Exhibit 13

March 9, 2006

To Our Shareholders:

We
are very pleased to report that Macatawa Bank completed its seventh straight year of
strong growth and profitability in 2005. In a highly competitive marketplace, we continue
to add new customers who appreciate our local focus, exceptional customer service,
competitive rates and innovative products.

For
the year just ended, Macatawa again achieved record results and we wanted to share a few
of the highlights with you:

| | o | Our
 earnings  per share were $2.00 for 2005,  an increase  of 61 percent  over 2004 -and a
record for the bank.
| | - | ----------------------------------------------------------------------------------------------------------------

| | o | Our
return on equity increased 51 percent to 15.30 percent  again, another record.
| | - | -----------------------------------------------------------------------------------

| | o | Our
return on assets increased 41 percent to 1.17 percent  a new high for Macatawa.
| | - | ------------------------------------------------------------------------------------

| | o | Our
number of accounts grew approximately 10 percent, showing continued market growth.
| | - | --------------------------------------------------------------------------------------

| | o | We
provided a payroll in excess of $17.4 million for West Michigan residents, employing more
than 450 full- and part-time workers in 26 locations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

These
exceptional results allowed us to share the benefits of our success with you through
dividend increases. For the fifth time in five years, we increased our dividend. The
latest was a 20 percent increase to $0.18 per share per quarter. In addition to our
traditional five percent stock dividend, we also paid shareholders a special one-time 10
percent stock dividend in 2005.

The
stock market has responded favorably to our results and to the strength of our business
model. Macatawas stock rose 30 percent during 2005 at a time when many large banks
found their share prices stagnant or declining. While we cannot control the markets or the
movement of our stock price, we believe that if we perform well and share those rewards
with our shareholders, the market will look on us favorably. That was certainly the case
in 2005. Macatawa Bank has come a long way since our inception in 1997, and we owe that to
our relationships  with our customers, our employees, the communities in which we
operate and with you, our shareholders.

# BUILDING ON OUR
RELATIONSHIPS: Growing Geographically

The
strength of these relationships has allowed us, in only eight years, to become the number
one bank in Ottawa County based on market share. During 2005, we continued to invest in
the lakeshore, relocating our Main Street Zeeland branch in order to capture more business
from this dynamic community.

---



Additionally,
we broke ground on a new branch on Eighth Street in downtown Holland, which underscores
our commitment to maintain a strong and visible presence in this key community. We are
both pleased and humbled to be named the top Ottawa County bank, for the second
consecutive year. We will continue working to both deserve and grow our leadership role in
this important market.

At
the same time, we want to expand and strengthen our presence in Kent County, where we see
tremendous growth potential. While the area is home to many banks, we feel that
Macatawas brand of service is unique  and appeals to both personal and
business customers.

Our
goal is to become the dominant player in this market and we will continue to dedicate
significant resources to translate this vision into a reality. In June 2005, we opened a
new branch in Rockford, making it our 10th location in the greater Grand Rapids area.

We
are well underway with our 2006 expansion plans. We have already broken ground on a new
Jenison office  our second in that growing community. Our storefront location in
Byron Center will be relocating to a new full-service branch later this year. In addition,
we are finalizing plans on two other strategic locations that will allow us to expand both
our geographic footprint and the strength of the Macatawa name.

# BUILDING ON OUR
RELATIONSHIPS: Growing our Products and
Services

Listening
to the market and responding with innovative products and services gives Macatawa an edge
in competing for new customers. We take customer feedback to heart and use it to expand
our product offerings.

