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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

OR

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

For the transition period from _______ to _______

Commission file number: 000-25927

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

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

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [__]

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

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

INDEX

2

Part I Financial Information
Item 1.

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

See accompanying notes to consolidated financial statements

3

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

See accompanying notes to consolidated financial statements

4

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

See accompanying notes to consolidated financial statements

5

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

See accompanying notes to consolidated financial statements

6

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

See accompanying notes to consolidated financial statements

7

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

See accompanying notes to consolidated financial statements

8

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

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in Macatawa Bank Corporation’s (the “Company”) 2003 Annual Report containing financial statements for the year ended December 31, 2003.

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

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

NOTE 2 — PRINCIPLES OF CONSOLIDATION

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

9

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

NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS

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

NOTE 4 — EARNINGS PER SHARE

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

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

10

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

NOTE 5 — SECURITIES

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

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

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

NOTE 6 – LOANS

Loans were as follows (in thousands):

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

NOTE 7 - DEPOSITS.

Deposits are summarized as follows (in thousands):

12

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

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS

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

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

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

13

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

NOTE 9 – HEDGING ACTIVITIES

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

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

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

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

NOTE 10 — REGULATORY MATTERS

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

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required before it is able to accept brokered deposits. If a bank is undercapitalized, capital distributions are limited, as well as its asset growth and expansion, and the bank is required to implement plans for necessary capital restoration.

14

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

NOTE 10 — REGULATORY MATTERS (Continued)

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

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

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

15

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

NOTE 11 – CONTINGENCIES

The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business.

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

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

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

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

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Item 2.

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

Macatawa Bank Corporation is a Michigan corporation and is the holding company for two wholly owned subsidiaries, Macatawa Bank and Macatawa Investment Services, Inc. and for two trusts, Macatawa Statutory Trust I and Macatawa Statutory Trust II. Effective January 9, 2002, Macatawa Bank Corporation elected to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act. Macatawa Bank commenced operations on November 25, 1997. On April 1, 2002 Macatawa Bank Corporation acquired Grand Bank Financial Corporation (“GBFC”) and its wholly owned banking subsidiary, Grand Bank. Its results are included in the consolidated statements of income since this effective date. Grand Bank was merged into Macatawa Bank effective January 1, 2003 with the combined bank named Macatawa Bank. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The bank operates twenty-one branch offices and a lending and operational service facility, providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan. Macatawa Investment Services was formed in October 2001 and gained approval in June 2002 from NASD to commence operations as a broker/dealer. Macatawa Investment Services provides various services including discount brokerage, personal financial planning, and consultation regarding mutual funds and annuities. Macatawa Statutory Trusts I and II are grantor trusts and issued $20.0 million each of pooled trust preferred securities. These trusts are not consolidated in the Corporation’s financial statements. For further information regarding consolidation, see Note 2 to the Consolidated Financial Statements. Macatawa Bank Mortgage Company, a subsidiary of Macatawa Bank, originates and sells residential mortgage loans into the secondary market on a servicing released basis.

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

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

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

17

FINANCIAL CONDITION

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

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

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

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

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

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

18

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

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

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

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

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

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

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

19

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

RESULTS OF OPERATIONS

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

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

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

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

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

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