FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

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

For the transition period from _______ to ________

Commission file number 000-25927

MACATAWA BANK CORPORATION
(Exact name of registrant as specified in its charter)

10753 Macatawa Drive, Holland, Michigan 49424
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock.

Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  X  .

The registrant’s revenues for 2003 were $74,078,000. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on a per share price of $24.18 as of June 30, 2003, was $182,110,000 (common stock, no par value). As of March 4, 2004, there were outstanding 8,375,972 shares of the Company’s common stock (no par value). Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held April 21, 2004 are incorporated by reference into Part II and Part III of this Report.

PART I

ITEM 1: Business

        As used in this Annual Report, the terms “we,” “us,” “our” and “Macatawa” mean Macatawa Bank Corporation and its subsidiaries, unless the context indicates another meaning.

General

        Macatawa Bank Corporation is a Michigan corporation and is a financial holding company and the bank holding company for its wholly owned banking subsidiary, Macatawa Bank, as well as Macatawa Investment Services, Inc. and Macatawa Statutory Trust I. 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. Grand Bank was formed in 1987 and operated from a single location in Grand Rapids, Michigan. Grand Bank became a wholly owned subsidiary effective April 1, 2002 upon the completion of the acquisition of Grand Bank Financial Corporation (GBFC), and its results are included in the consolidated statements of income since this effective date. To achieve further synergies from the Grand Bank acquisition, we merged Grand Bank into Macatawa Bank effective January 1, 2003 with the combined bank named Macatawa Bank. At the same time, Grand Bank Mortgage Company was merged into Macatawa Bank Mortgage Company.

        Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The bank operates twenty branch offices and a lending and operational service facility offering commercial and personal banking services, including checking and savings accounts (including certificates of deposit), safe deposit boxes, travelers checks, money orders, trust services and commercial, mortgage and consumer loans 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 the NASD to commence operations as a broker/dealer. Macatawa Investment Services provides various brokerage services including discount brokerage, personal financial planning and consultation regarding mutual funds. Macatawa Statutory Trust I is a grantor trust that issued a pooled trust preferred security in July, 2003. Macatawa Bank Mortgage Company, a subsidiary of Macatawa Bank, originates and sells residential mortgage loans into the secondary market on a servicing released basis. As of December 31, 2003, we had total assets of $1.4 billion, total deposits of $1.1 billion, approximately 71,000 deposit accounts and shareholders’ equity of $121.9 million.

        Our headquarters and administrative offices are located at 10753 Macatawa Drive, Holland, Michigan 49424, and our telephone number is (616) 820-1444. Our internet website address is www.macatawabank.com. We make available free of charge through this website our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after filing such reports with the Securities and Exchange Commission. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

Products and Services

        Deposit Services. We offer a broad range of deposit services, including checking accounts, savings accounts and time deposits of various types. Transaction accounts and time certificates are tailored to the principal market area at rates competitive with those offered in the area. All deposit accounts are insured by the FDIC up to the maximum amount permitted by law. We solicit these accounts from individuals, businesses, associations, churches, nonprofit organizations, financial institutions and government authorities. We may also use alternative funding sources as needed, including advances from Federal Home Loan Banks, conduit financing and the packaging of loans for securitization and sale.

        Deposits are gathered primarily from the communities we serve through our network of 20 branches. We offer business and consumer checking accounts, regular and money market savings accounts, and certificates of deposits having many options in their terms.

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        We set our deposit pricing to be competitive with other banks in our market area. This has enabled us to increase deposits from new, as well as existing customers, while maintaining a healthy net interest margin. We periodically purchase brokered deposits to supplement funding needs. These are time accounts originated outside of our local market area. Brokered deposits comprised approximately 10% of total deposits at December 31, 2003 and approximately 12% at December 31, 2002. We operate in a very competitive environment, competing with other local banks similar in size and with significantly larger regional banks. We monitor rates at other financial institutions in the area to ascertain that our rates are competitive with the market. We also attempt to offer a wide variety of products to meet the needs of our customers.

        Deposit Portfolio Composition. The following table sets forth the average deposit balances and the weighted average rates paid thereon.

        The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity as of December 31, 2003:

(Dollars in thousands)

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      Lending Activities.

        Loan Portfolio Composition. The following table reflects the composition of our loan portfolio and the corresponding percentage of our total loans represented by each class of loans as of the dates indicated.

Loan Portfolio Composition

Nonperforming Assets. The following table shows the composition and amount of our nonperforming assets.

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Loan Loss Experience
The following is a summary of our loan balances at the end of each period and the daily average balances of these loans. It also includes changes in the allowance for loan losses arising from loans charged-off and recoveries on loans previously charged-off, and additions to the allowance which we have expensed.

Allocation of the Allowance for Loan Losses
The following table shows the allocation of the allowance for loan loss at the dates indicated to the extent specific allocations have been determined relative to particular loans.

(Dollars in thousands)

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        Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table shows the amount of total loans outstanding as of December 31, 2003 which, based on remaining scheduled repayments of principal, are due in the periods indicated.

(Dollars in thousands)

        Interest Sensitivity. Below is a schedule of the loan amounts maturing or repricing which are classified according to their sensitivity to changes in interest rates at December 31, 2003.

(Dollars in thousands)

        Residential Real Estate Loans. We originate residential mortgage loans, which are generally long-term with either fixed or variable interest rates. Our general policy, which is subject to review by our management as a result of changing market and economic conditions and other factors, is to sell in the secondary market the majority of residential mortgage loans originated. Residential mortgage loan originations derive from a number of sources, including advertising, direct solicitation, real estate broker referrals, existing borrowers and depositors, builders and walk-in customers. Loan applications are accepted at most of our offices. The substantial majority of these loans are secured by properties in our market area.

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        Our variable rate mortgage loans are fully amortizing loans with contractual maturities of up to 30 years. These loans generally carry interest rates which are reset to a stated margin over an independent index, generally the one-, three- or five-year constant maturity treasury index. Increases or decreases in the interest rate of our variable rate mortgage loans are generally limited to 2% annually with lifetime interest rate caps of 6% over the initial interest rate. Our variable rate mortgage loans may be convertible into fixed rate loans upon payment of a fee, do not contain prepayment penalties and do not produce negative amortization. Initial interest rates offered on our variable rate mortgage loans may be below the fully indexed rate, although borrowers are generally qualified at the fully indexed rate.

        We also offer fixed rate mortgage loans to owner occupants with maturities up to 30 years, which conform to secondary market standards. Interest rates charged on these fixed rate loans are priced on a daily basis according to market conditions. These loans generally do not include prepayment penalties. We currently sell in the secondary market, long-term, conforming fixed-rate loans with terms of 15 years or greater which we originated.

        Generally we originate residential mortgage loans with loan-to-value ratios not to exceed 80%. For loans with loan-to-value ratios in excess of 80%, we require private mortgage insurance in an amount sufficient to reduce our exposure to 80% or less of the lower of the appraised value or purchase price of the underlying collateral. In underwriting one- to four-family residential real estate loans, we evaluate both the borrower’s ability to make monthly payments and the value of the property securing the loan. Properties securing one- to four-family residential real estate loans that we made are appraised by independent fee appraisers. We require borrowers to obtain title insurance and fire, property and, if necessary, flood insurance.

