Macatawa Bank (MCBC) 10-Q 2004 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

OR

[ ] TRANSITION REPORT UNDER 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 issuer as specified in its charter)

Michigan(State of other jurisdiction incorporation or organization)	38-3391345of (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 check 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 [X] No [__]

Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [__]

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,808,196 shares of the Company’s Common Stock (no par value) were outstanding as of August 4, 2004.

INDEX

Part I.
















Part II.



















Signatures


Financial Information:

Item 1.
Consolidated Financial Statements
Notes to Consolidated Financial Statements

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

Item 3.
Quantitative and Qualitative Disclosures
About Market Risk

Item 4.
Controls and Procedures

Other Information:

Item 1.
Legal Proceedings

Item 2.
Changes in Securities and Use of Proceeds

Item 3.
Defaults Upon Senior Securities

Item 4.
Submission of Matters to a Vote of Security Holders

Item 5.
Other Information

Item 6.
Exhibits and Reports on Form 8-K Page
Number




3
9



17



24


27




27


28


28


28


28


29

30

2

Part I Financial Information
Item 1.

MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2004 (unaudited) and December 31, 2003

(dollars in thousands except share data)	June 30, 2004			December 31, 2003
ASSETS
Cash and due from banks	$	35,161		$	41,633
Federal funds sold		-			18,414
Cash and cash equivalents		35,161			60,047
Securities available for sale		125,885			107,049
Securities held to maturity		2,556			2,624
Federal Home Loan Bank stock		9,687			8,793
Loans held for sale		1,910			4,054
Total loans		1,288,461			1,157,107
Allowance for loan losses		(17,907	)		(16,093	)
		1,270,554			1,141,014
Premises and equipment - net		41,553			38,713
Accrued interest receivable		5,785			5,095
Goodwill		23,915			23,915
Acquisition intangibles		2,562			2,787
Other assets		6,409			7,020
Total assets	$	1,525,977		$	1,401,111
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	143,351		$	139,557
Interest-bearing		1,007,996			969,842
Total		1,151,347			1,109,399
Federal funds purchased		30,231			-
Federal Home Loan Bank advances		177,747			145,680
Long-term debt		41,238			19,655
Accrued expenses and other liabilities		2,824			4,477
Total liabilities		1,403,387			1,279,211
Shareholders' equity
Preferred stock, no par value, 500,000 shares authorized;
no shares issued and outstanding
Common stock, no par value, 20,000,000 shares authorized;
8,808,983 shares and 8,370,073 issued and outstanding as of
June 30, 2004 and December 31, 2003, respectively		124,088			114,568
Retained earnings		93			5,300
Accumulated other comprehensive income		(1,591	)		2,032
Total shareholders' equity		122,590			121,900
Total liabilities and shareholders' equity	$	1,525,977		$	1,401,111

See accompanying notes to consolidated financial statements

3

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Month Periods Ended June 30, 2004 and 2003
(unaudited)

(dollars in thousands except per share data)	Three Months Ended June 30, 2004		Three Months Ended June 30, 2003		Six Months Ended June 30, 2004		Six Months Ended June 30, 2003
Interest income
Loans, including fees	$	17,241	$	14,766	$	33,235	$	29,033
Securities		1,395		1,119		2,706		2,260
Total interest income		18,636		15,885		35,941		31,293
Interest expense
Deposits		4,229		4,397		8,634		9,024
Other		1,837		1,201		3,346		2,374
Total interest expense		6,066		5,598		11,980		11,398
Net interest income		12,570		10,287		23,961		19,895
Provision for loan losses		1,440		870		2,665		1,865
Net interest income after
provision for loan losses		11,130		9,417		21,296		18,030
Noninterest income
Service charges on deposit accounts		729		652		1,380		1,252
Loan production revenue		748		973		1,277		1,959
Trust fees		832		603		1,570		1,186
Other		442		173		822		310
Total noninterest income		2,751		2,401		5,049		4,707
Noninterest expense
Salaries and benefits		4,848		4,109		9,335		7,699
Occupancy		640		516		1,338		1,074
Furniture and equipment		730		641		1,407		1,235
Legal and professional fees		262		168		314		297
Advertising		287		256		573		459
Data processing		246		186		497		385
Supplies		126		143		269		276
Other		1,794		1,404		3,456		2,678
Total noninterest expenses		8,933		7,423		17,189		14,103
Income before federal income tax		4,948		4,395		9,156		8,634
Income tax expense		1,602		1,463		2,944		2,891
Net income	$	3,346	$	2,932	$	6,212	$	5,743
Basic earnings per share		.38		.33		.71		.66
Diluted earnings per share		.37		.33		.69		.65
Dividends per share		.12		.10		.23		.19

See accompanying notes to consolidated financial statements

4

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Six Month Periods Ended June 30, 2004 and 2003
(unaudited)

(dollars in thousands)	Three Months Ended June 30, 2004			Three Months Ended June 30, 2003		Six Months Ended June 30, 2004			Six Months Ended June 30, 2003
Net income	$	3,346		$	2,932	$	6,212		$	5,743
Other comprehensive income, net of tax:
Net unrealized gains/(losses) on
securities		(2,979	)		438		(2,501	)		252
Net unrealized gains/(losses) on
derivative instruments		(1,656	)		14		(1,122	)		5
Comprehensive income	$	(1,289	)	$	3,384	$	2,589		$	6,000

See accompanying notes to consolidated financial statements

5

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Six Month Periods Ended June 30, 2004 and 2003
(unaudited)

(dollars in thousands except per share data)	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders' Equity
Balance, January 1, 2003	$	105,201	$	5,931		$	2,842		$	113,974
Net income for six months ended June 30,
2003				5,743						5,743
Other comprehensive income, net of tax:
Net unrealized gains on securities							252			252
Net unrealized gains on derivative
instruments							5			5
Comprehensive income										6,000
Issued 74,672 shares for stock option
exercises		358								358
Issued 397,664 shares in payment of 5%
stock dividend		8,927		(8,941	)					(14	)
Cash dividends at $.19 per share				(1,630	)					(1,630	)
Balance, June 30, 2003	$	114,486	$	1,103		$	3,099		$	118,688
Balance, January 1, 2004	$	114,568	$	5,300		$	2,032		$	121,900
Net income for six months ended
June 30, 2004				6,212						6,212
Other comprehensive income, net of tax:
Net unrealized losses on securities							(2,501	)		(2,501	)
Net unrealized losses on derivative
instruments							(1,122	)		(1,122	)
Comprehensive income										2,589
Issued 20,647 shares for stock option
exercises (net of 2,661 shares
exchanged)		190								190
Issued 418,263 shares in payment of 5%
stock dividend		9,330		(9,355	)					(25	)
Cash dividends at $.23 per share				(2,064	)					(2,064	)
Balance, June 30, 2004	$	124,088	$	93		$	(1,591	)	$	122,590

See accompanying notes to consolidated financial statements

6

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Month Periods Ended June 30, 2004 and 2003
(unaudited)

