.

MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

As of March 31, 2015 (unaudited) and December 31, 2014

(Dollars in thousands, except per share data)

	March 31, 2015			December 31, 2014
ASSETS
Cash and due from banks	$	27,001		$	31,503
Federal funds sold and other short-term investments		107,078			97,952
Cash and cash equivalents		134,079			129,455
Interest-bearing time deposits in other financial institutions		20,000			20,000
Securities available for sale, at fair value		155,640			161,874
Securities held to maturity (fair value 2015 - $43,402 and 2014 - $31,428)		43,042			31,585
Federal Home Loan Bank (FHLB) stock		11,238			11,238
Loans held for sale, at fair value		2,368			2,347
Total loans		1,135,311			1,118,483
Allowance for loan losses		(18,680	)		(18,962	)
Net loans		1,116,631			1,099,521
Premises and equipment – net		52,506			52,894
Accrued interest receivable		3,670			3,399
Bank-owned life insurance		28,357			28,195
Other real estate owned - net		27,038			28,242
Net deferred tax asset		11,254			12,265
Other assets		4,386			2,831
Total assets	$	1,610,209		$	1,583,846

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	373,215		$	404,143
Interest-bearing		947,301			902,182
Total deposits		1,320,516			1,306,325
Other borrowed funds		96,836			88,107
Long-term debt		41,238			41,238
Accrued expenses and other liabilities		6,038			5,657
Total liabilities		1,464,628			1,441,327

Commitments and contingent liabilities		---			---

Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 33,866,789 shares issued and outstanding at March 31, 2015 and December 31, 2014		216,581			216,460
Retained deficit		(71,839	)		(74,002	)
Accumulated other comprehensive income		839			61
Total shareholders' equity		145,581			142,519
Total liabilities and shareholders' equity	$	1,610,209		$	1,583,846

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three Month Periods Ended March 31, 2015 and 2014

(unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Interest income
Loans, including fees	$	10,963		$	10,943
Securities
Taxable		501			500
Tax-exempt		344			255
FHLB Stock		117			156
Federal funds sold and other short-term investments		86			116
Total interest income		12,011			11,970
Interest expense
Deposits		619			740
Other borrowings		415			431
Subordinated and long-term debt		325			324
Total interest expense		1,359			1,495
Net interest income		10,652			10,475
Provision for loan losses		(1,000	)		(1,000	)
Net interest income after provision for loan losses		11,652			11,475
Noninterest income
Service charges and fees		1,001			991
Net gains on mortgage loans		723			258
Trust fees		734			631
ATM and debit card fees		1,110			1,052
Gain on sales of securities		83			10
Other		644			568
Total noninterest income		4,295			3,510
Noninterest expense
Salaries and benefits		6,182			5,823
Occupancy of premises		972			1,008
Furniture and equipment		783			840
Legal and professional		239			205
Marketing and promotion		305			277
Data processing		577			589
FDIC assessment		281			328
Interchange and other card expense		276			271
Bond and D&O Insurance		145			163
Net losses on repossessed and foreclosed properties		451			(186	)
Administration and disposition of problem assets		376			657
Other		1,275			1,194
Total noninterest expenses		11,862			11,169
Income before income tax		4,085			3,816
Income tax expense		1,245			1,177
Net income	$	2,840		$	2,639

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

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Month Periods Ended March 31, 2015 and 2014

(unaudited)

(Dollars in thousands)

	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014

Net income	$	2,840		$	2,639

Other comprehensive income:

Unrealized gains:
Net change in unrealized gains (losses) on securities available for sale		1,281			1,144
Tax effect		(449	)		(400	)
Net change in unrealized gains (losses) on securities available for sale, net of tax		832			744

Less: reclassification adjustments:
Reclassification for gains included in net income		83			10
Tax effect		(29	)		(3	)
Reclassification for gains included in net income, net of tax		54			7

Other comprehensive income, net of tax		778			737

Comprehensive income	$	3,618		$	3,376

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Three Month Periods Ended March 31, 2015 and 2014

(unaudited)

(Dollars in thousands, except per share data)

	Common Stock			Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balance, January 1, 2014	$	216,263		$	(81,786	)	$	(1,955	)	$	132,522
Net income for the three months ended March 31, 2014					2,639						2,639
Common stock issuance costs		(102	)								(102	)
Cash dividends at $.02 per share					(677	)					(677	)
Net change in unrealized gain (loss) on securities available for sale, net of tax								737			737
Stock compensation expense		69									69
Balance, March 31, 2014	$	216,230		$	(79,824	)	$	(1,218	)	$	135,188

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 (loss) 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

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Month Periods Ended March 31, 2015 and 2014

(unaudited)

(Dollars in thousands)

	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Cash flows from operating activities
Net income	$	2,840		$	2,639
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		684			774
Stock compensation expense		121			69
Provision for loan losses		(1,000	)		(1,000	)
Origination of loans for sale		(23,438	)		(14,114	)
Proceeds from sales of loans originated for sale		24,140			16,093
Net gains on mortgage loans		(723	)		(258	)
Gain on sales of securities		(83	)		(10	)
Write-down of other real estate		518			298
Net gain on sales of other real estate		(67	)		(484	)
Change in net deferred tax asset		592			1,177
Change in accrued interest receivable and other assets		(1,826	)		217
Earnings in bank-owned life insurance		(162	)		(154	)
Change in accrued expenses and other liabilities		(869	)		1,588
Net cash from operating activities		727			6,835

Cash flows from investing activities
Loan originations and payments, net		(16,809	)		12,297
Change in interest-bearing deposits in other financial institutions		---			(7,500	)
Purchases of securities available for sale		(10,590	)		(13,455	)
Purchases of securities held to maturity		(10,326	)		---
Proceeds from:
Maturities and calls of securities available for sale		5,195			2,906
Sales of securities available for sale		12,063			561
Principal paydowns on securities		919			790
Sales of other real estate		1,452			3,501
Additions to premises and equipment		(250	)		(592	)
Net cash from investing activities		(18,346	)		(1,492	)

Cash flows from financing activities
Change in deposits		14,191			(32,956	)
Repayments of other borrowed funds		(1,271	)		(1,217	)
Proceeds from other borrowed funds		10,000			---
Cash dividends paid		(677	)		(677	)
Common stock issuance costs		---			(102	)
Net cash from financing activities		22,243			(34,952	)
Net change in cash and cash equivalents		4,624			(29,609	)
Cash and cash equivalents at beginning of period		129,455			156,892
Cash and cash equivalents at end of period	$	134,079		$	127,283

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Three Month Periods Ended March 31, 2015 and 2014

(unaudited)

(Dollars in thousands)

	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Supplemental cash flow information
Interest paid	$	1,347	$	1,489
Income taxes paid		1,575		---
Supplemental noncash disclosures:
Transfers from loans to other real estate		699		554
Security settlement		1,250		3,413

See accompanying notes to consolidated financial statements.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Operating results for the three month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

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

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

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. At March 31, 2015, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

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

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

Derivatives: Certain of our commercial loan customers have entered into interest rate swap agreements directly with the Bank. At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank's interest rate swap with its commercial loan customer. This is known as a back-to-back swap agreement. Under this arrangement the Bank has two freestanding interest rate swaps, both of which are carried at fair value. As the terms mirror each other, there is no income statement impact to the Bank. At March 31, 2015 and December 31, 2014, the total notional amount of such agreements was $20.0 million and resulted in a derivative asset with a fair value of $224,000 and $140,000, respectively, which were included in other assets and a derivative liability of $224,000 and $140,000, respectively, which were included in other liabilities.

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

Adoption of New Accounting Standards:

The Financial Accounting Standards Board ("FASB") has issued Accounting Standards Update (ASU) No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. Adoption of this ASU by the Company in the first quarter of 2015 resulted in four residential real estate properties totaling $595,000 being classified as other real estate owned at March 31, 2015.