        Multi-Family and Commercial Real Estate Loans. We originate permanent loans secured by multi-family and commercial real estate. Our permanent multi-family and commercial real estate loan portfolio includes loans secured by apartment buildings, condominiums, small office buildings, small business facilities, medical facilities and other non-residential building properties, substantially all of which are located within our primary market area.

        Permanent multi-family and commercial real estate loans have a maximum maturity of 10 years with an amortization period of up to 20 years. Most of these loans, however, have maturities of 5 years or less with amortization periods of 15 and 20 years. Multi-family loans and commercial real estate loans are written in amounts of up to 80% of the lesser of the appraised value of the property or the purchase price, and borrowers are generally personally liable for all or part of the indebtedness.

        Appraisals on properties securing multi-family and commercial real estate loans that we originate are primarily performed by independent appraisers who we designate at the time the loan is made. Management reviews all appraisals on multi-family and commercial real estate loans. In addition, our underwriting procedures generally require verification of the borrower’s credit history, income and financial statements, banking relationships, references, and historical and projected cash flows for the property that indicate minimum debt service coverage ratios.

        Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. For example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations, cash flow from the project will be reduced.

        Construction and Development Loans. We make construction loans to individuals for the construction of their residences. Construction loans are also made to builders and developers for the construction of one- to four-family residences and the development of one- to four-family lots, residential subdivisions, condominium developments and other commercial developments.

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        Construction loans to individuals for their residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs six to nine months. These construction loans have rates and terms which generally match one- to four-family loans then offered by us, except that during the construction phase, the borrower pays interest only. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans.

        Construction loans to builders of one- to four-family residences generally require the payment of interest only for up to one year with adjustable rates. These loans may also provide for the payment of loan fees from loan proceeds. We also make loans to builders for the purpose of developing one- to four-family lots and residential condominium projects. These loans typically have terms of two years or less with maximum loan to value ratios of 80%. These loans may provide for the payment of loan fees from loan proceeds. Loan principal is typically paid down as lots or units are sold.

        Construction and development loans are obtained principally through continued business from developers and builders who have previously borrowed from us, as well as referrals from existing customers. As part of the application process, the applicant must submit accurate plans, specifications and costs of the project to be constructed or developed to us. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building). Construction and development loans to borrowers other than owner-occupants involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. Further, because of the uncertainties inherent in estimating development and construction costs and the market for the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project.

        Commercial Business Loans. Our commercial business lending portfolio contains loans with a variety of purposes and security, including loans to finance operations and equipment. Generally, our commercial business lending has been limited to borrowers headquartered, or doing business, in our primary market area.

        Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

        Consumer Loans. We originate a variety of different types of consumer loans, including automobile loans, home equity lines of credit and installment loans, home improvement loans, deposit account loans and other loans for household and personal purposes. Our automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles. Loans secured by automobiles are generally originated for up to 80% of the National Automobile Dealers Association book value of the automobile securing the loan.

        Our home equity installment loans are written so that the total commitment amount, when combined with the balance of the first mortgage lien, generally will not exceed the greater of 80% of the appraised value of the property or 80% of two times the Michigan real estate assessment value. These loans have a maximum maturity of 5 years with an amortization period of up to 15 years, and carry fixed rates of interest.

        We also originate home equity lines of credit utilizing the same underwriting standards as for home equity installment loans. Home equity lines of credit are revolving line of credit loans. The majority of our existing home equity line of credit portfolio has adjustable rates, interest only payments and a maximum maturity of ten years.

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        The underwriting standards that we employ for consumer loans include a determination of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

        Securities.        Our security portfolio is classified as either “available for sale” or “held to maturity.” Securities classified as “available for sale” may be sold to meet our liquidity needs. The primary objective of our investing activities is to provide for the safety of the principal invested. Our secondary considerations include earnings, liquidity and decreased overall exposure to changes in interest rates.

Securities Portfolio

(Dollars in thousands)

        Excluding our holdings of the investment portfolio in U.S. Treasury and U.S. Government Agency Securities, we had no investments in securities of any one issuer which exceeded 10% of shareholders’ equity.

        Schedule of Maturities of Investment Securities and Weighted Average Yields. The following is a schedule of maturities and their weighted average yield of each category of investment securities we held at December 31, 2003.

(Dollars in thousands)

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        Trust Services. We began offering trust services in January 1999, to further provide for the financial needs of our customers. With the acquisition of Grand Bank in April 2002 our trust assets increased by over $500 million and as of December 31, 2003, the Trust Department had assets of approximately $1.00 billion. Our types of service include both personal trust and employee benefit plans.

Market Area

        Our market area of Ottawa, Kent and northern Allegan Counties are located in western Michigan. This area consists of two mid-sized cities, Grand Rapids and Holland, and rural areas. Grand Rapids is the second largest city in Michigan and Holland the largest city in Ottawa County. Both cities and surrounding areas have a solid and diverse economic base, which includes tourism, office furniture, automotive components and assemblies, pharmaceutical, transportation, equipment, food and construction supplies. Companies operating in the market area include Steelcase, Herman Miller, Alticor, Haworth, Johnson Controls, General Motors, Gerber, SPX, Magna Donnelly, and Meijer.

        Much of our success as a retail and small to mid-sized business lender has been due to our market area’s favorable population, housing and income demographics. Population within our three county market area grew by 20.6% from 1990 to 2002. Household income levels in our market area exceed state and national levels while unemployment levels are below state but above national levels.

Competition

        Our primary market area includes Ottawa County, northern Allegan County and southwestern Kent County, all located in Western Michigan. There are many bank, thrift and credit union offices located within our market area. Most are branches of larger financial institutions. We also face competition from finance companies, insurance companies, mortgage companies, securities brokerage firms, money market funds and other providers of financial services. Many of our competitors have been in business a number of years, have established customer bases, are larger and have higher lending limits than we do. We compete for loans principally through our ability to communicate effectively with our customers and to understand and meet their needs. Our management believes that our personal service philosophy enhances our ability to compete favorably in attracting individuals and small businesses. We actively solicit customers and compete for deposits by offering our customers personal attention, professional service, and competitive interest rates.

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Environmental Matters

        We do not believe that existing environmental regulations will have any material effect upon our capital expenditures, our earnings or our competitive position.

Employees

        As of December 31, 2003, we had 282 full-time and 105 part-time employees. We have assembled a staff of experienced, dedicated and highly qualified professionals whose goal is to provide outstanding service. The majority of our management team has at least 10 years of banking experience, and several key personnel have more than 20 years of banking experience. None of our employees is represented by collective bargaining agreements with us.

Acquisition of Grand Bank

        On April 1, 2002, Grand Bank Financial Corporation was merged into Macatawa Bank Corporation. Macatawa Bank Corporation became the holding company for Grand Bank. Effective January 1, 2003, Grand Bank was merged into Macatawa Bank.

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SUPERVISION AND REGULATION

        The following is a summary of certain statutes and regulations affecting Macatawa Bank Corporation and Macatawa Bank. This summary is qualified in its entirety by such statutes and regulations. A change in applicable laws or regulations may have a material effect on us and our business.

General

        Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, our growth and earnings performance can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the FDIC, the Commissioner of the Michigan Office of Financial and Insurance Services (“Commissioner”), the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.

        Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to us and our bank establishes a comprehensive framework for our respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, our depositors, and the public, rather than our shareholders.

        Federal law and regulations establish supervisory standards applicable to the lending activities of our bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.