(dollars in thousands)	Six Months Ended June 30, 2004			Six Months Ended June 30, 2003
Cash flows from operating activities
Net income	$	6,212		$	5,743
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization		1,517			1,550
Provision for loan losses		2,665			1,865
Gain on sales of loans		(1,277	)		(1,959	)
Origination of loans for sale		(81,167	)		(175,573	)
Proceeds from sales of loans originated for sale		84,588			176,113
Net change in:
Accrued interest receivable and other assets		(1,805	)		3,382
Accrued expenses and other liabilities		299			(3,562	)
Net cash from operating activities		11,032			7,559
Cash flows from investing activities
Loan originations and payments, net		(132,205	)		(78,084	)
Purchase of Federal Home Loan Bank Stock		(894	)		(1,577	)
Purchases of securities available for sale		(41,439	)		(16,290	)
Maturities and calls of securities available for sale		18,505			10,069
Principal paydowns on securities		286			1,951
Additions to premises and equipment		(4,101	)		(9,812	)
Net cash used in investing activities		(159,848	)		(93,743	)
Cash flows from financing activities
Net increase in deposits		41,948			52,066
Net increase in short term borrowings		30,231			3,000
Proceeds from Federal Home Loan Bank advances		94,000			40,000
Repayments of Federal Home Loan Bank advances		(61,933	)		(17,544	)
Proceeds from long-term debt and other borrowings		21,583			2,355
Cash dividends paid		(2,089	)		(1,644	)
Proceeds from exercise of stock options		190			358
Net cash from financing activities		123,930			78,591
Net change in cash and cash equivalents		(24,886	)		(7,593	)
Cash and cash equivalents at beginning of period		60,047			47,874
Cash and cash equivalents at end of period	$	35,161		$	40,281

See accompanying notes to consolidated financial statements

7

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Six Month Periods Ended June 30, 2004 and 2003
(unaudited)

(dollars in thousands)	Six Months Ended June 30, 2004		Six Months Ended June 30, 2003
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	12,060	$	11,642
Income taxes	$	3,325	$	3,500

See accompanying notes to consolidated financial statements

8

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in Macatawa Bank Corporation’s (the “Company”) 2003 Annual Report containing financial statements for the year ended December 31, 2003.

All per share amounts and average shares outstanding have been adjusted for all periods presented to reflect the 5% stock dividends distributed on May 28, 2004 and May 30, 2003.

Employee compensation expense under stock option plans is reported using the intrinsic value method. No compensation cost related to stock options was recognized during the three and six month periods ended June 30, 2004 and 2003, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. Had compensation cost for stock options been measured using the fair value method, net income and basic and diluted earnings per share would have been the pro forma amounts indicated below (dollars in thousands except per share data). The pro forma effect may increase in the future if more options are granted.

	Three Months Ended June 30, 2004			Three Months Ended June 30, 2003			Six Months Ended June 30, 2004			Six Months Ended June 30, 2003
Net income as reported	$	3,346		$	2,932		$	6,212		$	5,743
Stock-based compensation cost, net of tax		(59	)		(47	)		(129	)		(83	)
Pro forma net income	$	3,287		$	2,885		$	6,083		$	5,660
Basic earnings per share as reported		.38			.33			.71			.66
Pro forma basic earnings per share		.37			.33			.69			.65
Diluted earnings per share as reported		.37			.33			.69			.65
Pro forma diluted earnings per share		.37			.32			.68			.64

NOTE 2 — PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, Macatawa Bank and Macatawa Investment Services. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company also 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, under FASB Interpretation No. 46, are not consolidated with the Company. Accordingly, the securities issued by these trusts are not reported as liabilities; however, the subordinated debentures issued by the Company and held by the trust are reported as liabilities under the caption “Long-term debt”.

9

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS

Under the new standard for certain liabilities and equity instruments, mandatorily redeemable instruments such as trust preferred securities are considered liabilities and not part of mezzanine (or temporary) equity. Accordingly, the trust preferred securities issued by the Company on July 15, 2003 and March 18, 2004 were classified as liabilities for Generally Accepted Accounting Principles, and as a component of capital for regulatory purposes, see Note 10.

NOTE 4 — EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and six month periods ended June 30, 2004 and June 30, 2003 are as follows (dollars in thousands except per share data):

	Three Months Ended June 30, 2004		Three Months Ended June 30, 2003		Six Months Ended June 30, 2004		Six Months Ended June 30, 2003
Basic earnings per share
Net income	$	3,346	$	2,932	$	6,212	$	5,743
Weighted average common
shares outstanding		8,804,830		8,782,030		8,796,986		8,758,317
Basic earnings per share	$	0.38	$	0.33	$	0.71	$	0.66
Diluted earnings per share
Net income	$	3,346	$	2,932	$	6,212	$	5,743
Weighted average common
shares outstanding		8,804,830		8,782,030		8,796,986		8,758,317
Add: Dilutive effects of assumed
exercise of stock options		153,146		127,464		155,230		127,136
Weighted average common and
dilutive potential common
shares outstanding		8,957,976		8,909,494		8,952,216		8,885,453
Diluted earnings per share	$	0.37	$	0.33	$	0.69	$	0.65

There were no antidilutive shares for the three and six month periods ended June 30, 2004 and 2003.

10

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 5 — SECURITIES

The amortized cost and fair values of securities were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Values
June 30, 2004
Available for sale:
U.S. Treasury securities and obligations
Of U. S. Government agencies	$	89,534	$	501	$	(1,250	)	$	88,785
State and municipal bonds		38,042		401		(1,343	)		37,100
	$	127,576	$	902	$	(2,593	)	$	125,885
Held to maturity:
State and municipal bonds	$	2,556	$	83	$	(12	)	$	2,627
	$	2,556	$	83	$	(12	)	$	2,627
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Values
December 31, 2003
Available for sale:
U. S. Treasury securities and obligations
Of U. S. Government agencies	$	74,804	$	1,535	$	(114	)	$	76,225
State and municipal bonds		30,088		945		(209	)		30,824
	$	104,892	$	2,480	$	(323	)	$	107,049
Held to maturity:
State and municipal bonds	$	2,624	$	77		---		$	2,701
	$	2,624	$	77		---		$	2,701

Contractual maturities of debt securities at June 30, 2004 were as follows (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Held to Maturity Securities				Available for Sale Securities
	Amortized Cost		Fair Values		Amortized Cost		Fair Values
Due less than one year		---		---	$	3,085	$	3,125
Due one year to five years		---		---		75,570		74,961
Due five years to ten years		517		505		20,590		20,705
Due after ten years		2,039		2,122		28,331		27,094
Total	$	2,556	$	2,627	$	127,576	$	125,885

11

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 6 – LOANS

Loans were as follows (in thousands):

	June 30, 2004			December 31, 2003
Commercial	$	340,864		$	381,097
Commercial mortgage		594,602			467,918
Residential mortgage		203,496			172,647
Consumer		149,499			135,445
		1,288,461			1,157,107
Allowance for loan losses		(17,907	)		(16,093	)
	$	1,270,554		$	1,141,014

Activity in the allowance for loan losses was as follows (in thousands):

	Three Months Ended June 30, 2004			Three Months Ended June 30, 2003			Six Months Ended June 30, 2004			Six Months Ended June 30, 2003
Balance at beginning of period	$	16,958		$	14,163		$	16,093		$	13,472
Provision for loan losses .		1,440			870			2,665			1,865
Charge-offs		(565	)		(548	)		(946	)		(856	)
Recoveries		74			28			95			32
Balance at end of period	$	17,907		$	14,513		$	17,907		$	14,513

NOTE 7 - DEPOSITS.