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

Newly Issued Not Yet Effective Standards:

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

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Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2015
Available for Sale:
U.S. Treasury and federal agency securities	$	65,619		162		(81	)	$	65,700
U.S. Agency MBS and CMOs		15,832		114		(14	)		15,932
Tax-exempt state and municipal bonds		35,643		637		(53	)		36,227
Taxable state and municipal bonds		23,520		446		(6	)		23,960
Corporate bonds and other debt securities		12,234		74		(3	)		12,305
Other equity securities		1,500		16		---			1,516
	$	154,348	$	1,449	$	(157	)	$	155,640
Held to Maturity
Tax-exempt state and municipal bonds	$	43,042	$	372	$	(12	)	$	43,402

December 31, 2014
Available for Sale:
U.S. Treasury and federal agency securities	$	67,612	$	53	$	(501	)	$	67,164
U. S. Agency MBS and CMOs		16,692		67		(71	)		16,688
Tax-exempt state and municipal bonds		37,203		419		(161	)		37,461
Taxable state and municipal bonds		25,012		351		(70	)		25,293
Corporate bonds and other debt securities		13,762		34		(30	)		13,766
Other equity securities		1,500		2		---			1,502
	$	161,781	$	926	$	(833	)	$	161,874
Held to Maturity:
Tax-exempt state and municipal bonds	$	31,585	$	64	$	(221	)	$	31,428

Proceeds from the sale of securities available for sale were $12.1 million and $561,000, respectively, in the three month periods ended March 31, 2015 and 2014 resulting in net gain on sale of $83,000 and $10,000, respectively, as reported in the Consolidated Statements of Income. This resulted in a reclassification of $83,000 ($54,000 net of tax) for the three months ended March 31, 2015 and $10,000 ($7,000 net of tax) for the three months ended March 31, 2014 from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income.

Contractual maturities of debt securities at March 31, 2015 were as follows (dollars in thousands):

	Held–to-Maturity Securities				Available-for-Sale Securities
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	19,030	$	19,022	$	2,592	$	2,606
Due from one to five years		3,796		3,816		93,449		94,048
Due from five to ten years		19,976		20,324		35,906		36,393
Due after ten years		240		240		20,901		21,077
	$	43,042	$	43,402	$	152,848	$	154,124

- 13 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (Continued)

Securities with unrealized losses at March 31, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (dollars in thousands):

	Less than 12 Months					12 Months or More					Total
March 31, 2015	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	5,747	$	(7	)	$	19,407	$	(74	)	$	25,154	$	(81	)
U.S. Agency MBS and CMOs		2,127		(11	)		1,084		(3	)		3,211		(14	)
Tax-exempt state and municipal bonds		18,188		(16	)		2,265		(49	)		20,453		(65	)
Taxable state and municipal bonds		---		---			1,209		(6	)		1,209		(6	)
Corporate bonds and other debt securities		1,080		(1	)		501		(2	)		1,581		(3	)
Other equity securities		---		---			---		---			---		---
Total temporarily impaired	$	27,142	$	(35	)	$	24,466	$	(134	)	$	51,608	$	(169	)

	Less than 12 Months					12 Months or More					Total
December 31, 2014	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury and federal agency securities	$	16,426	$	(45	)	$	35,350	$	(456	)	$	51,776	$	(501	)
U.S. Agency MBS and CMOs		---		---			9,732		(71	)		9,732		(71	)
Tax-exempt state and municipal bonds		26,820		(264	)		4,545		(118	)		31,365		(382	)
Taxable state and municipal bonds		3,982		(19	)		3,240		(51	)		7,222		(70	)
Corporate bonds and other debt securities		4,187		(13	)		1,988		(17	)		6,175		(30	)
Other equity securities		---		---			---		---			---		---
Total temporarily impaired	$	51,415	$	(341	)	$	54,855	$	(713	)	$	106,270	$	(1,054	)

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Management determined that the unrealized losses for each period were attributable to changes in interest rates and not due to credit quality. As such, no OTTI charges were necessary during the three month periods ended March 31, 2015 and 2014.

Securities with a carrying value of approximately $1.0 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at March 31, 2015 and December 31, 2014.

- 14 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

	March 31, 2015			December 31, 2014
Commercial and industrial	$	341,530		$	327,674

Commercial real estate:
Residential developed		12,143			12,771
Unsecured to residential developers		7,221			7,496
Vacant and unimproved		50,103			50,372
Commercial development		1,733			4,082
Residential improved		68,365			69,612
Commercial improved		273,800			269,757
Manufacturing and industrial		74,707			76,441
Total commercial real estate		488,072			490,531

Consumer
Residential mortgage		199,042			190,249
Unsecured		821			948
Home equity		95,770			98,887
Other secured		10,076			10,194
Total consumer		305,709			300,278

Total loans		1,135,311			1,118,483
Allowance for loan losses		(18,680	)		(18,962	)
	$	1,116,631		$	1,099,521

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

Three months ended March 31, 2015	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,173		$	8,690		$	4,046		$	53		$	18,962
Charge-offs		---			---			(78	)		---			(78	)
Recoveries		84			608			104			---			796
Provision for loan losses		(83	)		(728	)		(165	)		(24	)		(1,000	)
Ending Balance	$	6,174		$	8,570		$	3,907		$	29		$	18,680

Three months ended March 31, 2014	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	6,174		$	10,868		$	3,703		$	53		$	20,798
Charge-offs		(39	)		---			(43	)		---			(82	)
Recoveries		39			590			38			---			667
Provision for loan losses		(87	)		(1,086	)		177			(4	)		(1,000	)
Ending Balance	$	6,087		$	10,372		$	3,875		$	49		$	20,383

- 15 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

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

March 31, 2015	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	2,458	$	1,033	$	952	$	---	$	4,443
Collectively evaluated for impairment		3,716		7,537		2,955		29		14,237
Total ending allowance balance	$	6,174	$	8,570	$	3,907	$	29	$	18,680

Loans:
Individually reviewed for impairment	$	10,029	$	29,488	$	14,839	$	---	$	54,356
Collectively evaluated for impairment		331,501		458,584		290,870		---		1,080,955
Total ending loans balance	$	341,530	$	488,072	$	305,709	$	---	$	1,135,311

December 31, 2014	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	2,429	$	743	$	893	$	---	$	4,065
Collectively evaluated for impairment		3,744		7,947		3,153		53		14,897
Total ending allowance balance	$	6,173	$	8,690	$	4,046	$	53	$	18,962

Loans:
Individually reviewed for impairment	$	9,084	$	29,818	$	14,495	$	---	$	53,397
Collectively evaluated for impairment		318,590		460,713		285,783		---		1,065,086
Total ending loans balance	$	327,674	$	490,531	$	300,278	$	---	$	1,118,483

- 16 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2015 (dollars in thousands):

March 31, 2015	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	3,186	$	3,186	$	---

Commercial real estate:
Residential developed		216		216		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		112		112		---
Commercial improved		331		331		---
Manufacturing and industrial		206		206		---
		865		865		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	4,051	$	4,051	$	---

With an allowance recorded:
Commercial and industrial	$	6,843	$	6,843	$	2,458

Commercial real estate:
Residential developed		514		514		30
Unsecured to residential developers		---		---		---
Vacant and unimproved		1,486		1,486		42
Commercial development		197		197		5
Residential improved		7,427		7,427		364
Commercial improved		16,518		16,518		573
Manufacturing and industrial		2,481		2,481		19
		28,623		28,623		1,033
Consumer:
Residential mortgage		9,323		9,323		574
Unsecured		---		---		---
Home equity		5,516		5,516		378
Other secured		---		---		---
		14,839		14,839		952
	$	50,305	$	50,305	$	4,443

Total	$	54,356	$	54,356	$	4,443

- 17 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2014 (dollars in thousands):

December 31, 2014	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	3,019	$	3,019	$	---

Commercial real estate:
Residential developed		531		531		---
Unsecured to residential developers		---		---		---
Vacant and unimproved		---		---		---
Commercial development		---		---		---
Residential improved		547		547		---
Commercial improved		331		331		---
Manufacturing and industrial		206		206		---
		1,615		1,615		---
Consumer:
Residential mortgage		---		---		---
Unsecured		---		---		---
Home equity		---		---		---
Other secured		---		---		---
		---		---		---
	$	4,634	$	4,634	$	---