        Macatawa Bank Mortgage Company, a subsidiary of Macatawa Bank, and Macatawa Investment Services, Inc., a subsidiary of Macatawa Bank Corporation, are subject to various state and federal regulations.

Macatawa Bank Corporation

        General.        On January 9, 2002, Macatawa Bank Corporation became a financial holding company, within the meaning of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”), and is registered with, and subject to regulation by, the Federal Reserve Board under the Bank Holding Company Act, as amended (the “BHCA”). Under the BHCA, we are subject to periodic examination by the Federal Reserve Board, and are required to file with the Federal Reserve Board periodic reports of our operations and such additional information as the Federal Reserve Board may require.

        In accordance with Federal Reserve Board policy, we are expected to act as a source of financial strength to Macatawa Bank and to commit resources to support Macatawa Bank in circumstances where we might not do so absent such policy. In addition, if the Commissioner deems Macatawa Bank’s capital to be impaired, the Commissioner may require Macatawa Bank to restore its capital by a special assessment upon us as the bank’s sole shareholder. If we were to fail to pay any such assessment, the directors of Macatawa Bank would be required, under Michigan law, to sell the shares of the bank’s stock owned by us to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the bank’s capital.

        Investments and Activities. In general, any direct or indirect acquisition by us of any voting shares of any bank which would result in our direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation between us and another financial holding company or bank holding company, will require the prior written approval of the Federal Reserve Board under the BHCA. No Federal Reserve Board approval is required for us to acquire a company, other than a bank holding company or bank, engaged in activities that are financial in nature as determined by the Federal Reserve Board.

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        The merger or consolidation of an existing bank subsidiary of ours with another bank, or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability by such a subsidiary to pay any deposits in another bank, will require the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the BHCA and/or the Commissioner under the Michigan Banking Code, may be required.

        Financial holding companies, like us, may engage in various lending, advisory, insurance and insurance underwriting, securities underwriting, dealing and market making, and merchant banking activities (as well as those activities previously approved for bank holding companies by the Federal Reserve Board) together with such other activities as may be determined by the Federal Reserve Board (in coordination with other regulatory authorities) to be financial in nature, incidental to any such financial activity, or complimentary to any such financial activity, and which do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. In order to maintain the benefits and flexibility of being a financial holding company, each of our subsidiary depository institutions must continue to be “well-capitalized” and “well-managed” under applicable regulatory standards and each subsidiary depository institution must maintain at least a satisfactory or above Community Reinvestment Act rating.

        Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

        The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total average assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders’ equity) to total average assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.

        Dividends.        Macatawa Bank Corporation is a corporation separate and distinct from Macatawa Bank. Most of our revenues are dividends paid by our bank. Thus, our ability to pay dividends to our shareholders is indirectly limited by statutory restrictions on our bank’s ability to pay dividends described below. Further, in a policy statement, the Federal Reserve Board has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over our bank are possessed by the FDIC. The “prompt corrective action” provisions of federal law and regulation authorizes the Federal Reserve Board to restrict the payment of dividends by us for an insured bank which fails to meet specified capital levels.

        In addition to the restrictions on dividends imposed by the Federal Reserve Board, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, like us, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution.

        Federal Securities Regulation. Our common stock is registered with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act provides for numerous changes to the reporting, accounting, corporate governance and business practices of companies as well as financial and other professionals who have involvement with the U.S. public markets. The SEC continues to issue new and proposed rules implementing various provisions of the Sarbanes-Oxley Act.

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Macatawa Bank

        General.        Macatawa Bank is a Michigan banking corporation, and its deposit accounts are insured by the Bank Insurance Fund (the “BIF”) of the FDIC. As a BIF insured Michigan chartered bank, Macatawa Bank is subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Michigan banks, and the FDIC, as administrator of BIF. These agencies and the federal and state laws applicable to our bank and its operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices. Grand Bank was also subject to the same supervision and regulation until its merger into Macatawa Bank effective January 1, 2003.

        Deposit Insurance. As an FDIC-insured institution, we are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their respective levels of capital and results of supervisory evaluation. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.

        The Federal Deposit Insurance Act (“FDIA”) requires the FDIC to establish assessment rates at levels which will maintain the Deposit Insurance Fund at a mandated reserve ratio of not less than 1.25% of estimated insured deposits. For several years, the BIF reserve ratio has been at or above the mandated ratio and assessments have ranged from 0% of deposits for institutions in the lowest risk category to .27% of deposits in the highest risk category. However, there is speculation that the reserve may fall below the mandated ratio resulting in increased assessments in 2003.

        FICO Assessments. Our bank, as a member of the BIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation (“FICO”). FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC’s Savings Association Insurance Fund (the “SAIF”) which insures the deposits of thrift institutions. From now until the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.

        Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to fund the operations of the Commissioner. The amount of supervisory fees paid by a bank is based upon the bank’s total assets, as reported to the Commissioner.

        Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, FDIC insured non-member banks, such as Macatawa Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders’ equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.

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        Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Federal regulations define these capital categories as follows:

        As of December 31, 2003, each of Macatawa Bank’s ratios exceeded minimum requirements for the well capitalized category.

        Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.

        In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.

        Dividends.        Under Michigan law, our bank is restricted as to the maximum amount of dividends it may pay on its common stock. Our bank may not pay dividends except out of net income after deducting its losses and bad debts. A Michigan state bank may not declare or pay a dividend unless the bank will have surplus amounting to at least 20% of its capital after the payment of the dividend.

        Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by our bank, if such payment is determined, by reason of the financial condition of our bank, to be an unsafe and unsound banking practice.

        Insider Transactions. Our bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to us or our subsidiaries, on investments in the stock or other securities of our or our subsidiaries and the acceptance of the stock or other securities of us or our subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by our bank to its directors and officers, to our directors and officers, the directors and officers of our bank, to our principal shareholders and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of our company or one of its subsidiaries or a principal shareholder in our company may obtain credit from banks with which our bank maintains a correspondent relationship.

        Safety and Soundness Standards. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

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        Investments and Other Activities. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC in accordance with federal law. These restrictions are not currently expected to have a material impact on the operations of our bank.

        Consumer Protection Laws. Our bank’s business includes making a variety of types of loans to individuals. In making these loans, we are is subject to State usury and regulatory laws and to various federal statutes, including the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act and regulations promulgated thereunder, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of our bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, our bank is subject to extensive regulation under State and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon our bank and its directors and officers.

        Branching Authority. Michigan banks have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals. Banks may establish interstate branch networks through acquisitions of other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

        Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Michigan Office of Financial and Insurance Services, Division of Financial Institutions, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.

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ITEM 2: Properties.

        We own or lease facilities located in Ottawa County, Allegan County and Kent County, Michigan. Our administrative offices are located at 10753 Macatawa Drive, Holland, Michigan 49424. Our administrative offices are approximately 49,000 square feet and contain our administration, human resources, trust, loan underwriting and processing, and proof and deposit operations.

        Our facilities as of March 1, 2004, were as follows:

        We believe our facilities are well-maintained and adequately insured. Because of our growth, we are continually evaluating the need for additional space and branches.

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ITEM 3: 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 plaintiffs may apply to the Court for relief from the stay after May 6, 2004. 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 has 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 estimated that approximately $13.4 million will be needed to pay premiums on the Trade Partners viaticals for the next two years. 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 January 2004, the Receiver reported that he had received since the inception of the receivership cash payments for death benefit claims aggregating about $12.1 million, and had claims pending for an additional $3.8 million. He reported at the same time that he had paid premiums on the portfolio totaling approximately $3.9 million since the inception of the receivership. As of January 15, 2004, the receiver reported cash on hand in excess of $8,200,000. As additional viaticated policies mature, death benefits from those policies could provide a source of funding for continued premium payments.