Deposits are summarized as follows (in thousands):

	June 30, 2004		December 31, 2003
Noninterest-bearing demand deposit accounts	$	143,351	$	139,557
Money market accounts		399,183		355,271
NOW and Super NOW accounts		151,245		148,682
Savings accounts		39,368		37,004
Certificates of deposit		418,200		428,885
	$	1,151,347	$	1,109,399

12

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

Advances from the Federal Home Loan Bank were as follows (in thousands):

June 30, 2004 Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
Single maturity fixed rate advances	$	74,828	July 2004 to June 2007		2.69	%
Putable advances		41,000	January 2005 to December 2010		5.98	%
Short-term variable		50,000	September 2004 to October 2004		1.61	%
Amortizable mortgage advances		11,919	November 2004 to July 2018		3.90	%
	$	177,747
December 31, 2003
Single maturity fixed rate advances	$	67,173	January 2004 to January 2006		2.85	%
Putable advances		41,000	January 2005 to December 2010		5.98	%
Short-term variable		25,000	May 2004 to July 2004		1.11	%
Amortizable mortgage advances		12,507	February 2004 to July 2018		3.98	%
	$	145,680

Each advance is payable at its maturity date and contains a prepayment penalty. These advances were collateralized by securities totaling $85,624,000 and $74,789,000 at June 30, 2004 and December 31, 2003, and residential and commercial real estate loans totaling $720,806,000 and $598,214,000 under a blanket lien arrangement at June 30, 2004 and December 31, 2003, respectively.

Maturities as of June 30, 2004 were as follows (in thousands):

2004	$	83,062
2005		22,900
2006		17,200
2007		12,000
2008		1,052
Thereafter		41,533
	$	177,747

13

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 9 – HEDGING ACTIVITIES

The Company has asset/liability management policies that include guidelines for measuring and monitoring interest rate risk. Within these guidelines, parameters have been established for maximum fluctuations in net interest income. Possible fluctuations are measured and monitored using simulation modeling. The policies provide for the use of derivative instruments and hedging activities to aid in managing interest rate risk to within the policy parameters.

The Company’s assets are comprised of a large portion of loans on which the interest rates are variable. As such, the Company may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates. Interest rate swap arrangements may be utilized to hedge against these fluctuations in cash flows.

The Company has entered into interest rate swap arrangements (“swaps”), all of which are classified as cash flow hedges that convert the variable rate cash inflows on certain of its loans to fixed rates of interest. These swaps pay interest to the Company at a fixed rate and require interest payments from the Company at a variable rate. All of these swaps were fully effective during 2003 and the first six months of 2004. At June 30, 2004, there were five swaps outstanding each with a notional amount of $20 million. One of the swaps has a maturity of less than twelve months with an unrealized gain that more than offsets the twelve month combined unrealized loss of the remaining swaps. Accordingly, it is anticipated that approximately $38,000 net of tax, of net unrealized gains on these cash flow hedges will be reclassified to earnings over the next twelve months.

Summary information about interest rate swaps were as follows (dollars in thousands).

	June 30, 2004			December 31, 2003
Notional amounts	$	100,000		$	60,000
Weighted average pay rates		4.00	%		4.00	%
Weighted average receive rates		6.54	%		6.64	%
Weighted average maturity		3.7 years			3.9 years
Unrealized (loss) gain related to interest rate swaps	$	(756	)	$	970

NOTE 10 — REGULATORY MATTERS

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 measurements 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 weighting, 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 classifications, 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 before it is able to accept brokered deposits. If a bank is undercapitalized, capital distributions are limited, as well as its asset growth and expansion, and the bank is required to implement plans for necessary capital restoration.

14

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 10 — REGULATORY MATTERS (Continued)

At June 30, 2004 and December 31, 2003, actual capital levels and minimum required levels for the Company and the Bank were (in thousands):

	Actual					Minimum Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2004
Total capital (to risk weighted assets)
Consolidated	$	155,089		11.8	%	$	105,514		8.0	%	$	131,892		10.0	%
Macatawa Bank		133,096		10.1			105,322		8.0			131,652		10.0
Tier 1 capital (to risk weighted assets)
Consolidated		130,602		9.9			52,757		4.0			79,135		6.0
Macatawa Bank		116,639		8.9			52,661		4.0			78,991		6.0
Tier 1 capital (to average assets)
Consolidated		130,602		8.9			58,983		4.0			73,729		5.0
Macatawa Bank		116,639		7.9			58,873		4.0			73,591		5.0
December 31, 2003
Total capital (to risk weighted assets)
Consolidated	$	128,900		10.9	%	$	94,454		8.0	%	$	118,067		10.0	%
Macatawa Bank		118,301		10.0			94,404		8.0			118,005		10.0
Tier 1 capital (to risk weighted assets)
Consolidated		114,142		9.7			47,227		4.0			70,840		6.0
Macatawa Bank		103,550		8.8			47,202		4.0			70,803		6.0
Tier 1 capital (to average assets)
Consolidated		114,142		8.8			52,144		4.0			65,180		5.0
Macatawa Bank		103,550		8.0			52,040		4.0			65,049		5.0

Macatawa Bank was categorized as well capitalized at June 30, 2004 and December 31, 2003.

On March 18, 2004 the Company issued $20.0 million of pooled trust preferred securities (“Preferred Securities”) through one issuance by a wholly-owned subsidiary grantor trust, Macatawa Statutory Trust II (the “Trust”). This was in addition to the $20.0 million of pooled trust preferred securities previously issued in July, 2003. The Preferred Securities accrue and pay distributions quarterly at a specified rate as provided in the indenture, three-month LIBOR plus 2.75%. The Trust used the net proceeds from the offering to purchase a like amount of Junior Subordinated Debentures (the “Debentures”) of the Company. The Debentures are the sole assets of the Trust. The Company’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trust. The Preferred Securities are mandatorily redeemable upon the maturity of the Debentures which is March 18, 2034, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the Debentures in whole or in part on or after March 18, 2009, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. The initial interest rate on the Preferred Securities was 3.86%. Approximately $12.0 million of the $20.0 million issuance qualified as Tier 1 capital for regulatory capital purposes.