During
2005, we launched several new initiatives that have already been well received in the
market:

| | o | Health
Savings Accounts: Macatawa is one of the first banks in West Michigan to offer health
savings accounts, or HSAs. An HSA allows individuals to set aside funds to pay for
healthcare expenses on a pre-tax basis. As rising healthcare costs remain a concern for
everyone, HSAs have become a popular and economical way for handling payments. We are
very pleased that area health service providers endorse our program, which assists
greatly in our marketing efforts.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Homeowner
CD: We recognize that saving for a home or a home improvement project can be a daunting
task. To make the process more manageable, we introduced the Homeowners CD, a five-year
certificate of deposit with a competitive rate. This program makes it easier for
customers to set aside as little as $25 at a time toward a down payment or home
improvement.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Reverse
Mortgages: Again, Macatawa is one of the first banks in the area to offer a reverse
mortgage. A reverse mortgage allows seniors to take out a loan against the equity in
their home. Unlike a traditional mortgage, the reverse mortgage has the lender making
payments to the homeowner. This product increases the funds available to seniors so they
may enjoy their retirement years to the fullest.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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We
are currently developing and evaluating new products and services, with the intention of
expanding our offerings in 2006. We plan to continue focusing on ways to increase our non
interest revenue. As the pressure on net interest margins intensifies, it will be
particularly important for us to diversify our revenue sources and develop new products
that provide value for our customers.

# BUILDING ON OUR
RELATIONSHIPS: Encouraging Personal
Growth

When
you walk into a Macatawa Bank office, it is our sincere hope that you feel a true
difference, from the moment you are welcomed until your transaction is completed.

It
is often the little things that distinguish great service from good service. Macatawa is
small enough so that our tellers get to know you personally and whether your children
prefer grape or root beer lollipops. Yet we are big enough to offer a broad and
sophisticated array of products and services that meet the changing financial needs of
both individuals and businesses.

We
empower our employees to serve customers and solve their problems. We invest in our
employees through ongoing training to ensure that new employees absorb the Macatawa
culture  and all employees embrace our culture every day. We are committed to grow
from within through leadership programs that allow our employees to stretch and reach new
challenges.

Macatawa
Bank is a great place to work. We have an unparalleled staff who is friendly, caring and
professional. They are simply the best at what they do. Key to that, is their dedication
to providing extraordinary customer service at every level throughout our organization.

We
owe so much of the growth and success of Macatawa Bank in the past eight years to this
wonderful team and the relationships they have forged in the community. To give you a
better understanding of how these issues are intertwined, we thought we would let our
customers tell you in their own words just what a difference Macatawa Bank employees have
made in their lives.

Thank
you again for your continued confidence and support.

|/s/ Benj. A. Smith III
BENJAMIN A. SMITH IIICHAIRMAN & CEO / MACATAWA BANK CORPORATION | /s/ Philip J. Koning
PHILIP J. KONINGPRESIDENT & CEO / MACATAWA BANK
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------

---



# 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 Results of Operations and Financial
Condition. The Consolidated Balance Sheets as of December 31, 2005 and 2004, and the
Consolidated Statements of Income for the years ended December 31, 2005, 2004, and 2003,
are included elsewhere in this Annual Report.

|As of and For the Year Ended December 31    
|--------------------------------------------
|                                            
|
|                                            
|Financial Condition                         
|Total assets                                
|Securities                                  
|Loans                                       
|Deposits                                    
|FHLB advances                               
|Shareholders' equity                        
|                                            
|Share Information*                          
|Basic earnings per common share             
|Diluted earnings per common share           
|Book value per common share                 
|Dividends per common share                  
|Weighted average dilutive shares outstanding
|Shares outstanding at end of period         
|                                            
|Operations                                  
|Interest income                             
|Interest expense                            
|Net interest income                         
|Provision for loan losses                   
|Net interest income after provision         
|for loan losses                             
|Total noninterest income                    
|Total noninterest expense                   
|Income before tax                           
|Federal income tax                          
|Net income                                  
|                                            
|Performance Ratios                          
|Return on average equity                    
|Return on average assets                    
|Yield on average interest-earning assets    
|Cost on average interest-bearing liabilities
|Average net interest spread                 
|Average net interest margin                 
|Efficiency ratio                            
|                                            
|Capital Ratios                              
|Equity to assets                            
|Total risk-based capital ratio              
|                                            
|Credit Quality Ratios                       
|Allowance for loan losses to total loans    
|Nonperforming assets to total assets        
|Net charge-offs to average loans            