        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 December 31, 2003 no draws had yet been made on the line of credit.

        In April 2004 the receiver is to propose a plan of distribution of the assets of Trade Partners. We understand that the receiver is presently investigating a sale of the portfolio of insurance policies, but we do not know whether such a sale will take place or what the terms of any such sale would be. We do not know 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.

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        As 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 4: Submission of Matters to a Vote of Security Holders.

        No matters were submitted during the fourth quarter of 2003 to a vote of our shareholders.

ADDITIONAL ITEM: Executive Officers of the Registrant.

        The list below identifies those persons designated as executive officers of Macatawa Bank Corporation and Macatawa Bank.

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PART II

ITEM 5:                 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

        Our common stock has been quoted on the Nasdaq National Market since May 17, 2001. From December 27, 1999 through May 16, 2001, our common stock was quoted on the Nasdaq SmallCap Market. From the completion of our initial public offering in April 1998 through December 27, 1999, our common stock was quoted on the OTC Bulletin Board. High and low sales prices (as reported on the Nasdaq National Market) for each quarter are included in the following table. The information in the following table has been retroactively adjusted to reflect the effect of all stock dividends paid.

        On February 25, 2004, there were approximately 814 owners of record and, in addition, approximately 5,367 beneficial owners of our common stock.

        The Company declared its first cash dividend, amounting to $.06 per share, during the fourth quarter of 2000. Quarterly cash dividends totaling $.26 were paid during 2001, and a 3% stock dividend was declared during the second quarter of 2001. Quarterly cash dividends totaling $.32 were paid during 2002, and a 4% stock dividend was declared during the second quarter of 2002. Quarterly cash dividends totaling $.42 were paid during 2003, and a 5% stock dividend was declared during the second quarter of 2003. All of these cash dividend amounts have been retroactively adjusted to reflect the effect of the stock dividends.

        We intend to continue to declare quarterly cash dividends in the future. We may also consider declaring stock dividends on an annual basis. We are expecting to obtain the funds for the payment of future cash dividends from the dividends we receive from Macatawa Bank out of its earnings. However, there can be no assurance that we will have the financial resources to continue to pay dividends in the future.

ITEM 6:   Selected Financial Data.

        The information set forth under the caption “Selected Consolidated Financial Data” in our Annual Report to Shareholders for the year ended December 31, 2003, is incorporated by reference and is filed as part of Exhibit 13 to this form 10-K Annual Report.

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ITEM 7:   Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report to Shareholders for the year ended December 31, 2003, is hereby incorporated by reference and is filed as part of Exhibit 13 to this Form 10-K Annual Report.

ITEM 7A:   Quantitative and Qualitative Disclosures About Market Risk.

        The information set forth under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk Analysis” in our Annual Report to Shareholders for the year ended December 31, 2003, is hereby incorporated by reference and is filed as part of Exhibit 13 to this Form 10-K Annual Report.

ITEM 8:   Financial Statements and Supplementary Data.

        The information set forth under the captions “Quarterly Financial Data,” “Report of Independent Auditors,” “Consolidated Balance Sheets,” “Consolidated Statements of Income,” “Consolidated Statements of Changes in Shareholders’ Equity,” “Consolidated Statements of Cash Flow,” and “Notes to Consolidated Financial Statements” in our Annual Report to Shareholders for the year ended December 31, 2003, is hereby incorporated by reference and is filed as part of Exhibit 13 to this Form 10-K Annual Report.

ITEM 9:   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

        There have been no disagreements with our independent public accountants.

ITEM 9A:   Controls and Procedures.

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PART III

ITEM 10: Directors and Executive Officers of the Registrant.

        The information set forth on pages 4-5, under the caption “Information About Directors” and on page 13  under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement dated March 10, 2004, relating to our 2004 Annual Meeting of Shareholders and the information within that section is incorporated by reference. Information relating to our Executive Officers is included in Part I hereof entitled “Executive Officers of the Registrant.” There are no family relationships between or among the above-named executive officers. There are no arrangements or understandings between any of the above-named officers pursuant to which any of them was named an officer.

        We have adopted a Senior Officer Code of Ethics. A copy of our Senior Officer Code of Ethics is available upon request by writing to the Chief Financial Officer, Macatawa Bank Corporation, 10753 Macatawa Drive, Holland, Michigan 49424.

ITEM 11:   Executive Compensation.

        Information relating to compensation of our executive officers and directors is contained under the captions “Director Compensation” and “Executive Compensation,” in our definitive Proxy Statement dated March 10, 2004, relating to our 2004 Annual Meeting of Shareholders and the information within those sections is incorporated by reference.

ITEM 12:   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

        Information relating to security ownership of certain beneficial owners and management is contained on Page 2 under the caption “Voting Securities and Principal Holders Thereof” and on page 11 under the caption “Security Ownership of Management” in our definitive Proxy Statement dated March 10, 2004, relating to our 2004 Annual Meeting of Shareholders and the information within that section is incorporated by reference.

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Equity Compensation Plan Information

We maintain certain equity compensation plans under which common stock is authorized for issuance to employees, consultants and directors in exchange for services, including our Stock Compensation Plan, 1998 Directors’ Stock Option Plan, the Grand Bank Financial Corporation 1988 Stock Option Plan and the Grand Bank Financial Corporation Stock Option Plan of 1997.

The following table sets forth certain information regarding the above referenced equity compensation plans as of December 31, 2003. The following information has been adjusted to reflect the effect of all stock dividends.

Equity Compensation Plan Information

(1)     We had not granted warrants or rights applicable to this chart.

ITEM 13: Certain Relationships and Related Transactions.

        Information relating to certain relationships and related transactions is contained on page 12, under the caption “Transactions Involving Management” in our definitive Proxy Statement dated March 10, 2004, relating to our 2004 Annual Meeting of Shareholders and the information within that section is incorporated by reference.

ITEM 14: Principal Accountant Fees and Services.

        Information relating to principal accountant fees and services is contained on page 15, under the caption “Principal Accounting Firm Fees” in our definitive Proxy Statement dated March 10, 2004, relating to our 2004 Annual Meeting of Shareholders and the information within that section is incorporated by reference.

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PART IV

ITEM 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)     Financial Statements.

(b)     Reports on Form 8-K

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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, dated March 10, 2004.

MACATAWA BANK CORPORATION

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 10, 2004, by the following persons on behalf of the Registrant and in the capacities indicated. Each director of the Registrant, whose signature appears below, hereby appoints Benj. A. Smith, III and Philip J. Koning, and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K.

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EXHIBIT INDEX

Exhibit Number and Description

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Exhibit 10.3

EMPLOYMENT AGREEMENT

        This Employment Agreement (“Agreement”) is entered into as of this December 10, 2003, by and between BENJ. A SMITH III, a Michigan resident (“Smith”), and MACATAWA BANK CORPORATION, a Michigan corporation (“Company”). This Agreement supersedes and totally replaces a Consulting Agreement between the parties dated May 8, 2003. That prior agreement is terminated and is null and void.

