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Oct 15 (Reuters) - Macatawa Bank Corp's (MCBC.O: Quote, Profile, Research) quarterly profit more than halved as the amount it set aside to meet loan losses for residential land development loans increased significantly in the quarter.

"This is proving to be a challenging year for financial institutions across the country, and Macatawa Bank Corporation is no exception," Chief Executive Ben Smith said in a statement.

The residential real estate market throughout the country has declined, the company said adding the decline was compounded in Michigan by continued softness in the state's economy.

The bank holding company said third-quarter net income was $2.5 million, or 14 cents a share, compared with $6 million, or 35 cents a share, last year. Analysts expected earnings of 27 cents a share, according to Reuters Estimates.

Provision for loan losses surged to $3.6 million in the quarter, from $490,000 in the year-ago period. Sequentially, the provision for loan losses more than tripled.

Net interest income fell nearly 8 percent to $15.8 million. Non-performing assets saw an increase in the quarter, primarily in loans to residential land developers, which account for about 14 percent of the company's loan portfolio.

The Holland, Michigan-based company also said it filed a lawsuit to recover about $4.7 million from a defendant, who defaulted on loan repayments. (Reporting by Supantha Mukherjee, Sweta Singh in Bangalore)