With an allowance recorded:
Commercial and industrial	$	6,065	$	6,065	$	2,429

Commercial real estate:
Residential developed		550		550		35
Unsecured to residential developers		---		---		---
Vacant and unimproved		1,499		1,499		43
Commercial development		199		199		5
Residential improved		7,323		7,323		240
Commercial improved		16,113		16,113		389
Manufacturing and industrial		2,519		2,519		31
		28,203		28,203		743
Consumer:
Residential mortgage		9,492		9,484		584
Unsecured		---		---		---
Home equity		5,182		5,011		309
Other secured		---		---		---
		14,674		14,495		893
	$	48,942	$	48,763	$	4,065

Total	$	53,576	$	53,397	$	4,065

- 18 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three month periods ended March 31, 2015 and 2014 (dollars in thousands):

	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Average of impaired loans during the period:
Commercial and industrial	$	9,703	$	14,284

Commercial real estate:
Residential developed		937		4,532
Unsecured to residential developers		---		---
Vacant and unimproved		1,490		1,820
Commercial development		198		527
Residential improved		7,661		10,419
Commercial improved		16,759		18,291
Manufacturing and industrial		2,706		6,719

Consumer		14,784		14,415

Interest income recognized during impairment:
Commercial and industrial		326		338
Commercial real estate		356		453
Consumer		137		132

Cash-basis interest income recognized
Commercial and industrial		328		338
Commercial real estate		351		452
Consumer		140		134

- 19 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2015 and December 31, 2014:

March 31, 2015	Nonaccrual		Over 90 days Accruing

Commercial and industrial	$	6,732	$	---

Commercial real estate:
Residential developed		213		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		24
Commercial development		49		---
Residential improved		604		---
Commercial improved		1,720		---
Manufacturing and industrial		---		---
		2,586		24
Consumer:
Residential mortgage		64		---
Unsecured		37		---
Home equity		292		76
Other secured		---		---
		393		76
Total	$	9,711	$	100

December 31, 2014	Nonaccrual		Over 90 days Accruing

Commercial and industrial	$	5,605	$	---

Commercial real estate:
Residential developed		245		---
Unsecured to residential developers		---		---
Vacant and unimproved		---		---
Commercial development		29		---
Residential improved		766		---
Commercial improved		866		117
Manufacturing and industrial		---		---
		1,906		117
Consumer:
Residential mortgage		305		---
Unsecured		40		---
Home equity		436		17
Other secured		---		---
		781		17
Total	$	8,292	$	134

- 20 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

The following table presents the aging of the recorded investment in past due loans as of March 31, 2015 and December 31, 2014 by class of loans (dollars in thousands):

March 31, 2015	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	---	$	---	$	---	$	341,530	$	341,530

Commercial real estate:
Residential developed		---		---		---		12,143		12,143
Unsecured to residential developers		---		---		---		7,221		7,221
Vacant and unimproved		---		24		24		50,079		50,103
Commercial development		---		49		49		1,684		1,733
Residential improved		14		440		454		67,911		68,365
Commercial improved		959		573		1,532		272,268		273,800
Manufacturing and industrial		---		---		---		74,707		74,707
		973		1,086		2,059		486,013		488,072
Consumer:
Residential mortgage		---		62		62		198,980		199,042
Unsecured		6		---		6		815		821
Home equity		1		356		357		95,413		95,770
Other secured		---		---		---		10,076		10,076
		7		418		425		305,284		305,709
Total	$	980	$	1,504	$	2,484	$	1,132,827	$	1,135,311

December 31, 2014	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	54	$	---	$	54	$	327,620	$	327,674

Commercial real estate:
Residential developed		---		---		---		12,771		12,771
Unsecured to residential developers		---		---		---		7,496		7,496
Vacant and unimproved		100		---		100		50,272		50,372
Commercial development		---		29		29		4,053		4,082
Residential improved		100		440		540		69,072		69,612
Commercial improved		---		958		958		268,799		269,757
Manufacturing and industrial		---		---		---		76,441		76,441
		200		1,427		1,627		488,904		490,531
Consumer:
Residential mortgage		338		303		641		189,608		190,249
Unsecured		---		18		18		930		948
Home equity		79		422		501		98,386		98,887
Other secured		---		---		---		10,194		10,194
		417		743		1,160		299,118		300,278
Total	$	671	$	2,170	$	2,841	$	1,115,642	$	1,118,483

- 21 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

The Company had allocated $4,443,000 and $4,065,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings ("TDRs") as of March 31, 2015 and December 31, 2014, respectively. These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure. For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan. In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt. The second note is charged off immediately and collected only after the first note is paid in full. This modification type is commonly referred to as an A-B note structure. For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief. For each restructuring, a comprehensive credit underwriting analysis of the borrower's financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan's actual payment history demonstrates it would have cash flowed under the restructured terms. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

Based upon recently issued regulatory guidance, the Company has determined that in situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired loan designations may be removed. This guidance was first applied to loans outstanding at September 30, 2014 resulting in a reduction of $5.9 million in loans designated as TDR and impaired. In addition, the TDR designation may also be removed from loans modified under an A-B note structure. If the remaining "A" note is at a market rate at the time of restructuring (taking into account the borrower's credit risk and prevailing market conditions), the loan can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms. The market rate relative to the borrower's credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model. The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration differences in credit risk. In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.

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

The following table presents information regarding troubled debt restructurings as of March 31, 2015 and December 31, 2014 (dollars in thousands):

	March 31, 2015				December 31, 2014
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		37	$	10,029		36	$	9,085
Commercial real estate		80		28,529		84		29,817
Consumer		134		14,839		106		14,495
		251	$	53,397		226	$	53,397

- 22 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

The following table presents information related to accruing troubled debt restructurings as of March 31, 2015 and December 31, 2014. The table presents the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of each period reported (dollars in thousands):

	March 31, 2015		December 31, 2014
Accruing TDR - nonaccrual at restructuring	$	---	$	---
Accruing TDR - accruing at restructuring		45,650		46,197
Accruing TDR - upgraded to accruing after six consecutive payments		---		---
	$	45,650	$	46,197

The following tables present information regarding troubled debt restructurings executed during the three month periods ended March 31, 2015 and 2014 (dollars in thousands):

Three Months Ended March 31, 2015	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		1	$	408	$	---
Commercial real estate		1		42		---
Consumer		29		753		---
		31	$	1,203	$	---

Three Months Ended March 31, 2014	Number of Loans		Pre-Modification Outstanding Recorded Balance		Principal Writedown upon Modification
Commercial and industrial		1	$	60	$	---
Commercial real estate		4		2,263		---
Consumer		1		4		---
		6	$	2,327	$	---

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

- 23 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the three month periods ended March 31, 2015 and 2014 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

	Three Months Ended March 31, 2015					Three Months Ended March 31, 2014
	Number of Loans		Outstanding Recorded Balance			Number of Loans		Outstanding Recorded Balance
Commercial and industrial		---		$	---		---		$	---
Commercial real estate		---			---		1			131
Consumer		---			---		---			---

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

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

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

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

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

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

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

- 24 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

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

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

As of March 31, 2015 and December 31, 2014, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

March 31, 2015		1		2		3		4		5		6		7		8
Commercial and industrial	$	317	$	9,822	$	122,058	$	192,125	$	9,431	$	1,045	$	6,732	$	---

Commercial real estate:
Residential developed		---		---		2,713		4,390		4,016		811		213		---
Unsecured to residential developers		---		---		---		7,220		---		---		---		---
Vacant and unimproved		---		---		21,971		21,312		6,821		---		---		---
Commercial development		---		---		---		1,281		205		197		49		---
Residential improved		---		---		16,993		42,898		5,850		2,021		604		---
Commercial improved		---		4,705		58,863		185,384		20,526		2,603		1,719		---
Manufacturing and industrial		---		1,230		26,854		42,024		4,274		325		---		---
	$	317	$	15,757	$	249,452	$	496,634	$	51,123	$	7,002	$	9,317	$	---

December 31, 2014		1		2		3		4		5		6		7		8
Commercial and industrial	$	343	$	11,177	$	118,382	$	182,651	$	8,448	$	1,068	$	5,605	$	---