RECITALS

        Smith is the founder of Macatawa Bank (the “Bank”) and the Company. He currently serves as the Chairman and Chief Executive Officer of the Company and the Chairman of the Bank and is employed by the Bank. He has been in the banking and investment business for many years and is knowledgeable in all phases of the business of the Company and the Bank, including financial, management and operational matters and is a key employee who has played a major role in the success of the Company and the Bank. Smith is planning to resign his position as Chief Executive Officer of the Company. However, it is expected that Smith will continue to be actively engaged as an employee of the Bank or the Company for some period of time and the Company wishes to have the benefit of Smith’s expertise and experience. The Company has also agreed that in the event of Smith’s death his family should have the benefit of the compensation provided in this Agreement even though Smith would not be available to serve the Company.

        References to a “Macatawa Entity” in this Agreement include the Company, the Bank and any other entity controlled by the Company or the Bank.

        Accordingly, the parties have entered into this Agreement.

        1.        Commitment. At such time as Smith resigns as the Chief Executive Officer of the Company, the Company shall cause the Bank to continue Smith as an employee on the terms set forth in this Agreement.

        2.        Term. The term of the employment arrangement shall begin on the date (“Commencement Date”) that Smith resigns as the Chief Executive Officer of the Company. This arrangement will expire six (6) years after the Commencement Date (“Expiration Date”) unless terminated earlier as provided in this Agreement.

        3.        Services. During the term that the services are to be performed, Smith shall provide services to the Bank and the Company as requested by the Board of Directors or senior management of the Bank or the Company from time to time. Such services may include advice and consultation with respect to any and all phases or aspects of the Bank’s or the Company’s business or operations. Neither the Company nor the Bank has an obligation to use such services.

        4.        Availability. Smith shall make himself available to perform services at reasonable times during ordinary business hours. It is understood and agreed, however, that such performance of such services shall not require Smith’s full-time or his physical presence at the Bank or Company offices but shall be sufficient if provided by telephone, by letter or e-mail advice or by meetings with Bank or Company officials and others at such place or places as may be mutually convenient and acceptable to the Bank or the Company and Smith.

        5.        Compensation. As compensation for Smith holding himself available for and performing services during the term of this Agreement, the Company shall pay or cause the Bank to pay to Smith, Twelve Thousand Five Hundred Dollars ($12,500) per month beginning as of the Commencement Date. In the event of Smith’s death before the Expiration Date, these payments shall continue to be made until the Expiration Date to Smith’s wife, or if she is deceased to Smith’s living children in equal shares. The Company or the Bank shall also promptly reimburse Smith for reasonable expenses that he incurs in connection with performing his services upon submission of proper verification to the Company as to the nature and amount of those expenses. Smith shall not be entitled to participate in the Company’s or the Bank’s health, medical, hospitalization, dental or disability plans. Smith shall be eligible to participate in the Company’s Stock Compensation Plan.

        6.        Termination. The service obligations of Smith and the Company’s payment obligations shall terminate:

        For purposes of this Agreement, no act or failure to act on Smith’s behalf shall be considered “willful” unless done, or admitted to be done, by him not in good faith and unless he knew or should have known that his action or admission was not in, or was opposed to, the best interests of a Macatawa Entity; provided, that any act or omission to act on Smith’s behalf in reliance upon an opinion of counsel to the Company or counsel to Smith shall not be deemed to be willful. Smith shall not be deemed to have been terminated for cause unless or until there shall have been delivered to him a copy of the certification of a majority of the non-officer members of the Company’s Board of Directors finding that, in the good faith opinion of such majority, Smith was guilty of conduct deemed to be cause and specifying the details thereof, after reasonable notice to Smith and an opportunity for him, together with his counsel, to be heard before such majority.

        Notwithstanding any other provision of this Agreement, if this Agreement is terminated pursuant to this Section 6, the Company shall not be liable to Smith for any cost or obligation, except as may have been earned by Smith prior to the date of the termination.

        7.        Severability. The parties believe that every provision of this Agreement is effective and valid under applicable law, and whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid. If any provision of this Agreement is held, in whole or in part, to be invalid, the remainder of such provision and this Agreement shall remain in full force and effect, with the offensive term or condition being stricken to the extent necessary to comply with any conflicting law.

        8.        Waiver. No provision of this Agreement shall be waived by any party hereto, unless such waiver is in a writing, signed by a duly authorized representative of the party against whom such waiver is sought to be enforced. A waiver by either party of any breach or failure to comply with any provision of this Agreement by the other party shall not be construed as or constitute a continuing waiver of such provision or a waiver of any other breach of or failure to comply with any other provision of this Agreement.

        9.        Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties and their respective heirs, personal representatives, successors and assigns.

        10.        Amendment. This Agreement may not be amended or modified except by the further written agreement of Company and Smith.

        11.        Notice. All notices hereunder shall be sent by telefax or by U.S. Mail, by mailing such notice in the Untied States mail, first-class postage prepaid, registered or certified mail, return receipt requested to the other party at the last known address of such party or at such other address as a party shall from time to time designate in writing to the other party.

        12.        Applicable Law; Jurisdiction; Venue. The terms and conditions of this Agreement shall be governed, construed, interpreted and enforced in accordance with the domestic laws of the State of Michigan, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Michigan or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Michigan. Any and all actions concerning any dispute arising hereunder shall be filed and maintained in the Circuit Court of Ottawa County, Michigan or the federal district court for the Western District of Michigan. The parties specifically consent and submit to the jurisdiction and venue of such state or federal court.

        13.        Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement. The provisions of this Agreement shall supersede all contemporaneous oral agreements, communications and understandings and all prior oral and written communications, agreements and understandings between the parties with respect to the subject matter of this Agreement. Each party acknowledges that no representation, inducement or condition not set forth herein has been made or relied upon by either party.

        IN WITNESS WHEREOF, Company and Smith have executed this Agreement as of the Effective Date, intending to be legally bound.

Exhibit 10.5

INVESTMENT MANAGEMENT AGREEMENT

        This INVESTMENT MANAGEMENT AGREEMENT (“the Agreement”) is made and entered by and between SMITH & ASSOCIATES INVESTMENT MANAGEMENT SERVICES, a Michigan corporation of Holland, Michigan (referred to as the “Adviser”), and the undersigned (referred to as the “Client”).

        The Adviser is registered with the Securities and Exchange Commission as an investment adviser pursuant to the Investment Adviser Act of 1940, as amended (The “Advisers Act”). The Adviser renders investment advisory and supervisory services.

        The Client is a bank formed under the laws of the State of Michigan.

        The Client desires to obtain the Adviser’s services. The parties have, therefore, entered into this Agreement which describes all of the terms and conditions under which the Adviser’s services will be rendered to the Client.

        In consideration of the mutual covenants and agreements contained in this Agreement, the parties agree as follows:

APPOINTMENT AND AUTHORITY OF THE ADVISER

        1.        The Client hereby appoints and engages the Adviser, and the Adviser hereby accepts the appointment and engagement, as an investment adviser and investment manager with respect to the assets set forth in Exhibit A to this Agreement (referred to as the “Fund”) together with assets added to the Fund and excepting assets deleted from the Fund.

        2.        In order to perform its services under this Agreement, the Adviser is hereby granted, and shall have and exercise in its sole discretion, the power and authority to do the following with regard to the Fund without the prior approval of the Client; provided, however, that all actions by the Adviser shall be consistent with the Client’s Asset Liability Policy and any other applicable policies of the Bank:

Notwithstanding the foregoing, the Client shall have the final authority over investment decisions and the Adviser will comply with instructions given by the Client.