15

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 July 8, 2003 the Company filed a Form 8-K (dated July 1, 2003) with the Securities and Exchange Commission reporting events related to a former trust customer, Trade Partners, Inc. (“Trade Partners”), of the former Grand Bank. Trade Partners was involved in purchasing and selling interests in viaticals which are interests in life insurance policies of the terminally ill or elderly. Beginning in 1996, Grand Bank served as a custodian and escrow agent with respect to viaticals purchased by Trade Partners and sold to investors. Two lawsuits were filed, one in December 2002 and another in March 2003, against Trade Partners, Grand Bank and the Company alleging that Grand Bank breached certain escrow agreements related to viatical settlement contracts. Both of these lawsuits have been dismissed although the plaintiffs reserved the right to pursue the claims in the future. A third lawsuit was filed in April 2003 by two individual investors against Grand Bank, the Company, Trade Partners and certain individuals and entities associated with Trade Partners. The complaint seeks damages for the asserted breach of certain escrow agreements for which Grand Bank served as custodian and escrow agent. In addition, in May 2003 a purported class action complaint was filed against the Company alleging that Grand Bank breached escrow agreements and its fiduciary duties and violated the Michigan Uniform Securities Act with respect to the investments secured by the purported class in viaticals or in interests in limited partnerships which made loans to Trade Partners secured by viaticals. The Company has answered the complaint denying the material allegations and raising certain affirmative defenses. Management believes the Company has strong defenses and will vigorously defend the cases.

Trade Partners is now in receivership. The receiver has been authorized to borrow money from Macatawa Bank to pay premiums, if needed. Macatawa Bank extended a $4 million line of credit to the receiver, conditioned upon obtaining a security interest in the viaticals. As of June 30, 2004 no draws had yet been made on the line of credit.

It is possible that one or more additional legal actions may be initiated involving the custodial and escrow agent services provided by Grand Bank in connection with Trade Partners. If any such legal actions are commenced, the Company intends to defend them vigorously. To the extent any pending or future claims allege errors or omissions on the part of Grand Bank or Macatawa Bank, Management believes that some or all liability, if any is proven or established, will be covered by errors and omissions insurance maintained by Grand Bank and Macatawa Bank. The Company has reported the Trade Partners matter to its two insurance carriers. One carrier has assumed the Company’s defense and has advanced a portion of its defense costs pursuant to a reservation of rights letter asserting certain coverage defenses, and an Interim Funding Agreement. The other carrier has taken the position that the duty of defense rests solely with the first carrier, and reserves its rights with respect to indemnity.

The legal actions involving Trade Partners are at an early stage and the outcome of such actions is uncertain. While we are therefore unable to determine at this time whether or to what extent these actions may impact the Company, the Company believes it has strong defenses and fully intends to defend any and all such actions vigorously.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Macatawa Bank Corporation is a Michigan corporation and is the holding company for two wholly owned subsidiaries, Macatawa Bank and Macatawa Investment Services, Inc. and for two trusts, Macatawa Statutory Trust I and Macatawa Statutory Trust II. Effective January 9, 2002, Macatawa Bank Corporation elected to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act. Macatawa Bank commenced operations on November 25, 1997. On April 1, 2002 Macatawa Bank Corporation acquired Grand Bank Financial Corporation (“GBFC”) and its wholly owned banking subsidiary, Grand Bank. Its results are included in the consolidated statements of income since this effective date. Grand Bank was merged into Macatawa Bank effective January 1, 2003 with the combined bank named Macatawa Bank. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The bank operates twenty-one 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 Investment Services was formed in October 2001 and gained approval in June 2002 from NASD to commence operations as a broker/dealer. Macatawa Investment Services provides various services including discount brokerage, personal financial planning, and consultation regarding mutual funds and annuities. 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 the Corporation’s financial statements. For further information regarding consolidation, see Note 2 to the Consolidated Financial Statements. Macatawa Bank Mortgage Company, a subsidiary of Macatawa Bank, originates and sells residential mortgage loans into the secondary market on a servicing released basis.

While maintaining asset quality and improving profitability, we have experienced rapid and substantial growth since opening Macatawa Bank in November 1997. We first became profitable in 1999 and have increased earnings each year since then with 2003 net income reaching $11.8 million. Since our inception in 1997 we have raised approximately $100.6 million in capital through private and public common stock offerings and trust preferred offerings to facilitate our growth and progress over these years. When we acquired GBFC we issued 2,472,000 shares of common stock in exchange for all of the outstanding stock of GBFC.

We believe that growth in core deposits is key to our long-term success and is our primary funding source for asset growth. Establishing a branching network in our markets has been of high importance in order to facilitate this core deposit growth. We have gained community awareness and acceptance in our markets through this expanding branch network and our high service quality standards. Since our inception in 1997, core deposits have increased between $100 million and $200 million each year.

The West Michigan markets within which we operate are growing markets. Because of their growth and our ability to provide highly personalized service, these markets have provided significant expansion opportunities for us. In addition, acquisitions of banks within our markets by large banking institutions headquartered far away have provided us additional opportunity to gain market share. Grand Rapids is the largest market within West Michigan. It is also where we hold the lowest percent share of the market relative to the other markets within which we operate, and therefore we believe presents great opportunity. With our foundation now established in Grand Rapids, further expansion here will remain a high priority. We opened our new branch on the northwest side of the city during the first quarter, bringing our total number of branches in the greater Grand Rapids area to eight. We plan to open at least two more branches in this area within the next year. Also, we enjoy continuing success in the Holland/Zeeland area in building new and existing relationships, and our entrance into the Grand Haven market during the third quarter of 2003 has produced excellent growth results.We anticipate that we will continue to experience growth in our balance sheet and in our earnings due to these expansion opportunities.

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FINANCIAL CONDITION

Summary: Our total assets were $1.53 billion at June 30, 2004, an increase of $124.9 million from $1.40 billion at December 31, 2003. The growth in assets was primarily from growth in total portfolio loans. Total portfolio loans increased $131.4 million to $1.29 billion at June 30, 2004 from $1.16 billion at December 31, 2003.

The growth in assets was primarily funded by an increase in deposits and other borrowings. Total deposits increased $41.9 million to $1.15 billion at June 30, 2004 from 1.11 billion at December 31, 2003. Other borrowings, including federal funds purchased and Federal Home Loan Bank (“FHLB”) advances, increased $62.3 million to $208.0 million at June 30, 2004.

Portfolio Loans and Asset Quality: We believe the continued strong loan growth we have experienced reflects the acceptance of our community banking philosophy in the growing communities we serve. We continue to attract new loan customers and expand existing relationships despite the strong competition from other locally based community banks and larger regional banks.

The majority of the growth in our loan portfolio has been driven by our commercial loan department. Of the $131.4 million in growth during the first six months of 2004, $86.5 million was from our commercial loan portfolios. Commercial and commercial real estate loans accounted for approximately 73% of the total loan portfolio at June 30, 2004 and at December 31, 2003. Consumer loans comprised 12% of the portfolio, while residential mortgage loans were 15% of total loans at June 30, 2004.

Despite the large increase in the loan portfolio, nonperforming asset ratios improved during this period. The ratio of nonperforming loans to total loans of .21% at June 30, 2004 was down from .35% at December 31, 2003, and the ratio of nonperforming assets to total assets of .18% at June 30, 2004 was down from .32% at December 31, 2003. A general improvement in the collection of past due balances and the sale of foreclosed assets during the second quarter of 2004 are the primary reasons for the improvement.

Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. Our nonperforming loans include loans on non-accrual status, restructured loans, as well as loans delinquent more than 90 days, but still accruing. Foreclosed and repossessed assets include assets acquired in settlement of loans. The following table shows the composition and amount of our nonperforming assets.

(Dollars in thousands)	June 30, 2004			December 31, 2003
Nonaccrual loans	$	2,490		$	1,717
Loans 90 days past due and still accruing		252			2,308
Total nonperforming loans	$	2,742		$	4,025
Foreclosed assets		-			464
Repossessed assets		-			4
Total nonperforming assets	$	2,742		$	4,493
Nonperforming loans to total loans		0.21	%		0.35	%
Nonperforming assets to total assets		0.18	%		0.32	%

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Net charge-offs for the six months ended June 30, 2004 totaled $851,000 as compared to $824,000 for the same period in 2003. Although the amount of net charge-offs was slightly higher, when considering the growth in the total loan portfolio since the prior year, our net charge-offs as a percentage of loans has declined and continues to be low relative to comparable banks. However, we recognize that our loan portfolios remain relatively unseasoned, and no material trend of losses has been established.

The allowance for loan losses as of June 30, 2004 was $17.9 million, or 1.39% of total portfolio loans, compared to $16.1 million, or 1.39% of total loans at December 31, 2003. Our allowance for loan losses is maintained at a level management considers appropriate based upon our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance relies on several key elements, which include specific allowances for loans considered impaired, a formula allowance for graded loans, and general allocations based on historical trends for pools of similar loan types.

Specific allowances are established in cases where senior credit management has identified significant conditions or circumstances related to an individually impaired credit that we believe indicates the probability that a loss has been incurred. This amount is determined by methods prescribed by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”. The specific allowance for impaired loans was $881,000 at June 30, 2004 and $792,000 at December 31, 2003.

The formula allowance is calculated by applying loss factors to outstanding loans based on the internal risk grade of such loans. We use a loan rating method based upon an eight point system. Loans are assigned a loss allocation factor for each loan classification category. The lower the grading assigned to a loan category, the greater the allocation percentage that is applied. Changes in risk grade of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our loss experience, the banking industry’s historical loan loss experience, and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the analysis date. The formula allowance was $14.7 million at June 30, 2004 and $13.4 million at December 31, 2003.

Groups of homogeneous loans, such as residential real estate, open- and closed-end consumer loans, etc., receive an allowance allocation based on loss trends. In lieu of an established loan loss trend for Macatawa Bank, we use historical loss trends based on industry experience and peers in determining an adequate allowance for these pools of loans. General economic and business conditions, credit quality trends, collateral values, seasoning of the portfolios and recent loss experience are conditions considered in connection with allocation factors for these similar pools of loans. The general allowance was $1.4 million at June 30, 2004 and $1.6 million at December 31, 2003.

During the six months ended June 30, 2004 the allowance for loan losses increased by $1.8 million and was largely a result of additional provisions associated with an increase in the formula allowance due to the significant growth we have experienced in the commercial loan portfolio. The continued increase in the allowance was deemed necessary despite the decline in nonperforming loans given the significant growth in loans, the unseasoned nature of our portfolio and the still soft, although improving, economic conditions both on a national basis and locally.

Deposits and Other Borrowings: Total deposits increased to $1.15 billion at June 30, 2004 compared to $1.11 billion at December 31, 2003. In addition, the mix of the deposit portfolio experienced a shift during the first six months of 2004 to lower costing transaction accounts. Time deposits declined $10.7 million while transaction accounts, which include noninterest-bearing and interest-bearing demand deposits, money market, and savings accounts, grew by $52.6 million. This growth in transaction account deposits was substantially a result of our continued focus on quality customer service, the desire of customers to deal with a local bank, and the convenience of our expanding branch network. With the continued maturing of our branch network, we expect this trend of growth in transaction account deposits to continue.

19

The growth in other borrowings of $62.3 million included an increase of $32.1 million in FHLB advances and the use of $30.2 million of our capacity in overnight Federal funds purchased. The increase in these relatively low cost alternative sources of funds helped to fund the significant growth in loans we have experienced to date in 2004.

RESULTS OF OPERATIONS

Summary:Net income for the quarter ended June 30, 2004 was $3.35 million, an increase of 14% as compared to second quarter 2003 net income of $2.93 million. Earnings per share on a diluted basis were $.37 for the second quarter of 2004, which was an increase of 12% over the same period of the prior year. Net income for the six months ended June 30, 2004 was up 8% to $6.21 million compared to $5.74 million for the same period in the prior year. Earnings per share on a diluted basis were $.69 for the six months ended June 30, 2004 compared to $.65 for the same period in the prior year.

The increases in net income for both the three months and six months ended June 30, 2004 as compared to the same periods in the prior year were primarily related to growth in net interest income, and partially offset by an increase in the provision for loan losses and non-interest expense.

Net Interest Income:Net interest income for the second quarter of 2004 totaled $12.6 million, an increase of 22% as compared to $10.3 million for the second quarter of 2003. Net interest income for the first six months of 2004 totaled $24.0 million, an increase of 20% as compared to $19.9 million for the same period in 2003. The increase for both the three and six month periods was driven primarily by significant growth in average earning assets. Average earning assets increased $267.7 million to $1.4 billion for the second quarter of 2004 compared to the second quarter of 2003, and $243.4 million to $1.36 billion for the six month period ended June 30, 2004 compared to the same period in the prior year. The net interest margin remained relatively stable for both the three and six month periods; declining two basis points to 3.62% for the second quarter of 2004 and declining four basis points to 3.55% for the six month period ended June 30, 2004. Despite an improvement in the net interest spread for both the three and six month periods, a slightly greater reliance on interest bearing liabilities to fund the growth in interest earning assets resulted in the slight decline in the net interest margin for both the three and six month periods.

During both the three and six month periods, the decline in the yield on earning assets was more than offset by a decline in the cost of funds, resulting in the increase in net interest spread. The yield on earning assets declined by 27 basis points and 33 basis points, respectively, for the three and six months ended June 30, 2004 as compared to the same periods in the prior year. The decline for both periods is primarily because the majority of the loan growth during these periods was in variable rate loans, as loan customers preferred such products within the historically low rate environment. The cost of funds declined by 29 basis points and 35 basis points, respectively, for the three and six months ended June 30, 2004 as compared to the same periods in the prior year. The decline for both periods was primarily the result of a favorable shift in the mix of the deposit portfolio to lower costing core deposits. These lower costing core deposits, including demand, money market and savings accounts, represent approximately 63% of the deposit portfolio for both the three and six month periods ended June 30, 2004 compared to 54% for both the three and six month periods ended June 30, 2003.

Anticipated growth in earning assets is expected to continue to increase levels of net interest income. In addition, we would expect the recent 25 basis point increase in short-term interest rates by the Federal Reserve Bank to have a favorable impact on our net interest margin, driven largely by our significant portfolio of variable rate loans.