Commercial real estate:
Residential developed		---		---		2,491		4,702		4,491		842		245		---
Unsecured to residential developers		---		---		---		7,496		---		---		---		---
Vacant and unimproved		---		---		12,105		30,997		7,241		29		---		---
Commercial development		---		---		---		3,643		211		199		29		---
Residential improved		---		103		16,291		43,928		6,428		2,096		766		---
Commercial improved		---		4,392		61,543		178,169		20,558		4,229		866		---
Manufacturing and industrial		---		1,508		27,396		42,494		4,713		330		---		---
	$	343	$	17,180	$	238,208	$	494,080	$	52,090	$	8,793	$	7,511	$	---

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

	March 31, 2015		December 31, 2014
Not classified as impaired	$	3,056	$	4,220
Classified as impaired		13,263		12,084
Total commercial loans classified substandard or worse	$	16,319	$	16,304

- 25 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 3 – LOANS (Continued)

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

March 31, 2015	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	198,980	$	821	$	95,414	$	10,076
Nonperforming		62		---		356		---
Total	$	199,042	$	821	$	95,770	$	10,076

December 31, 2014	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	189,946	$	930	$	98,465	$	10,194
Nonperforming		303		18		422		---
Total	$	190,249	$	948	$	98,887	$	10,194

NOTE 4 – OTHER REAL ESTATE OWNED

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

	Three Months Ended March 31, 2015			Year Ended December 31, 2014			Three Months Ended March 31, 2014
Beginning balance	$	43,071		$	53,501		$	53,501
Additions, transfers from loans		699			4,932			554
Proceeds from sales of other real estate owned		(1,452	)		(12,487	)		(3,501	)
Valuation allowance reversal upon sale		(447	)		(3,499	)		(1,948	)
Gain (loss) on sale of other real estate owned		67			624			484
		41,938			43,071			49,090
Less: valuation allowance		(14,900	)		(14,829	)		(15,055	)
Ending balance	$	27,038		$	28,242		$	34,035

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

	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Beginning balance	$	14,829		$	16,705
Additions charged to expense		518			298
Reversals upon sale		(447	)		(1,948	)
Ending balance	$	14,900		$	15,055

- 26 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 5 – FAIR VALUE

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

Level 1:

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

Level 2:

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

Level 3:

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

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

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

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

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

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

- 27 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

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

	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2015
U.S. Treasury and federal agency securities	$	65,700		$	---	$	65,700	$	---
U.S. Agency MBS and CMOs		15,932			---		15,932		---
Tax-exempt state and municipal bonds		36,227			---		36,227		---
Taxable state and municipal bonds		23,960			---		23,960		---
Corporate bonds and other debt securities		12,305			---		12,305		---
Other equity securities		1,516			---		1,516		---
Loans held for sale		2,368			---		2,368		---
Interest rate swaps		224			---		---		224
Interest rate swaps		(224	)		---		---		(224	)

December 31, 2014
U.S. Treasury and federal agency securities	$	67,164		$	---	$	67,164	$	---
U.S. Agency MBS and CMOs		16,688			---		16,688		---
Tax-exempt state and municipal bonds		37,461			---		37,461		---
Taxable state and municipal bonds		25,293			---		25,293		---
Corporate bonds and other debt securities		13,766			---		13,766		---
Other equity securities		1,502			---		1,502		---
Loans held for sale		2,347			---		2,347		---
Interest rate swaps		140			---		---		140
Interest rate swaps		(140	)		---		---		(140	)

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

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2015
Impaired loans	$	10,780	$	---	$	---	$	10,780
Other real estate owned		23,291		---		---		23,291

December 31, 2014
Impaired loans	$	12,649	$	---	$	---	$	12,649
Other real estate owned		22,472		---		---		22,472

- 28 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

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

Asset

(Liability)

Fair

Value

Valuation

Technique

Unobservable

Inputs

Range (%)

March 31, 2015

Impaired Loans

10,780

Sales comparison approach

Adjustment for differences between comparable sales

1.0

20.0

Income approach

Capitalization rate

9.5

11.0

Other real estate owned

23,291

Sales comparison approach

Adjustment for differences between comparable sales

4.5

22.0

Income approach

Capitalization rate

9.5

11.0

Asset

(Liability)

Fair

Value

Valuation

Technique

Unobservable

Inputs

Range (%)

December 31, 2014

Impaired Loans

12,649

Sales comparison approach

Adjustment for differences between comparable sales

1.0

20.0

Income approach

Capitalization rate

9.5

12.0

Other real estate owned

22,472

Sales comparison approach

Adjustment for differences between comparable sales

3.0

22.7

Income approach

Capitalization rate

9.5

12.0

- 29 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at March 31, 2015 and December 31, 2014 (dollars in thousands).

	Level in	March 31, 2015						December 31, 2014
	Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and due from banks	Level 1	$	27,001		$	27,001		$	31,503		$	31,503
Cash equivalents	Level 2		107,078			107,078			97,952			97,952
Interest-bearing time deposits in other financial institutions	Level 2		20,000			20,062			20,000			20,062
Securities held to maturity	Level 3		43,042			43,402			31,585			31,428
FHLB stock			11,238		NA				11,238		NA
Loans, net	Level 2		1,105,851			1,104,245			1,086,872			1,082,675
Bank owned life insurance	Level 3		28,357			28,357			28,195			28,195
Accrued interest receivable	Level 2		3,670			3,670			3,399			3,399

Financial liabilities
Deposits	Level 2		(1,320,516	)		(1,320,749	)		(1,306,325	)		(1,306,671	)
Other borrowed funds	Level 2		(96,836	)		(97,948	)		(88,107	)		(89,066	)
Long-term debt	Level 2		(41,238	)		(35,514	)		(41,238	)		(35,396	)
Accrued interest payable	Level 2		(301	)		(301	)		(289	)		(289	)

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

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

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

- 30 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 6 – DEPOSITS

Deposits are summarized as follows (in thousands):

	March 31, 2015		December 31, 2014
Noninterest-bearing demand	$	373,215	$	404,143
Interest bearing demand		355,184		340,053
Savings and money market accounts		475,931		442,246
Certificates of deposit		116,186		119,883
	$	1,320,516	$	1,306,325

Approximately $50.5 million and $50.1 million in certificates of deposit were in denominations of $100,000 or more at March 31, 2015 and December 31, 2014, 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, 2015
Single maturity fixed rate advances	$	90,000	August 2016 to March 2020		1.69	%
Amortizable mortgage advances		6,836	March 2018 to July 2018		3.76	%
	$	96,836

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
December 31, 2014
Single maturity fixed rate advances	$	80,000	August 2016 to February 2019		1.69	%
Amortizable mortgage advances		8,107	March 2018 to July 2018		3.78	%
	$	88,107

Each advance is subject to a prepayment fee if paid prior to its maturity date. Fixed rate advances are payable at maturity. Amortizable mortgage advances are fixed rate advances with scheduled repayments based upon amortization to maturity. These advances were collateralized by residential and commercial real estate loans totaling $434,103,000 and $441,252,000 under a blanket lien arrangement at March 31, 2015 and December 31, 2014, respectively.

- 31 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 7 - OTHER BORROWED FUNDS

Scheduled repayments of FHLB advances as of March 31, 2015 were as follows (in thousands):

2015	$	667
2016		21,996
2017		2,055
2018		52,118
2019		10,000
Thereafter		10,000
	$	96,836

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank. There were no borrowings outstanding at March 31, 2015 and December 31, 2014, and the Company had approximately $22.8 million and $22.8 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $25.9 million and $25.9 million at March 31, 2015 and December 31, 2014, 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, 2015 and 2014 are as follows (dollars in thousands, except per share data):

	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Net income available to common shares	$	2,840	$	2,639

Weighted average shares outstanding, including participating stock awards - Basic		33,866,789		33,790,542

Dilutive potential common shares:
Stock options		---		---
Stock warrants		---		---
Weighted average shares outstanding - Diluted		33,866,789		33,790,542

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

Stock options for 260,261 and 355,328 shares of common stock for the three month periods ended March 31, 2015 and 2014, respectively, were not considered in computing diluted earnings per share because they were antidilutive.

- 32 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 9 - FEDERAL INCOME TAXES

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

	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Current	$	653	$	23
Deferred		592		1,154
	$	1,245	$	1,177

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, 2015			Three Months Ended March 31, 2014
Statutory rate		35	%		35	%
Statutory rate applied to income before taxes	$	1,430		$	1,336
Add (deduct)
Tax-exempt interest income		(117	)		(85	)
Bank-owned life insurance		(57	)		(54	)
Other, net		(11	)		(20	)
	$	1,245		$	1,177

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, 2015 or December 31, 2014.