SERVICES OF THE ADVISER

        3.        Based upon the information provided by the Client and other information available to the Adviser, the Adviser may from time to time prepare and update investment guidelines for consideration by the Client. The Client has the ultimate responsibility and authority to approve its Asset Liability Policy and related guidelines.

        4.        Adviser agrees to manage the Fund and exercise the powers and authority granted under this Agreement in accordance with the then current Asset Liability Policy of the Client or other applicable Client policies. If the Client instructs the Adviser to make specific investments or to follow specific investment guidelines other than those recommended by the Adviser, then the Adviser shall be relieved from responsibility for prudency, suitability, and diversification of investments made pursuant to such instructions.

        5.        The Adviser shall use its best efforts to obtain the best rate of return on the Fund that is consistent with applicable law, the Client’s Asset Liability Policy, any other investment guidelines of the Client then in effect and the Adviser’s duties or responsibility to the Client. The Adviser shall maintain a true and accurate account of all transactions made with respect to the Fund. The Adviser shall render to the Client a periodic written statement at least monthly of investment activity and current investments at fair market values determined in accordance with Section 16 of this Agreement.

        6.        The Adviser shall advise the Client regarding interest rates, current trends and forecasts of future interest rates.

        7.        The Adviser shall attend regularly scheduled Asset Liability Committee (ALCO) meetings of the Client to review investment activity and to consult regarding interest rates, investments and related matters.

        8.        The Adviser will perform required regulatory investment testing.

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        9.        The duties, responsibilities, and obligations of the Adviser are limited to those expressly provided in this Agreement or imposed by law. The Adviser shall not be liable for the accuracy of any information furnished by the Client, by the Client’s custodian, or by any other person not a party to this Agreement. The Client hereby appoints the Adviser as the agent of the Client with full power during the continuance of this Agreement to vote as proxy all Fund assets that are subject to the Employee Retirement Income Security Act. The Adviser shall not be required to take any action or render any advice with respect to shareholder voting rights with regard to Fund assets that are not subject to the Employee Retirement Income Security Act. The Adviser shall not have custody or possession of any of the Funds’ cash, securities, property, or evidences of ownership.

TRANSACTION PROCEDURES

        10.        The Adviser is required to obtain the prior approval of the Client to take any action regarding the assets listed in Exhibit B to this Agreement or interest, dividends or proceeds therefrom. Instructions, approvals or authorizations by the Client may be communicated to the Adviser in accordance with Section 29 of this Agreement (mail or facsimile) or verbally, by telephonic communication or e-mail to the Adviser. Verbal or telephonic instructions, approvals or authorizations by the Client regarding Exhibit B assets shall be promptly confirmed by the Adviser. Upon receipt of such confirmation, the Client shall immediately raise any objection. The Client’s failure to so object shall be deemed to be final and conclusive approval of the transaction described in the confirmation. The Advisor may communicate with the Client regarding confirmations or changes in the assets of the Fund in accordance with Section 29 of this Agreement (mail or facsimile) or by e-mail to the Client.

        11.        The Adviser shall have discretion as to the selection of securities brokers, real estate brokers, securities dealers, insurance agents, banks, financial institutions, securities issuers, and the like, for the execution of transactions on behalf of the Client, unless otherwise directed by the Client in Exhibit C to this Agreement. In the event that the Client directs the Adviser to use a particular broker or dealer, the Adviser may not have the ability to negotiate commissions and may not be able to obtain volume discounts or best execution. In addition, under those circumstances, a disparity may exist between the commissions charged to Clients who direct the Adviser to use a particular broker or dealer and other Clients who do not direct the Adviser to use a particular broker or dealer.

        12.        Securities transactions for the Client may be aggregated with securities transactions for other clients of the Adviser in order to obtain a better execution. The Adviser may cause the Client and other clients to pay a brokerage commission which is higher than commissions generally available in recognition of the value of services provided to the Adviser by a particular broker or dealer; provided, that such services shall be obtained in accordance with Rule 28 (e) promulgated under the Securities Exchange Act of 1934, as amended. Services obtained in connection with securities transactions for the client may also benefit other clients of the Adviser.

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        13.        All transactions for the Fund will be consummated by payment to or from, or delivery to or from, the Client or the Client’s custodian. The Client or the Client’s custodian shall have custody and possession of all the Fund’s cash, securities, property, or evidences of ownership. The Adviser shall issue instructions for the settlement of transactions initiated pursuant to this Agreement in writing or orally and promptly confirmed in writing. The Adviser shall instruct all brokers, dealers, and issuers executing orders on behalf of the Fund to forward to the Client or the Client’s custodian copies of all transaction confirmations.

COMPENSATION

        14.        In consideration for its services under this Agreement, the Adviser shall be compensated based on the aggregate fair market value of the Fund as determined in accordance with Section 13. The fee schedule is as follows:

        The minimum annual fee is $5,000, however exceptions may be made at the discretion of the Adviser. Fees may differ from the published schedule if agreed upon by the Client and the Adviser. The aggregate fair market value of assets in related accounts may be combined when fees are calculated. The above fee schedule may be modified by mutual agreement. Clients invested in mutual funds may pay multiple Advisory fees i.e., fees and expenses of the mutual fund as disclosed in the fund’s prospectus in addition to the Advisory fees of the Adviser for managing the assets invested in mutual funds. The client or the Client’s custodian shall be responsible for all commissions and fees of brokers, dealers, agents, issuers and the like. Such commissions and fees are not the responsibility of the Adviser and are not included in the above fee schedule.

        15.        Fees shall be computed and billed quarterly in advance. The fee due will be paid 7 days after receipt of the Adviser’s invoice, unless an objection has been received from the Client. Compensation for advice with respect to matters not directly involving the management of the Fund is not included in these management fees and shall be billed separately at a rate of $300 per hour payable within 10 days of receipt of the Adviser’s invoice. The Adviser will notify Client in advance if the Adviser believes any requested advice does not relate to management of the Fund.

        16.        For all purposes of this Agreement, the aggregate fair market value of investments in the Fund shall be the sum of the following as determined on the last day of each fiscal quarter:

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REPRESENTATIONS AND WARRANTIES

        17.        The Client represents and warrants to the Adviser that:

        18.        The Adviser represents and warrants to the Client that:

COMPLIANCE WITH LAWS

        19.        The Client and the Adviser each represent and warrant to the other that its actions with respect to the Fund are and shall be in accordance with all applicable law and regulation, including without limitation, the Advisers Act.

LIABILITY AND INDEMNIFICATION

        20.        The Adviser shall not be liable for any loss or diminution of the Fund, except to the extent that such loss or diminution results from any act or omission of the Adviser which is judicially determined to be a breach of its duties under this Agreement or under applicable law and regulation. The Client understands that there can be no assurance of the success or profitability of particular investments or investment strategies. The Client acknowledges that the Adviser has not made any express or implied representation, warranty, promise, or guaranty of the rate of return that may be earned with respect to the Fund.

        21.        The Adviser and its directors, officers, employees, and agents shall not be liable for any act or omission by the Client, its agents, or any person not a party to this Agreement, or any act or omission by the Adviser at the direction of the Client or its agents, including, without limitation, the use or withdrawal of funds from the Fund for any purpose, except as prescribed by law.