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The following table shows an analysis of net interest margin for the three-month periods ending June 30, 2004 and 2003.

	For the three months ended June 30,
	2004								2003
	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	$	85,873		$	898		4.18	%	$	66,054		$	815		4.94	%
Tax-exempt securities (1)		37,683			402		6.63	%		20,444			230		6.96	%
Loans		1,266,080			17,241		5.40	%		1,039,370			14,766		5.64	%
Fed funds sold		333			1		0.95	%		55			1		1.19	%
Federal Home Loan Bank stock		9,446			94		3.96	%		5,744			73		5.04	%
Total interest earning assets (1)		1,399,415			18,636		5.35	%		1,131,667			15,885		5.62	%
Noninterest earning assets
Cash and due from banks		32,769								30,324
Other		67,971								59,699
Total assets	$	1,500,155							$	1,221,690
Liabilities
NOWs and MMDAs	$	537,452			1,376		1.03	%	$	381,795			945		0.99	%
Savings		38,985			20		0.20	%		32,104			39		0.49	%
IRAs		27,139			214		3.17	%		25,578			237		3.72	%
Time deposits		385,682			2,619		2.73	%		416,034			3,176		3.06	%
Fed funds borrowed		31,973			96		1.19	%		16,857			61		1.44	%
Other borrowings		213,732			1,741		3.22	%		118,709			1,140		3.80	%
Total interest bearing liabilities		1,234,963			6,066		1.97	%		991,077			5,598		2.26	%
Noninterest bearing liabilities
Noninterest bearing demand accounts		133,289								106,279
Other noninterest bearing liabilities .		7,251								6,176
Shareholders' equity		124,652								118,158
Total liabilities and shareholders' equity	$	1,500,155							$	1,221,690
Net interest income				$	12,570							$	10,287
Net interest spread							3.38	%							3.36	%
Net interest margin (1)							3.62	%							3.64	%
Ratio of average interest earning assets to
Average interest bearing liabilities		113.32	%							114.19	%

(1)     Yield adjusted to fully tax equivalent.

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The following table shows an analysis of net interest margin for the six-month periods ending June 30, 2004 and 2003.

	For the six months ended June 30,
	2004								2003
	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	$	80,054		$	1,717		4.29	%	$	67,279		$	1,666		4.95	%
Tax-exempt securities (1)		36,276			776		6.65	%		19,100			433		7.03	%
Loans		1,229,804			33,235		5.36	%		1,019,795			29,033		5.68	%
Fed funds sold		1,521			7		0.94	%		1,700			10		1.17	%
Federal Home Loan Bank stock		9,157			206		4.45	%		5,573			151		5.38	%
Total interest earning assets (1)		1,356,812			35,941		5.32	%		1,113,447			31,293		5.65	%
Noninterest earning assets
Cash and due from banks		31,137								30,556
Other		67,686								58,198
Total assets	$	1,455,635							$	1,202,201
Liabilities
NOWs and MMDAs	$	530,828			2,746		1.04	%	$	381,605			2,014		1.06	%
Savings		37,990			41		0.22	%		30,611			76		0.50	%
IRAs		26,783			434		3.26	%		25,113			476		3.82	%
Time deposits		390,467			5,413		2.79	%		411,555			6,458		3.17	%
Fed funds borrowed		26,552			162		1.21	%		12,927			93		1.43	%
Other borrowings		184,023			3,184		3.42	%		115,036			2,281		3.94	%
Total interest bearing liabilities		1,196,643			11,980		2.00	%		976,847			11,398		2.35	%
Noninterest bearing liabilities
Noninterest bearing demand accounts		127,580								101,866
Other noninterest bearing liabilities .		7,144								6,464
Shareholders' equity		124,268								117,024
Total liabilities and shareholders'equity	$	1,455,635							$	1,202,201
Net interest income				$	23,961							$	19,895
Net interest spread							3.32	%							3.30	%
Net interest margin (1)							3.55	%							3.59	%
Ratio of average interest earning assets to
Average interest bearing liabilities		113.39	%							113.98	%

(1)     Yield adjusted to fully tax equivalent.

Provision for Loan Losses: The provision for loan losses for the three and six month periods ended June 30, 2004 increased to $1,440,000 and $2,665,000, respectively, as compared to $870,000 and $1,865,000 for the same periods in the prior year. The amounts of loan loss provision in both the current and prior year periods were a byproduct of establishing our allowance for loan losses at levels deemed necessary in our methodology for determining the adequacy of the allowance. For more information about our allowance for loan losses and our methodology for establishing its level, see the earlier discussion under Portfolio Loans and Asset Quality.

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Noninterest Income: Noninterest income for the three and six month periods ended June 30, 2004 increased to $2.8 million and $5.0 million, respectively, from $2.4 million and $4.7 million for the same periods in the prior year. A decline in loan production revenue in both the three and six month periods was more than offset by increases in other components of noninterest income. The largest component increase in noninterest income for both periods was in trust fees which grew primarily due to the development of new relationships and market value increases of underlying trust assets. Loan production revenue, including gains on sales of mortgage loans and fees for originating loans funded by other institutions, decreased compared to the prior year due to the general rise in long-term rates that has occurred during the first half of this year when compared to the same period in the prior year. The rate increase slowed mortgage refinance volume, which in turn decreased the level of revenue produced from these activities.

Noninterest Expense: Noninterest expense for the three and six month periods ended June 30, 2004 increased to $8.9 million and $17.2 million, respectively, from $7.4 million and $14.1 million for the same periods in the prior year. Salaries and benefits increased by $739,000 for the second quarter and $1,636,000 for the first six months of 2004 compared to the same periods in the prior year. Our growth has required additional staff in various areas including new branches, lending, trust and investment service departments and operations which are all necessary to support increased customer activity. The increased costs reflect our attention to properly managing and supporting our growth and our interest in creating a platform for strong future growth. Occupancy and furniture and equipment expense have increased along with our branch expansion, which included six new locations since the second quarter of 2003, and partially due to our new corporate headquarters, which we moved into during the second quarter of 2003. The increase in legal and professional fees of $94,000 for the second quarter of 2004 is primarily attributable to legal fees associated with Trade Partners. A partial reimbursement from our insurance carrier associated with Trade Partners in the first quarter of 2004 helped offset this second quarter increase resulting in only a slight increase in legal and professional fees for the six month period of 2004 compared to the same period in 2003. For further information regarding litigation related to Trade Partners, please refer to Part II of this form, Item 1 – Legal Proceedings. Although we expect noninterest expense levels to generally rise with our growth, we expect to continue to improve our efficiency by better utilizing our capacity as we grow. The efficiency ratio for the second quarter of 2004 was 58.31% compared to 58.50% for the second quarter of 2003. We believe the additional capacity within our branch network will continue to provide future growth opportunities without significant additional costs.

LIQUIDITY AND CAPITAL RESOURCES

Total shareholders’ equity increased $690,000 to $122.6 million at June 30, 2004 from December 31, 2003, as the retention of earnings was largely offset by a reduction in accumulated other comprehensive income. The change in accumulated other comprehensive income was due to a decrease in both the market value of securities available for sale and the derivative instruments associated with the Company’s interest rate swap arrangements due principally to the general rise in longer-term interest rates during the first half of 2004. For more information regarding our interest rate swap arrangements see Note 9 to the consolidated financial statements.