- 33 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(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, 2015			December 31, 2014
Deferred tax assets
Allowance for loan losses	$	6,538		$	6,637
Nonaccrual loan interest		984			935
Valuation allowance on other real estate owned		5,215			5,190
Unrealized loss on securities available for sale		---			---
Other		1,293			1,896
Gross deferred tax assets		14,030			14,658
Valuation allowance		---			---
Total net deferred tax assets		14,030			14,658

Deferred tax liabilities
Depreciation		(1,871	)		(1,908	)
Prepaid expenses		(21	)		(21	)
Unrealized gain on securities available for sale		(452	)		(33	)
Other		(432	)		(431	)
Gross deferred tax liabilities		(2,776	)		(2,393	)
Net deferred tax asset	$	11,254		$	12,265

There were no unrecognized tax benefits at March 31, 2015 or December 31, 2014 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, 2015		December 31, 2014
Commitments to make loans	$	124,754	$	81,274
Letters of credit		12,121		11,862
Unused lines of credit		361,626		389,099

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately $22.5 million and $14.2 million at March 31, 2015 and December 31, 2014, respectively.

- 34 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

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

At March 31, 2015, approximately 61% of the Bank's commitments to make loans were at fixed rates, offered at current market rates. The remainder of the commitments to make loans were at variable rates tied to prime and generally expire within 30 days. The majority of the unused lines of credit were at variable rates tied to prime.

NOTE 11 – CONTINGENCIES

The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. On January 27, 2014, the Company's former Chairman and Chief Executive Officer, Mr. Benj. A. Smith III, commenced legal action against the Company claiming that the Company breached an alleged employment agreement pursuant to which he claimed entitlement to $20,833 monthly for a period of six years from the date of his resignation in February 2009. On February 10, 2015, the Company entered into a settlement agreement with Mr. Smith related to this litigation. A liability of $516,000, net of insurance proceeds, was accrued and the related expense was included in other noninterest expense at December 31, 2014. The amounts due were paid to Mr. Smith during the first quarter of 2015. As of March 31, 2015, there were no material pending legal proceedings to which we or any of our subsidiaries are a party or which any of our properties are the subject.

NOTE 12 – SHAREHOLDERS' EQUITY

Regulatory Capital

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

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

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. 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.

- 35 -

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

(Unaudited)

NOTE 12 – SHAREHOLDERS' EQUITY (Continued)

At March 31, 2015 and December 31, 2014, 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, 2015
CET1 capital (to risk weighted assets)
Consolidated	$	144,341		10.7	%	$	60,487		4.5	%		N/	A		N/	A
Bank		178,932		13.3			60,477		4.5		$	87,355			6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		184,341		13.7			80,650		6.0			N/	A		N/	A
Bank		178,932		13.3			80,636		6.0			107,514			8.0
Total capital (to risk weighted assets)
Consolidated		201,173		15.0			107,533		8.0			N/	A		N/	A
Bank		195,761		14.6			107,514		8.0			134,393			10.0
Tier 1 capital (to average assets)
Consolidated		184,341		11.9			61,969		4.0			N/	A		N/	A
Bank		178,932		11.6			61,885		4.0			77,356			5.0

December 31, 2014
Tier 1 capital (to risk weighted assets)
Consolidated	$	174,084		14.3	%	$	48,706		4.0	%		N/	A		N/	A
Bank		170,983		14.0			48,788		4.0		$	73,182			6.0	%
Total capital (to risk weighted assets)
Consolidated		189,353		15.6			97,420		8.0			N/	A		N/	A
Bank		186,276		15.3			97,575		8.0			121,969			10.0
Tier 1 capital (to average assets)
Consolidated		174,084		11.6			59,998		4.0			N/	A		N/	A
Bank		170,983		11.4			59,923		4.0			74,904			5.0

Approximately $40.0 million of trust preferred securities outstanding at March 31, 2015 and December 31, 2014, respectively, qualified as Tier 1 capital. Refer to our 2014 Form 10-K for more information on the trust preferred securities.

The Bank was categorized as "well capitalized" at March 31, 2015 and December 31, 2014.

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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, 2015, we had total assets of $1.61 billion, total loans of $1.14 billion, total deposits of $1.32 billion and shareholders' equity of $145.6 million. During the first quarter of 2015, we recognized net income of $2.8 million compared to net income of $2.6 million in the first quarter of 2014. The Bank was categorized as "well capitalized" under regulatory capital standards at March 31, 2015.

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.

RESULTS OF OPERATIONS

Summary: Net income for the quarter ended March 31, 2015 was $2.8 million, compared to net income of $2.6 million in the first quarter of 2014. Net income per common share on a diluted basis was $0.08 for the first quarter of 2015 and $0.08 for the first quarter of 2014.

The increase in earnings in the first quarter of 2015 compared to the first quarter of 2014 was due primarily to increased net interest income and increased gains on sales of residential mortgages, partially offset by an increase in nonperforming asset expense and salaries and benefit costs. Net interest income increased to $10.7 million in the first quarter of 2015 compared to $10.5 million in the same period in 2014. The provision for loan losses was a negative $1.0 million for the three month periods ended March 31, 2015 and 2014. We realized increased income from gains on sales of residential mortgages, which increased from $258,000 in the first quarter of 2014 to $723,000 in the first quarter of 2015. Nonperforming asset expenses (including administration costs and losses) were $827,000 for the first quarter of 2015 compared to $471,000 for the first quarter of 2014, as we realized lower net gains on sales and incurred a higher level of valuation writedowns. We again were in a net loan recovery position for the first quarter of 2015, with $718,000 in net loan recoveries, compared to $585,000 in net loan recoveries in the first quarter of 2014. Lost interest from elevated levels of nonperforming assets was approximately $415,000 for the three months ended March 31, 2015 compared to $570,000 for the three months ended March 31, 2014. Each of these items is discussed more fully below.

Net Interest Income: Net interest income totaled $10.7 million for the first quarter of 2015 and $10.5 million for the first quarter of 2014.

Net interest income was positively impacted in the first quarter of 2015 by an increase in average earning assets of $65.7 million compared to the first quarter of 2014. The comparability to 2014 is also affected by a one-time recovery of interest of $337,000 on a previously charged off loan that was realized in the first quarter of 2014. Our average yield on earning assets for the first quarter of 2015 decreased 13 basis points compared to the same period in 2014 from 3.59% to 3.46%. The one-time interest recovery recognized in the first quarter of 2014 accounted for approximately 10 basis points of the decline. Average interest earning assets totaled $1.42 billion for the first quarter of 2015 compared to $1.35 billion for the first quarter of 2014. The net interest margin was 3.07% for the first quarter of 2015 compared to 3.15% for the first quarter of 2014. An increase of $22.4 million in average securities between periods partially mitigated the impact of reduction in average loan yield from 4.22% in the first quarter of 2014 to 3.91% in the first quarter of 2015.

Excluding the effect of the one-time interest recovery discussed above, our average yield on earning assets remained relatively flat compared to the first quarter of 2014. We believe the bulk of our loans subject to repricing in this low interest rate environment have already repriced and that our portfolio rates have now stabilized. As we are now experiencing loan growth and continue to deploy our excess liquidity, net interest margin should be positively impacted.

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Index

The cost of funds decreased 5 basis points to 0.53% in the first quarter of 2015 from 0.58% in the same period in 2014. A decrease in the rates paid on our savings and money market accounts in response to declining market rates within the current rate environment caused the reduction in our cost of funds. Also contributing to the reduction was a shift in our deposit mix from higher costing time deposits to lower costing demand and savings accounts.

The following table shows an analysis of net interest margin for the three month periods ended March 31, 2015 and 2014.