        22.        The Client shall indemnify and hold harmless the Adviser or its directors, officers, employees, and agents from any liability incurred by the Adviser or its directors, officers, employees, and agents by reason of any direct or indirect act, omission, or instruction of the Client or its agents.

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TERMINATION AND ASSIGNMENT

        23.        This Agreement may be terminated at any time by either party upon written notice of termination. Termination shall be effective 30 days following receipt of such notice. Fees paid in advance will be prorated to the date of termination, and any unearned portion will be refunded to the Client.

        24.        Neither this Agreement nor the Adviser’s responsibilities under this Agreement shall be assigned or delegated by the Adviser without the written consent of the Client.

MISCELLANEOUS

        25.        This Agreement shall be binding upon and inure to the exclusive benefit of the parties to this Agreement and their successors. No person not a party to this Agreement shall derive any benefit whatsoever from this Agreement except as provided by law.

        26.        Nothing in this Agreement shall prevent the Adviser from rendering services to any person other than the Client. The Client understands that the Adviser and its directors, officers, employees, and agents may from time to time recommend, hold, buy, sell, or trade securities and other investments for their own respective accounts or the accounts of others. These investments may be the same or different from those investments recommended, held, bought, sold or traded by or on behalf of the Client.

        27.        In the event that the Adviser or its directors, officers, employees, or agents should obtain so-called “inside information” with respect to an issuer of securities, the Adviser shall have no obligation to use such information for the benefit of the Client which would violate any federal or state securities laws or regulations. The Client agrees to keep, and to cause its agents to keep, any of the Adviser’s recommendations and advice confidential.

        28.        The Adviser shall be entitled to presume the validity and due authorization of any approval, instruction, notice, authorization or communication by and on behalf of the Client if given in accordance with Section 10 by the person or persons identified in Exhibit D to this Agreement.

        29.        With the exception of communications between the Client and the Adviser pursuant to Section 10 of this Agreement, all communications with respect to this Agreement shall be in writing and shall be deemed made when (a) hand delivered to the address below or in Exhibit D, (b) sent by first-class mail, postage prepaid, addressed to the other party at the address appearing below or in Exhibit D, or (c) sent by facsimile transmission to the number appearing below or in Exhibit D. The addresses and numbers shown below or in Exhibit D may be modified by written instructions given in accordance with the forgoing requirements. Notice by hand delivery shall be effective upon delivery. Notice by mail shall be effective upon mailing. Telefax communications shall be effective upon receipt.

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        Notices to Smith & Associates:

                SMITH & ASSOCIATES
                106 E. 8th Street
                Holland, Michigan 49423
                Telephone:    (616) 396-0119
                Facsimile:    (616) 396-2381

        Notices to Client:

                Macatawa Bank
                Attn: Chief Financial Officer
                10753 Macatawa Drive
                Holland, Michigan 49424
                Telephone:    616-494-7645
                Facsimile:    616-494-7644

        30.        Federal and State securities laws may impose liabilities under certain circumstances on persons who act in good faith. Nothing in this Agreement will waive or limit any rights that Client may have under Federal and State securities laws.

        31.        The parties agree that any action or proceeding arising out of this Agreement or the services of the Adviser pursuant to this Agreement shall be commenced, if at all, in the Circuit Court for the County of Ottawa and State of Michigan or in the Federal District Court for the Western District of Michigan. The parties agree and consent to such courts exercising personal jurisdiction over each of them with respect to any such action or proceeding. The construction, validity, enforcement, and performance of this Agreement shall be governed by the laws of the State of Michigan, including the period of limitations provided thereby, subject to any superseding federal law.

        32.        If any provision of this Agreement is rendered unenforceable under applicable law, the remaining provisions of this Agreement shall continue in effect as though the invalid provision were not part of this Agreement. In this Agreement wherever a word is used in the singular form, it may also be construed as though used in the plural form. Headings are inserted for convenience of reference only and shall not affect the meaning of any provision.

        33.        The Agreement constitutes the entire agreement and understanding of the parties. The Agreement shall control as between the Client and the Adviser over any other agreement affecting the rights and obligations between the parties whether executed before or after this Agreement, excepting written amendments to this Agreement. Except to the extent provided in the Agreement, the Agreement may only be amended in a writing executed by both parties. The Agreement may be executed in any number of counterparts. Each counterpart shall be deemed to be an original and all of which shall constitute one and the same instrument.

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        34.        The Client hereby acknowledges receipt of a copy of the Adviser’s investment adviser disclosure statement. This disclosure statement generally describes the nature and scope of the Adviser’s services as an investment adviser. This is the information required by Part II of Form ADV which is on file with the Securities and Exchange Commission.

        35.        The Client shall, upon request, execute and deliver to the Adviser letters of authority, substantially in the form as contained in Exhibit E to this Agreement, evidencing the Adviser’s powers and authority under this Agreement. The Client consents to the disclosure of this Agreement to any person with whom the Adviser may transact business on behalf of the Client.

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the 11th day of March, 2004.

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EXHIBIT A

ASSETS CONSTITUTING THE FUND

        The following assets constitute the “Fund” for purposes of this Agreement:

Investment securities of Macatawa Bank, excluding the stock of the Federal Home Loan Bank (FHLB)

Other Assets

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EXHIBIT B

TRANSACTIONS REQUIRING PRIOR APPROVAL

        The following transactions or kinds of transactions shall require the prior approval of the Client:

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EXHIBIT C

DESIGNATED PERSONS TO EFFECT TRANSACTIONS

        The Adviser is hereby directed to use the following brokers, dealers, or agents for the transactions described below:

All brokers, dealers and agents must be approved under the policies of Macatawa Bank

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EXHIBIT D

PERSONS AUTHORIZED TO ACT FOR THE CLIENT

        The Client does hereby appoint the following person, persons or entities as Client’s attorney-in-fact to do all things that Client could do if personally present with regard to all matters arising under the Investment Management Agreement:

The Chief Financial Officer of Macatawa Bank and any other persons designated by the Chief Financial Officer.

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EXHIBIT E

(Date)

Gentlemen:

        This shall confirm the appointment of Smith & Associates Investment Management Services, a Michigan corporation (the “Adviser”), as investment adviser and investment manager for the above-noted account (“the Account”). The Adviser has discretionary authority as agent and attorney-in-fact on behalf of the Account to execute and deliver any order for the purchase, sale, exchange, or conversion or other transaction for securities or other investments with any registered representative of any brokerage firm, bank, or other financial institution authorized to purchase or sell securities on the New York Stock Exchange, American Stock Exchange, Midwest Stock Exchange, or any other stock exchange or market, including the over-the-counter market, and to act in private transactions, as the Adviser deems to be in the best interests of the Account.

Very truly yours,

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EXHIBIT 13

Selected Consolidated Financial Data

The following selected consolidated financial and other data are derived from the Company’s Financial Statements and should be read with the Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Consolidated Balance Sheets as of December 31, 2003 and 2002, and the Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001, are included elsewhere in this Annual Report.

(Dollars in thousands, except share and per share data)

*Retroactively adjusted to reflect the effect of all stock dividends

Quarterly Financial Data (unaudited)

A summary of selected quarterly results of operations for the years ended December 31, 2003 and 2002 follows:

(Dollars in thousands, except per share data)

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in such forward-looking statements.

The following section presents additional information to assess the financial condition and results of operations of the Company. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this Annual Report.