*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, 2005 and 2004 follows:

|Three Months Ended              
|--------------------------------
|                                
|                                
|                                
|2005                            
|Interest income                 
|Net Interest income             
|Provision for loan losses       
|Income before income tax expense
|Net income                      
|                                
|Net income per share*           
|Basic                           
|Diluted                         
|                                
|2004                            
|Interest income                 
|Net Interest income             
|Provision for loan losses       
|Income before income tax expense
|Net income                      
|                                
|Net income per share*           
|Basic                           
|Diluted                         

Net income for the third quarter of
2004 includes the impact of a $2.3 million ($1.5 million after-tax, or $0.15 per share)
charge against earnings related to the one borrower whose loans became impaired as
described in Note 4 of the financial statements.

*Retroactively adjusted to reflect
the effect of all stock dividends.

2

---



# Managements
Discussion and Analysis of Results of Operations and Financial Condition

Managements discussion and
analysis of results of operations and financial condition 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 results of operations and financial condition 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 two wholly owned subsidiaries,
Macatawa Bank and Macatawa Investment Services, Inc. and for two trusts, Macatawa
Statutory Trust I and Macatawa Statutory Trust II. Macatawa Bank Corporation is a
financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act. Macatawa Bank
is a Michigan chartered bank with depository accounts insured by the Federal Deposit
Insurance Corporation. The bank operates twenty-three 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 is a broker/dealer providing 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 the Notes to the Consolidated Financial Statements included herein.
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 of 1997. We first became profitable in 1999 and have increased
earnings each year since then with 2005 net income reaching $20.9 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.

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.

The West Michigan markets within
which we operate continue to provide significant expansion opportunities for us. We opened
our tenth branch in the Kent County market on the north side of the greater Grand Rapids
area during the second quarter of 2005. Because of the significance of the greater Grand
Rapids market and as it represents the greatest opportunity for market share growth, we
anticipate additional branch openings in this market within the next few years. We also
continue to enjoy success in building new and existing relationships in the
Holland/Zeeland area, 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.

3

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# RESULTS OF OPERATIONS

Summary:Net income totaled
$20.9 million, or $2.00 per diluted share for 2005 as compared to $12.8 million, or $1.24
per diluted share for 2004, and $11.8 million, or $1.15 per diluted share for 2003. The
results for 2004 include a charge against earnings of $2.3 million ($1.5 million after
tax), or approximately $0.15 per share, for a loss associated with the impaired commercial
loan relationship described under Loan Portfolio and Asset Quality.

The increase in net income
principally reflects strong growth in our net interest income due to our continuing growth
in interest earning assets, partially offset by increases in noninterest expense.

Net Interest Income:Net
interest income totaled $62.8 million during 2005 compared to $52.0 million during 2004
and $42.1 million during 2003. The 21% growth in net interest income during 2005 compared
to 2004 was driven by significant growth in average interest earning assets which
increased by $219.0 million, or 15%, to $1.65 billion for 2005. The net interest margin
increased 17 basis points to 3.81% for 2005, also contributing to the growth in net
interest income. The increases in short-term interest rates that began in mid-2004 were a
primary reason for the increase in the net interest margin.

The yield on earning assets increased
90 basis points to 6.37% for 2005 from 5.47% for 2004. The primary reason for this
increase was the rise in the yield on our variable rate loan portfolio. The increases in
short-term interest rates that began in mid-2004 continued throughout all of 2005 causing
the increase in variable rate loan yields. The addition of new loans at generally higher
rates during this period also contributed to the increase in asset yield. The increase in
the yield on earning assets was offset by an 80 basis point increase in our overall cost
of funds to 2.87% for 2005. The primary reasons for the increase can be attributed to
higher rates paid on our deposit accounts, the rollover of time deposits to higher rates
within the rising rate environment during 2005, and a shift to higher costing sources of
funds, primarily time deposits. Part of the increase in time deposits was from the use of
brokered time deposits to support the growth in assets during the year. In addition, the
rates paid on retail time deposits reached levels in 2005 that had not been seen in the
past few years, causing deposit customers to shift funds from transaction accounts,
primarily money market accounts, into the higher rate time accounts.