	For the three months ended March 31,
	2015								2014
	Average Balance			Interest Earned or paid		Average Yield or cost			Average Balance			Interest Earned or paid		Average Yield or cost
	(Dollars in thousands)
Assets
Taxable securities	$	119,711			501		1.67	%	$	118,299		$	500		1.68	%
Tax-exempt securities (1)		70,770			344		3.14			49,750			255		3.23
Loans (2)		1,121,893			10,963		3.91			1,038,624			10,943		4.22
Federal Home Loan Bank stock		11,238			117		4.15			11,236			156		5.55
Federal funds sold and other short-term investments		92,031			86		0.38			132,062			116		0.35
Total interest earning assets (1)		1,415,643			12,011		3.46			1,349,971			11,970		3.59

Noninterest earning assets:
Cash and due from banks		24,269								25,173
Other		110,465								118,057
Total assets	$	1,550,377							$	1,493,201

Liabilities
Deposits:
Interest bearing demand	$	324,848			97		0.12	%	$	279,825			78		0.12	%
Savings and money market accounts		464,359			216		0.19			470,962			317		0.27
Time deposits		121,119			306		1.02			149,503			345		0.94
Borrowings:
Other borrowed funds		88,437			415		1.88			89,788			431		1.92
Long-term debt		41,238			325		3.16			41,238			324		3.15
Total interest bearing liabilities		1,040,001			1,359		0.53			1,031,316			1,495		0.58

Noninterest bearing liabilities:
Noninterest bearing demand accounts		360,901								323,638
Other noninterest bearing liabilities		5,413								3,759
Shareholders' equity		144,062								134,488
Total liabilities and shareholders' equity	$	1,550,377							$	1,493,201

Net interest income				$	10,652							$	10,475

Net interest spread (1)							2.93	%							3.01	%
Net interest margin (1)							3.07	%							3.15	%
Ratio of average interest earning assets to average interest bearing liabilities		136.12	%							130.90	%

(1)	Yield adjusted to fully tax equivalent.

(2)	Includes average nonaccrual loans of approximately $11.3 million and $12.5 million for the three months ended March 31, 2015 and 2014.

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Index

Provision for Loan Losses: The provision for loan losses for the first quarter of 2015 was a negative $1.0 million compared to a negative $1.0 million for the first quarter of 2014. 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 $718,000 in the first quarter of 2015 and $585,000 in the first quarter of 2014. At March 31, 2015, we had experienced net loan recoveries in four of the past five quarters.

Net loan recoveries were $718,000 in the first quarter of 2015 compared to net loan recoveries of $585,000 for the first quarter of 2014. In the first quarter of 2015, we had $78,000 in charge-offs, compared to $82,000 in the first quarter of 2014. We continue to experience positive results from our collection efforts as evidenced by our net loan recoveries. Gross loan recoveries were $796,000 for the first quarter of 2015 and $667,000 for the same period in 2014. 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, 2015 increased to $4.3 million compared to $3.5 million for the same period in 2014. The components of noninterest income are shown in the table below (in thousands):

	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Service charges and fees on deposit accounts	$	1,001	$	991
Net gains on mortgage loans		723		258
Trust fees		734		631
Gain as sales of securities		83		10
ATM and debit card fees		1,110		1,052
Bank owned life insurance ("BOLI") income		163		154
Investment services fees		283		245
Other income		198		169
Total noninterest income	$	4,295	$	3,510

Net gains on mortgage loans increased significantly in the first quarter of 2015 compared to the first quarter as a result of increased volume arising from market decreases in mortgage loan rates beginning at the end of 2014 as well as improved execution, resulting in higher gain margins. Loans originated for sale in the first quarter of 2015 were $23.4 million, compared to $14.1 million in the first quarter of 2014. Trust fees and investment service fees were also up in the first quarter of 2015 due to investment market improvement.

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Index

Noninterest Expense: Noninterest expense increased to $11.9 million for the three month period ended March 31, 2015, from $11.2 million for the same period in 2014. The components of noninterest expense are shown in the table below (in thousands):

	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Salaries and benefits	$	6,182	$	5,823
Occupancy of premises		972		1,008
Furniture and equipment		783		840
Legal and professional		239		205
Marketing and promotion		305		277
Data processing		577		589
FDIC assessment		281		328
Interchange and other card expense		276		271
Bond and D&O insurance		145		163
Administration and disposition of problem assets		827		471
Outside services		394		417
Other noninterest expense		881		777
Total noninterest expense	$	11,862	$	11,169

We experienced a slight increase in noninterest expense, primarily as a result of an increase in nonperforming asset expenses. Most other categories had reductions compared to the first quarter of 2014 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 2015 from the first quarter of 2014. We had 351 full-time equivalent employees at March 31, 2015 compared to 354 at March 31, 2014. The increased expense for the first quarter of 2015 was primarily attributable to increases in salaries and incentive based compensation resulting from increased production in the mortgage banking and investment services areas as well as expenses associated with restricted stock awards.

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 2015 compared to the same period in the prior year.

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

	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Legal and professional – nonperforming assets	$	89	$	102
Repossessed and foreclosed property administration		287		555
Net losses on repossessed and foreclosed properties		451		(186	)
Total	$	827	$	471

While the overall costs associated with nonperforming assets increased for the first quarter of 2015, these increases 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 $34.0 million at March 31, 2014 to $27.0 million at March 31, 2015. 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 in for the three month period ended March 31, 2015, increased $637,000 from the same period in 2014. This increase was primarily due to a lower level of gains on sales of other real estate properties in the first quarter of 2015. In the first quarter of 2014, we recognized gains totaling $484,000 on such sales, compared to $67,000 in the first quarter of 2015. The gains in the first quarter of 2014 were unusually high due to the sale of the final lots remaining on one of our development properties with a very low carry value.

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Index

Federal Income Tax Expense: We recorded $1,245,000 in federal income tax expense for the three month period ended March 31, 2015 compared to $1,177,000 in the same period in 2014. 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 2015 reflect federal income tax expense, at an effective tax rate of 30.48% compared to 30.85% for first quarter of 2014.

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 $1.610 billion at March 31, 2015, an increase of $26.4 million from $1.584 billion at December 31, 2014. This change reflected increases of $4.6 million in cash and cash equivalents, $10.2 million in securities held to maturity and $16.8 million in our loan portfolio, partially offset by decreases of $5.0 million in securities available for sale. Total deposits increased by $14.2 million and other borrowed funds increased by $8.7 million at March 31, 2015 compared to December 31, 2014.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $134.1 million at March 31, 2015 compared to $129.5 million at December 31, 2014. The $4.6 million increase was primarily the result of a higher level of deposit balances at March 31, 2015 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 matures in February 2016. This time deposit provides a higher interest rate than federal funds sold or other short-term investments.

Securities: Securities available for sale were $155.6 million at March 31, 2015 compared to $161.9 million at December 31, 2014. The balance at March 31, 2015 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio increased from $31.6 million at December 31, 2014 to $43.0 million at March 31, 2015. Our held to maturity portfolio is comprised of state and municipal bonds.

Portfolio Loans and Asset Quality: Total portfolio loans increased by $16.8 million in the first quarter of 2015 and were $1.14 billion at March 31, 2015 compared to $1.12 billion at December 31, 2014. During the first quarter of 2015, our commercial portfolio increased by $11.4 million, while our consumer portfolio decreased by $3.4 million and our residential mortgage portfolio increased by $8.8 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 2015 increased significantly compared to the same period in 2014 due to the mortgage rate environment. Residential mortgage loans originated for sale were $23.4 million in the first quarter of 2015 compared to $14.1 million in the first quarter of 2014. This increased volume contributed to the growth in our residential mortgage portfolio 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 have focused our efforts on reducing our exposure to residential land development loans, diversifying our commercial loan portfolio and improving asset quality. We believe our loan portfolio has stabilized 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. We plan to continue measured, high quality loan portfolio growth in 2015, and achieved further growth of $11.4 million in the first quarter of 2015. All of this first quarter growth took place in our commercial and industrial portfolio, which grew by $13.9 million whereas our exposure to commercial real estate loans declined by $2.5 million in the same period. This mix shift within the commercial portfolio also helps diversify credit risk.

Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 73% of the total loan portfolio at March 31, 2015 and 73% at December 31, 2014. Residential mortgage and consumer loans comprised approximately 27% of total loans at March 31, 2015 and December 31, 2014.