Overview

Macatawa Bank Corporation is a Michigan corporation and is the holding company for three wholly owned subsidiaries, Macatawa Bank, Macatawa Investment Services, Inc., and Macatawa Statutory Trust I. 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 formed in 1987 and operated from a single location in Grand Rapids, Michigan. To achieve further synergies from the Grand Bank acquisition, the Company merged Grand Bank 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 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 Trust I is a grantor trust that issued a pooled trust preferred security in July, 2003. 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 $80.6 million in capital through private and public common stock offerings and a trust preferred offering to facilitate our growth and progress over these years. In conjunction with the acquisition of 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. As such, 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 $150 million each year. During 2003 core deposits grew by 23% to a total of $996.8 million.

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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 northeast side of the city during the fourth quarter, bringing our total number of branches in the greater Grand Rapids area to seven. We plan to open at least three more branches in this area within the next 18 months. 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 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.

Financial Condition

Summary.
The consolidated financial statements include the effect of the acquisition of GBFC which was effective April 1, 2002. A schedule of the significant GBFC assets and liabilities acquired is contained in Note 2 to the Consolidated Financial Statements.

The acquisition was accounted for using the purchase method of accounting. As a result, certain purchase accounting adjustments were required to record the acquired assets and liabilities at market value. The value of the purchase accounting adjustments is being amortized over the respective lives of the varying assets and liabilities.

Based on SFAS 142, “Goodwill and Other Intangible Assets”, we have recorded intangible assets for the estimated value of core deposit accounts and trust customer accounts acquired in the acquisition. The intangible values represent the present value of the estimated net revenue streams attributed to the respective intangibles. The intangible assets acquired are valued using certain assumptions for alternative cost of funds, lives of respective core deposits or trust customers, discount rates and other applicable assumptions. The total of both core deposit intangibles and trust customer intangibles was $3.7 million, and is being amortized on an accelerated basis over 10 years.

The balance of the acquisition price in excess of the fair market value of assets and liabilities acquired, including intangible assets, was recorded as goodwill and totaled $23.9 million. Under SFAS 142, goodwill is defined as an intangible asset with an indefinite useful life, and as such, is not amortized, but is required to be tested annually for impairment of the value. If impaired, an impairment loss must be recorded for the value equal to the excess of the asset’s carrying value over its fair value.

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The amount of goodwill recorded in this transaction relative to the smaller amounts of identified intangible assets and lack of intangibles related to loan and deposit customer lists reflects that the value of GBFC related primarily to the foundation it provides to further build our presence in the Grand Rapids market. The value of this foundation lies with the GBFC workforce, their customer service orientation and their relationships within the community. The amount of the core deposits intangible asset recorded is small relative to the total purchase price and reflects that the GBFC deposit portfolio was weighted towards higher interest rate account types.

Our total assets were $1.40 billion at December 31, 2003, an increase of $224.5 million from $1.18 billion in total assets at December 31, 2002. We believe the continued strong asset growth reflects the acceptance of our community banking philosophy in the growing communities we serve. Our asset growth consists primarily of growth in our loan portfolio as we continue to attract new loan customers despite the strong competition from other locally based community banks and larger regional banks. The asset growth was primarily in earning assets of loans and securities, but also included increased cash, premises, and equipment. The increase in total assets was principally funded by strong deposit growth. Deposits grew by $188.5 million during 2003, a 20% growth rate. Additional borrowings were used to a lesser extent to supplement the funding provided by deposits. We attribute the strong deposit growth to our quality customer service, the desire of our customers to bank with a local bank, and convenient accessibility through the expansion of our branch network.

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Cash and Cash Equivalents.
Our cash and cash equivalents, which include federal funds sold and short-term investments, were $60.0 million at December 31, 2003, as compared to $47.9 million at December 31, 2002. The increase was a result of high customer deposit activity right at the end of 2003 causing an investment in federal funds sold until these funds are deployed into higher yielding assets.

Securities.
Securities increased $19.5 million to $109.7 million at December 31, 2003 from $90.2 million at December 31, 2002. Securities increased due to purchasing additional securities as a means of balancing our interest rate risk. Primarily fixed rate securities were purchased to offset growth in variable rate loans. These securities were also purchased to support our liquidity. We expect continued growth of our securities portfolio generally consistent with the growth of our company in order to help balance our interest rate risk and maintain appropriate levels of liquidity.

Loan Portfolio.
Our total loan portfolio increased to $1.16 billion at December 31, 2003, from $961.0 million at December 31, 2002. We also had loans held for sale of $4.1 million at December 31, 2003, as compared to $18.7 million at December 31, 2002. Loans grew by $196.1 million during 2003 continuing our consistent pattern of growth. The majority of loans we make are to small and mid-sized businesses in the form of commercial and commercial real estate loans. Our combined commercial loans accounted for approximately 73% of our total portfolio loans at both December 31, 2003 and 2002. Our residential real estate loan portfolio, which also includes residential construction loans made to the individual homeowners, comprised approximately 15% of portfolio loans. However, our residential loan origination volume is significantly higher, with only a small portion of residential home loans retained for our own portfolio. We sell the majority of fixed-rate obligations and do not retain servicing. We originated for sale $305.6 million in residential mortgages in 2003, $240.8 million in 2002, and $135.6 million in 2001. The lower overall market interest levels experienced during 2003 and 2002 resulted in significantly higher levels of residential refinancing and loan originations during these years as compared to 2001. Our consumer loan portfolio includes both loans secured by personal property, as well as home equity fixed term and line of credit loans. Consumer loans comprised approximately 12% of our portfolio loans as of December 31, 2003. Approximately 89% of our home equity loans are underwritten at terms of a loan to value ratio of less than 90%, and are considered well collateralized. The types of loans and mix of the GBFC portfolio was very similar to our portfolio and as a result the overall mix of the combined loan portfolio did not change significantly upon acquisition in 2002. We anticipate further growth in the loan portfolio due to continuing opportunities within our market area.

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Nonperforming Assets.
Nonperforming assets are comprised of nonperforming loans and foreclosed assets. Our nonperforming loans include loans on non-accrual status, restructured loans, as well as loans delinquent more than 90 days, but still accruing. Nonperforming loans as of December 31, 2003 totaled $4.0 million compared to $2.8 million at December 31, 2002. One credit relationship comprised approximately one half of the balance in nonperforming loans at the end of 2003. While still paying, this borrower’s weak financial condition warranted concern, and therefore the loan was placed in non-accrual in 2002 and remained in this status throughout 2003. For the remaining portion of our nonperforming loans we are well-collateralized or we have written the loan down to a level commensurate with the estimated value of the underlying collateral. Our loan performance is reviewed regularly by an external loan review team, our own loan officers, and our senior management. When reasonable doubt exists concerning collectibility of interest or principal of one of our loans, that loan is placed in non-accrual status. Any interest previously accrued but not collected at that time is reversed and charged against current earnings. Foreclosed assets include assets acquired in settlement of loans. As of December 31, 2003 foreclosed assets totaled $468,000 compared to $446,000 as of December 31, 2002. Total nonperforming assets amounted to $4.5 million as of December 31, 2003 and represented .32% of total assets, a level well below historical peer averages.

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

Loan Loss Experience
The following is a summary of our loan balances at the end of each period and the daily average balances of these loans. It also includes changes in the allowance for loan losses arising from loans charged-off and recoveries on loans previously charged-off, and additions to the allowance which we have expensed.