Improved earnings during the first six months of 2004 allowed us to increase the cash dividends paid during the period. We began paying cash dividends at the end of 2000 and have increased the amount of the dividend each year since then. It is anticipated that we will continue to pay quarterly cash dividends in the future. We have also paid a stock dividend each year beginning in 2001. On April 21, 2004 we announced our fourth consecutive annual stock dividend, set at 5%, which was paid on May 28, 2004 to shareholders of record as of May 12, 2004. All per share and average share information in this report has been adjusted to reflect the effect of this dividend.

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At June 30, 2004, our total capital to risk-weighted assets was 11.8% compared to 10.9% at December 31, 2003. The increase was largely a result of our issuance of trust preferred securities in the first quarter of 2004. On March 18, 2004, we raised additional regulatory capital by participating in a pooled trust preferred security issuance in the amount of $20.0 million. Of this $20.0 million, approximately $12.0 million qualified as Tier 1 capital with the remaining qualifying as Tier 2 capital. We expect this additional regulatory capital coupled with improving profitability to support our growth in assets into 2006. For more information regarding the trust preferred securities, please refer to Note 10 of the Notes to Consolidated Financial Statements. Our Tier 1 Capital as a percent of average assets was 8.8% at both June 30, 2004 and December 31, 2003, well in excess of the 5.0% regulatory minimum forwell capitalized institutions. The additional $12.0 million of Tier 1 capital from the trust preferred securities issuance was largely offset by the significant growth we have experienced since December 31, 2003.

The liquidity of a financial institution reflects its ability to provide funds to meet loan requests, to accommodate possible outflows of deposits and to take advantage of interest rate market opportunities. Our sources of liquidity include loan payments by our borrowers, maturity and sales of securities available for sale, growth of deposits and deposit equivalents, federal funds lines, our borrowings from the Federal Home Loan Bank, and our issuance of trust preferred securities and common stock. 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. We feel our liquidity position is sufficient to meet these needs.

Forward Looking Statements

This report includes “forward-looking statements” as that term is used in the securities laws. All statements regarding our expected financial position, business and strategies are forward-looking statements. In addition, the words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. The presentation and discussion of the provision and allowance for loan losses, statements concerning future profitability or future growth or increases, and statements about the adequacy of our capital resources are examples of inherently forward looking statements in that they involve judgments and statements of belief as to the outcome of future events. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and our future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Analysis

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. Therefore, our market risk exposure is mainly comprised of our sensitivity to interest rate risk. 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.

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We use two interest rate risk measurement techniques in our interest rate risk management. The first is static gap analysis. This measures the difference between the dollar amounts of interest sensitive assets and liabilities that may be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to our net interest margin during periods of changing market interest rates.

The following table summarizes our interest rate repricing gaps (in thousands) for selected maturity periods as of June 30, 2004.

	<3 Months			3-12 Months			1-5 Years			Over 5 Years			Total
Assets:
Fixed rate loans	$	30,519		$	60,336		$	282,260		$	54,260		$	427,375
Variable rate loans		810,966			3,703			42,384			4,033			861,086
Taxable securities		1,097			2,029			75,268			10,391			88,785
Tax-exempt securities		-			-			-			39,656			39,656
Federal Home Loan Bank stock		9,687			-			-			-			9,687
Loan Loss Reserve		-			-			-			-			(17,907	)
Cash & due from banks		-			-			-			-			35,161
Acquisition intangibles		-			-			-			-			26,477
Loans held for sale		-			-			-			-			1,910
Fixed assets		-			-			-			-			41,553
Other assets		-			-			-			-			12,194
Total	$	852,269		$	66,068		$	399,912		$	108,340		$	1,525,977
Liabilities:
Time deposits $100,000 and over	$	46,132		$	160,705		$	65,690		$	1,832		$	274,359
Time deposits under $100,000		27,428			65,434			47,247			3,732			143,841
Other borrowings		95,695			35,798			35,485			82,238			249,216
Savings		39,368			-			-			-			39,368
NOW & money market accounts		550,428			-			-			-			550,428
Non-Interest Bearing Deposits		-			-			-			-			143,351
Other Liabilities & Equity		-			-			-			-			125,414
Total	$	759,051		$	261,937		$	148,422		$	87,802		$	1,525,977
Period interest rate gap:		93,218			(195,869	)		251,490			20,538
Cumulative interest rate gap:		93,218			(102,651	)		148,838			169,377
Cumulative interest rate gap
to total assets		6.11	%		(6.73	)%		9.75	%		11.10	%
Rate sensitive assets to rate
Sensitive liabilities		1.12			0.25			2.69			1.23
Cumulative rate sensitive assets to
Rate sensitive liabilities		1.12			0.90			1.13			1.13

The above table shows that total assets maturing or repricing within three months exceeded liabilities maturing within the same time period by $93.2 million indicating that we are asset sensitive in this time horizon. To offset the asset sensitivity in this time horizon, we have entered into interest rate swaps that have the effect of converting $100.0 million in variable rate loans repricing in less than three months into fixed rate loans repricing in one to five years. The interest rate swaps are not reflected in the table above and are more fully discussed in Note 9 of the Consolidated Financial Statements.

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The above gap analysis is limited in that repricing and cash flows of various categories of assets and liabilities are subject to competitive pressures, consumer sentiments and other influences that are beyond our control. Gap analysis does not reflect these influences and also does not reflect the magnitude of interest rate changes on net interest income as a result of the various assets and liabilities shown as re-priceable within twelve months. As a result, various assets and liabilities indicated as maturing or repricing within a stated period may, in fact, mature or reprice in other periods or at different volumes.

We also utilize a simulation model 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 the same shifts in interest rates, as calculated by discounting the estimated future cash flows using a market-based discount rate.

The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of June 30, 2004 (dollars in thousands).

Interest Rate Scenario	Economic Value of Equity		Percent Change			Net Interest Income		Percent Change
Interest rates up 200 basis points	$	125,262		(8.11	)%	$	57,681		5.51	%
Interest rates up 100 basis points		132,632		(2.71			56,174		2.75
No change in interest rates		136,321		-			54,668		-
Interest rates down 100 basis points		139,247		2.15			52,575		(3.83	)
Interest rates down 200 basis points		144,852		6.26			49,110		(10.17	)

If interest rates were to increase, this analysis suggests that we are well-positioned for improvements in net interest income over the next twelve months. Further, our balanced sensitivity in time horizons beyond one year results in little fluctuation in EVE under the various rate shock scenarios.

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. The Company’s Chief Executive Officer and Chief Financial Officer, 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 Form 10-Q Quarterly Report, have concluded that the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the company, particularly during the period in which this Form 10-Q Quarterly Report was being prepared.

(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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Please refer to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, (Part II, Item 1 Legal Proceedings) for information concerning legal proceedings related to Trade Partners, Inc.