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Index

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

	March 31, 2015					December 31, 2014
	Balance		Percent of Total Loans			Balance		Percent of Total Loans
Commercial real estate: (1)
Residential developed	$	12,143		1.1	%	$	12,771		1.1	%
Unsecured to residential developers		7,221		0.6			7,496		0.7
Vacant and unimproved		50,103		4.4			50,372		4.5
Commercial development		1,733		0.2			4,082		0.4
Residential improved		68,365		6.0			69,612		6.2
Commercial improved		273,800		24.1			269,757		24.1
Manufacturing and industrial		74,707		6.6			76,441		6.9
Total commercial real estate		488,072		43.0			490,531		43.9
Commercial and industrial		341,530		30.1	%		327,674		29.3	%
Total commercial		829,602		73.1			818,205		73.2

Consumer
Residential mortgage		199,042		17.5			190,249		17.0
Unsecured		821		0.1			948		0.1
Home equity		95,770		8.4			98,887		8.8
Other secured		10,076		0.9			10,194		0.9
Total consumer		305,709		26.9			300,278		26.8
Total loans	$	1,135,311		100.0	%	$	1,118,483		100.0	%

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

Commercial real estate loans accounted for approximately 43% of the total loan portfolio at March 31, 2015 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 decreased $2.5 million since December 31, 2014. Our commercial and industrial loan portfolio increased by $13.9 million to $341.5 million at March 31, 2015 and represented 30% 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, 2015 and 17% at December 31, 2014. We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan to value loans) 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 2015 increased from the first quarter of 2014 as interest rates decreased late in the fourth quarter of 2014. We added two experienced mortgage lenders in the first quarter of 2015. 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 $3.4 million to $106.7 million at March 31, 2015 from $110.0 million at December 31, 2014, due primarily to a decrease in home equity loans. Consumer loans comprised approximately 9% of our portfolio loans at March 31, 2015 and 10% at December 31, 2014.

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Index

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

	Portfolio Originations		Percent of Total Originations			Average Loan Size
Commercial real estate:
Residential developed	$	484		0.4	%	$	97
Unsecured to residential developers		---		---			---
Vacant and unimproved		1,051		0.8			175
Commercial development		---		---			---
Residential improved		12,414		9.9			226
Commercial improved		6,573		5.2			299
Manufacturing and industrial		1,584		1.3			317
Total commercial real estate		22,106		17.6			238
Commercial and industrial		78,210		62.1			38
Total commercial		100,316		79.7			47

Consumer
Residential mortgage		17,748		14.1			183
Unsecured		28		---			7
Home equity		5,959		4.7			67
Other secured		1,847		1.5			39
Total consumer		25,582		20.3			108
Total loans	$	125,898		100.0	%		53

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, 2015, nonperforming assets totaled $36.9 million compared to $36.7 million at December 31, 2014. Additions to other real estate owned in the first quarter of 2015 were $699,000, compared to $554,000 in the first quarter of 2014. Based on the loans currently in their redemption period, we expect there to be fewer additions to other real estate owned in 2015 than there were in 2014. 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. Proceeds from sales of foreclosed properties were $3.5 million in the first quarter of 2014 resulting in a net realized gain on sale of $484,000. We expect the level of sales of foreclosed properties in the remainder of 2015 to be similar to the levels experienced in 2014.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of March 31, 2015, nonperforming loans totaled $9.8 million, or 0.86% of total portfolio loans, compared to $8.4 million, or 0.75% of total portfolio loans, at December 31, 2014.

Loans for development or sale of 1-4 family residential properties comprised approximately $213,000, or 2.2% of total nonperforming loans, at March 31, 2015 compared to $245,000, or 2.9% of total nonperforming loans, at December 31, 2014. The remaining balance of nonperforming loans at March 31, 2015 consisted of $2.4 million of commercial real estate loans secured by various types of non-residential real estate, $6.7 million of commercial and industrial loans, and $500,000 of consumer and residential mortgage loans.

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $27.0 million at March 31, 2015 and $28.2 million at December 31, 2014. Of this balance at March 31, 2015, there were 55 commercial real estate properties totaling approximately $26.0 million. The remaining balance was comprised of 12 residential properties totaling approximately $1.1 million. Four commercial real estate properties comprised $15.3 million, or 56%, of total other real estate owned at March 31, 2015. All properties acquired through or in lieu of foreclosure are initially transferred at their fair value less estimated costs to sell and then evaluated monthly for impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least annually on all foreclosed assets.

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Index

At March 31, 2015, our foreclosed asset portfolio had a weighted average age held in portfolio of 3.86 years. Below is a breakout of our foreclosed asset portfolio at March 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):

Foreclosed Asset Property Type	Carrying Value at March 31, 2015		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)
Single Family	$	729		0.2	%		0.9	%
Residential Lot		344		31.8			51.2
Multi-Family		---		---			---
Vacant Land		4,148		42.1			54.1
Residential Development		8,915		36.3			78.3
Commercial Office		1,101		24.8			55.8
Commercial Industrial		---		---			---
Commercial Improved		11,801		32.9			45.1
	$	27,038		34.8			64.0

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

	March 31, 2015			December 31, 2014
Nonaccrual loans	$	9,711		$	8,292
Loans 90 days or more delinquent and still accruing		100			134
Total nonperforming loans		9,811			8,426

Foreclosed assets		27,038			28,242
Repossessed assets		38			38
Total nonperforming assets (NPAs)		36,887			36,706
Accruing troubled debt restructurings (TDRs) (1)		45,650			46,197
Total NPAs and accruing TDRs	$	82,537		$	82,903

NPLs to total loans		0.86	%		0.75	%
NPAs to total assets		2.29	%		2.32	%

(1)

Comprised of approximately $30.8 million and $32.0 million of commercial loans and $14.8 million and $14.2 million of consumer loans whose terms have been restructured at March 31, 2015 and December 31, 2014, respectively. Interest is being accrued on these loans under their restructured terms as they are less than 90 days past due.

We had a total of $53.4 million of loans whose terms have been modified in troubled debt restructurings ("TDRs") as of March 31, 2015 and December 31, 2014. 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.

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Based upon recently issued regulatory guidance, we have determined that in situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be removed. This guidance was applied to loans outstanding at December 31, 2014, resulting in a reduction of $5.9 million in loans designated as TDR and impaired.

Allowance for loan losses: The allowance for loan losses at March 31, 2015 was $18.7 million, a decrease of $282,000, compared to $19.0 million at December 31, 2014. The balance of the allowance for loan losses represented 1.65% of total portfolio loans at March 31, 2015 compared to 1.70% of total portfolio loans at December 31, 2014. The allowance for loan losses to nonperforming loan coverage ratio decreased from 225.04% at December 31, 2014 to 190.40% at March 31, 2015.

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

(in millions)	Quarter Ended March 31, 2015			Quarter Ended December 31, 2014		Quarter Ended September 30, 2014			Quarter Ended June 30, 2014			Quarter Ended March 31, 2014
Commercial loans	$	829.6		$	818.2	$	753.8		$	748.7		$	735.1
Nonperforming loans		9.8			8.4		8.4			8.1			15.5
Other real estate owned and repo assets		27.1			28.3		28.8			31.6			34.1
Total nonperforming assets		36.9			36.7		37.2			39.6			49.6
Net charge-offs (recoveries)		(0.7	)		0.1		(0.3	)		(0.7	)		(0.6	)
Total delinquencies		2.5			2.8		5.1			5.2			6.6

Nonperforming loans continually declined since the first quarter of 2010 to $9.8 million at March 31, 2015. As discussed earlier, we have had net loan recoveries in several quarters over the last two years and in four of the last five quarters. Our total delinquencies have continued to stabilize and were $2.5 million at March 31, 2015 and $6.6 million at March 31, 2014. Our delinquency percentage at March 31, 2015 was the lowest quarterly level in Company history.

These factors all provide for a reduction in our allowance for loan losses, and thus impacts our provision for loan losses. The allowance for loan losses decreased $282,000 in the first quarter of 2015 due to a negative provision for loan losses of $1.0 million for the three months ended March 31, 2015 compared to a negative $1.0 million for the same period of 2014. Net loan recoveries were $718,000 for the three months ended March 31, 2015, compared to net recoveries of $585,000 for the same period in 2014. The ratio of net charge-offs to average loans was (0.26)% on an annualized basis for the first quarter of 2015, compared to 0.02% for the fourth quarter of 2014 and (0.23)% for the first quarter of 2014.

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

Our allowance for loan losses is maintained at a level believed appropriate based upon our 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.

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Overall, impaired loans were stable at $54.4 million at March 31, 2015 compared to $53.4 million at December 31, 2014. The specific allowance for impaired loans increased $378,000 to $4.4 million, compared to $4.1 million at December 31, 2014. The specific allowance for impaired loans represented 8.2% of total impaired loans at March 31, 2015 and 7.6% at December 31, 2014. The overall balance of impaired loans remained elevated partially due to an accounting rule (ASU 2011-02) adopted in 2011 that requires us to identify classified loans that renew at existing contractual rates as troubled debt restructurings ("TDRs") if the contractual rate is less than market rates for similar loans at the time of renewal.

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

The determination of our loss factors is based upon our actual loss history by loan grade and adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. We use a rolling 18 month actual net chargeoff history as the base for our computation. Over the past two years, the 18 month period computations have reflected sizeable decreases in net chargeoff experience. We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. Adjustments to the qualitative factors also involved consideration of different loss periods for the Bank, including 12, 24, 36 and 48 month periods. Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans decreased to $11.3 million at March 31, 2015 compared to $11.7 million at December 31, 2014. This resulted in a general reserve percentage allocated at March 31, 2015 of 1.42% of commercial loans, a slight decrease from 1.50% at December 31, 2014. The qualitative component of our general allowance allocated to commercial loans decreased from $11.7 million at December 31, 2014 to $11.3 million at March 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 $3.0 million at March 31, 2015 and $3.2 million at December 31, 2014.

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 $52.5 million at March 31, 2015, down $388,000 from $52.9 million at December 31, 2014 as depreciation more than offset capital additions of current facilities during the first quarter of 2015.

Deposits and Other Borrowings: Total deposits increased $14.2 million to $1.321 billion at March 31, 2015, as compared to $1.306 billion at December 31, 2014. Non-interest checking account balances decreased $30.9 million during the first quarter of 2015. Interest bearing demand account balances increased $15.1 million and savings and money market account balances increased $33.7 million in the first quarter of 2015. We decreased higher costing certificates of deposits by $3.7 million in the first quarter of 2015. 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 28% of total deposits at March 31, 2015 and 31% at December 31, 2014. These balances typically increase at year end for many of our commercial customers, then decline in the first quarter. Interest bearing demand, including money market and savings accounts, comprised 63% of total deposits at March 31, 2015 and 60% at December 31, 2014. Time accounts as a percentage of total deposits were 9% at March 31, 2015 and December 31, 2014.

Borrowed funds totaled $138.1 million at March 31, 2015, including $96.8 million of Federal Home Loan Bank advances and $41.2 million in long-term debt associated with trust preferred securities. Borrowed funds totaled $129.3 million at December 31, 2014, including $88.1 million of Federal Home Loan Bank advances and $41.2 million in long-term debt associated with trust preferred securities. Borrowed funds increased by $8.7 million in the first quarter of 2015 due to a $10.0 million advance taken in the first quarter of 2015, partially offset by an annual payment on an amortizing Federal Home Loan Bank advance.

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CAPITAL RESOURCES

Total shareholders' equity of $145.6 million at March 31, 2015 increased $3.1 million from $142.5 million at December 31, 2014. The increase was primarily a result of net income of $2.8 million earned in the first quarter of 2015 and an increase of $778,000 in accumulated other comprehensive income, partially offset by the payment of $677,000 in cash dividends to shareholders on February 27, 2015. The Bank was categorized as "well capitalized" at March 31, 2015.

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, 2015			Dec 31, 2014			Sept 30, 2014			June 30, 2014			March 31, 2014
Total capital to risk weighted assets		15.0	%		15.6	%		16.3	%		16.3	%		16.1	%
Common Equity Tier 1 to risk weighted assets		10.7			N/	A		N/	A		N/	A		N/	A
Tier 1 capital to average assets		11.9			11.6			11.6			11.4			11.1

Approximately $40.0 million of trust preferred securities outstanding at March 31, 2015 qualified as Tier 1 capital.

LIQUIDITY

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

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

We have actively pursued initiatives to maintain a strong liquidity position. The Bank reduced its reliance on non-core funding sources, including brokered deposits, and focused on achieving a non-core funding dependency ratio below its peer group average. We have had no brokered deposits on our balance sheet since December 2011. We also reduced other borrowed funds by $56.8 million in 2012, $1.8 million in 2013 and $1.9 million in 2014. We continue to maintain significant on-balance sheet liquidity. At March 31, 2015, the Bank held $134.1 million of federal funds sold and other short-term investments and $20.0 million in time deposits with other financial institutions with maturities of less than 18 months. In addition, the Bank has available borrowing capacity from correspondent banks of approximately $239.0 million as of March 31, 2015.

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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, 2015.

(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		80,810		29,897		5,479		---
Other borrowed funds		1,996		34,173		60,667		---
Total	$	82,806	$	64,070	$	66,146	$	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, 2015, we had a total of $361.6 million in unused lines of credit, $124.8 million in unfunded loan commitments and $12.1 million in standby letters of credit.

Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises. Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year. Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings. In 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 February 2015, the Bank paid a dividend of $1.2 million to the Company in anticipation of the common share cash dividend of $0.02 per share paid on February 27, 2015 to shareholders of record on February 10, 2015. The cash distributed for this cash dividend payment totaled $677,000. The Company retained the remaining balance for general corporate purposes. At March 31, 2015, the Bank had a retained earnings balance of $19.1 million.

During the first quarter of 2015, the Company also received a payment from the Bank totaling $4.0 million, representing the Bank's intercompany tax liability for the 2014 tax year in accordance with the Company's tax allocation agreement. During the first quarter of 2014, the Company received a payment from the Bank totaling $1.9 million, representing the Bank's intercompany tax liability for the 2013 tax year.

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, 2015 was $5.0 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 2015.

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.

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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, 2015, we had gross deferred tax assets of $14.0 million, gross deferred tax liabilities of $2.8 million resulting in a net deferred tax asset of $11.2 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 2015, we again concluded at March 31, 2015 that no valuation allowance on our net deferred tax asset was required. Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

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

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

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

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

The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of March 31, 2015 (dollars in thousands).

Interest Rate Scenario	Economic Value of Equity			Percent Change			Net Interest Income			Percent Change
Interest rates up 200 basis points		$	178,671		(0.23	)%		$	44,665		2.76	%
Interest rates up 100 basis points			179,979		0.50				44,053		1.35
No change			179,083		---				43,468		---
Interest rates down 100 basis points			166,035		(7.29	)			43,113		(0.82	)
Interest rates down 200 basis points			166,035		(7.29	)			42,904		(1.30	)

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

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

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

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

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Item 4:

CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2015, the end of the period covered by this report.

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

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

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

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

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	First Amended Settlement and Release and Warrant Issuance Agreement dated January 30, 2009. Previously filed with the Commission on April 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.3. Here incorporated by reference.

4.4	Second Amendment to Settlement and Release and Warrant Issuance Agreement dated April 30, 2009. Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.4. Here incorporated by reference.

4.5	Warrant Agreement between Macatawa Bank Corporation and Registrar and Transfer Company dated June 16, 2009. Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.5. Here incorporated by reference.

4.6	Warrant Agreement Addendum between Macatawa Bank Corporation and Registrar and Transfer Company dated July 27, 2009. Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.6. Here incorporated by reference.

4.7	Form of Warrant Certificate (first series). Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.7. Here incorporated by reference.

4.8	Form of Warrant Certificate (second series). Previously filed with the Commission on July 24, 2014 in Macatawa Bank Corporation's Quarterly Report on Form 10-Q, Exhibit 4.8. Here incorporated by reference.

4.9	Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the SEC upon request.

31.1	Certification of Chief Executive Officer.

31.2	Certification of Chief Financial Officer.

32.1	Certification pursuant to 18 U.S.C. Section 1350.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

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


	MACATAWA BANK CORPORATION

	/s/ Ronald L. Haan
	Ronald L. Haan
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ Jon W. Swets
	Jon W. Swets
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Dated: April 23, 2015

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