A lawsuit was filed in April 2003 by John and Kathryn Brand in Oklahoma state court against Grand Bank, the Company, Trade Partners and certain individuals and entities associated with Trade Partners. The complaint seeks damages for the asserted breach of certain escrow agreements for which Grand Bank served as custodian and escrow agent. The Company and Grand Bank have answered this complaint, denying the material allegations and raising certain affirmative defenses. No trial date has been set in this matter. In May 2003, a purported class action complaint was filed by Forrest W. Jenkins and Russell S. Vail against the Company and against LaSalle Bank Corporation in the United States District Court for the District of Western Michigan. The purported class included investors who invested in limited liability companies formed by Trade Partners. On November 6, 2003, the court permitted the plaintiffs to amend their complaint to expand the purported class to include all individuals who invested in Trade Partners viatical investments. The class has not been certified. The court stayed this action to avoid interference with the process of the receivership proceedings, though the stay was modified on July 19, 2004 to permit the Company and plaintiffs to engage in certain limited discovery directed to each other. The plaintiffs allege that Grand Bank breached certain escrow agreements, breached its fiduciary duties, acted negligently or grossly negligently with respect to the plaintiff’s investments and violated the Michigan Uniform Securities Act. The amended complaint seeks certification of the action as a class action, unspecified damages and other relief. The Company has answered this complaint denying the material allegations and raising certain affirmative defenses. The Company believes it has meritorious defenses and intends to vigorously defend both cases.

On April 15, 2003, the United States District Court for the Western District of Michigan appointed a receiver for Trade Partners. In order to prevent or minimize any loss to investors in the viaticals sold by Trade Partners to investors, the court appointed receiver has been coordinating the payment of premiums on the approximately 1,000 outstanding viaticated insurance policies in the Trade Partners portfolio so that the policies do not lapse. The receiver informed the Company that nine policies with a total face value of approximately $1.4 million have lapsed for failure to pay premiums prior to the receiver’s coordination efforts. In addition, about $700,000 is being contested as to lapses.

The receiver has received court permission to pool the death benefits of any of the Trade Partners viaticated policies that mature and use the benefits to pay premiums on other viaticated policies. In July 2004, the Receiver reported that he had received since the inception of the receivership cash payments for death benefit claims aggregating about $17 million, and had claims pending for an additional $1.8 million. He reported at the same time that he had paid premiums on the portfolio totaling approximately $6.3 million since the inception of the receivership. As of July 15, 2004, the receiver reported cash on hand in excess of $9.1 million. As additional viaticated policies mature, death benefits from those policies could provide a source of funding for continued premium payments.

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In addition, on July 1, 2003, the United States District Court for the Western District of Michigan authorized the receiver to borrow money from Macatawa Bank to pay premiums, if needed. Macatawa Bank has agreed to extend a $4 million line of credit to the receiver, conditioned upon obtaining a security interest in the viaticals. As of June 30, 2004 no draws had yet been made on the line of credit.

The receiver in June 2004 proposed a plan of distribution of the assets of Trade Partners. No hearing has yet been set on the plan, though one is likely to be held before the end of calendar year 2004. The receiver has received authorization from the Court to pursue a sale of those policies in the portfolio which were written on the lives of AIDs patients, but no such sale has yet been submitted to the Court for approval. The receiver has indicated that he is likely to seek to sell the rest of the portfolio at some point. It is not known whether such sales will take place or what the terms of any such sales would be. The Company has no information on the amount of distributions the receiver may propose to make to investors, or when such distributions might begin.

It is possible that one or more additional legal actions may be initiated involving the custodial and escrow agent services provided by Grand Bank in connection with Trade Partners. If any such legal actions are commenced, the Company intends to defend them vigorously. To the extent any pending or future claims allege errors or omissions on the part of Grand Bank or Macatawa Bank, Management believes that some or all liability, if any is proven or established, will be covered by errors and omissions insurance maintained by Grand Bank and Macatawa Bank. The Company has reported the Trade Partners matter to its two insurance carriers. One carrier has assumed the Company’s defense and has advanced a portion of its defense costs pursuant to a reservation of rights letter asserting certain coverage defenses, and an Interim Funding Agreement. The other carrier has taken the position that the duty of defense rests solely with the first carrier, and reserves its rights with respect to indemnity.

As of the date hereof, except as disclosed above, there were no material pending legal proceedings, other than routine litigation incidental to the business of banking to which we or any of our subsidiaries are a party of or which any of our properties are the subject.

Item 2. Changes in Securities and Use of Proceeds. None.

Item 3. Defaults Upon Senior Securities. None.

Item 4. Submission of Matters to a Vote of Securities Holders.

The annual meeting of shareholders was held on April 21, 2004, at which meeting the shareholders elected two directors.

Director Nominee:
John F. Koetje
Philip J. Koning Term Expires:
2007
2007 For:
6,945,418
6,943,088 Withheld:
208,613
210,943

Item 5. Other Information. None.

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Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits –

31.1  Certificate of the Chief Executive Officer of Macatawa Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2  Certificate of the Chief Financial Officer of Macatawa Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1  Certificate of the Chief Executive Officer and the Senior Vice President and Chief Financial Officer of Macatawa Bank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on 8-K

The Company filed a Form 8-K Item 12 disclosure dated April 19, 2004 containing a press release announcing the first quarter 2004 earnings.

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SIGNATURES

        In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, to be signed on its behalf by the undersigned, thereunto duly authorized.

MACATAWA BANK CORPORATION


/s/ Benj. A. Smith, III
——————————————
Benj. A. Smith, III
Chairman and Chief Executive Officer


/s/ Jon W. Swets
——————————————
Jon W. Swets
Chief Financial Officer
(Principal Financial and Accounting Officer)

DATE: August 6, 2004

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EXHIBIT INDEX

Exhibit Description

31.1 Certificate of the Chief Executive Officer of Macatawa Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certificate of the Chief Financial Officer of Macatawa Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certificate of the Chief Executive Officer and the Senior Vice President and Chief Financial Officer of Macatawa Bank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EXHIBIT 31.1

I, Benj. A. Smith III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Macatawa Bank Corporation;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and have:

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

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

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

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

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

Date: August 6, 2004
/s/ Benj. A. Smith, III
——————————————
Benj. A. Smith, III
Chief Executive Officer

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EXHIBIT 31.2

I, Jon W. Swets, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Macatawa Bank Corporation;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and have:

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

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

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

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

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

Date: August 6, 2004
/s/ Jon W. Swets
——————————————
Jon W. Swets
Chief Financial Officer

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EXHIBIT 32.1

Benj. A. Smith III, Chief Executive Officer of Macatawa Bank Corporation and Jon W. Swets, Senior Vice President and Chief Financial Officer of Macatawa Bank Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of Macatawa Bank Corporation.

Dated: August 6, 2004

/s/ Benj. A. Smith, III
——————————————
Benj. A. Smith, III
Chief Executive Officer


/s/ Jon W. Swets
——————————————
Jon W. Swets
Senior Vice President and Chief Financial Officer

34