The 24% growth in net interest income
during 2004 compared to 2003 was also largely driven by significant growth in average
interest earning assets which increased by $273.0 million, or 24%, to $1.43 billion for
2004. The net interest margin was relatively flat, increasing 1 basis point to 3.64% for
2004.

During a period of historically low
rates that began during 2003 and remained throughout all of 2004, the decline in the yield
on earning assets of eight basis points in 2004 compared to 2003 was offset by a
corresponding decline of 12 basis points in the overall cost of funds. A shift to lower
costing transaction accounts, primarily money market accounts, also contributed to the
decline in the cost of funds during 2004.

Anticipated growth in earning assets
is expected to continue to increase levels of net interest income. We do not, however,
anticipate changes in short-term interest rates to have as much of an impact on our net
interest margin considering our balanced sensitivity. We continue to maintain derivative
instruments, as discussed in the Notes to the Consolidated Financial Statements, to help
balance our interest rate risk sensitivity considering our significant variable rate loan
portfolio. This is discussed in further detail under the section Sensitivity to Market
Risk.

4

---



The following table shows an analysis
of net interest margin for the years ended December 31, 2005, 2004 and 2003.

|                                                                                 | For the years ended December 31,
|-------------------------------------------------------------------------------- | --------------------------------
|                                                                                 |                                 
|                                                                                 |                                 
|                                                                                 |                                 
|                                                                                 |                                 
|                                                                                 |                                 
|Assets:                                                                          |                                 
|Taxable securities                                                               |                                 
|Tax-exempt securities (1)                                                        |                                 
|Loans (2)                                                                        |                                 
|Federal Home Loan Bank stock                                                     |                                 
|Federal funds sold and other short-term                                          |                                 
|investments                                                                      |                                 
|                                                                                 |                                 
|Total interest earning assets (1)                                                |                                 
|                                                                                 |                                 
|Noninterest earning assets:                                                      |                                 
|Cash and due from banks                                                          |                                 
|Other                                                                            |                                 
|                                                                                 |                                 
|Total assets                                                                     |                                 
|                                                                                 |                                 
|                                                                                 |                                 
|Liabilities and Shareholders' Equity:                                            |                                 
|Deposits:                                                                        |                                 
|NOW and money market accounts                                                    |                                 
|Savings                                                                          |                                 
|IRAs                                                                             |                                 
|Time deposits                                                                    |                                 
|Borrowings:                                                                      |                                 
|Federal Home Loan Bank advances                                                  |                                 
|Long-term debt                                                                   |                                 
|Federal funds borrowed and other                                                 |                                 
|borrowed funds                                                                   |                                 
|                                                                                 |                                 
|Total interest bearing liabilities                                               |                                 
|                                                                                 |                                 
|Noninterest bearing liabilities:                                                 |                                 
|Noninterest bearing demand accounts                                              |                                 
|Other noninterest bearing liabilities                                            |                                 
|                                                                                 |                                 
|Shareholders' equity                                                             |                                 
|                                                                                 |                                 
|Total liabilities and                                                            |                                 
|Shareholders' equity                                                             |                                 
|                                                                                 |                                 
|                                                                                 |                                 
|Net interest income                                                              |                                 
|                                                                                 |                                 
|Net interest spread (1)                                                          |                                 
|Net interest margin (1)                                                          |                                 
|Ratio of average interest earning assets to average interest bearing liabilities |                                 

---

|(1) | Yields are adjusted for tax-exempt interest.
|--- | --------------------------------------------

|(2) | Loan fees included in interest income are not material. Nonaccrual loans are
          included in average loans outstanding.
|--- | -----------------------------------------------------------------------------------------------------------------------------

5

---



The following table presents the
dollar amount of changes in net interest income due to changes in volume and rate.

|                              | For The Year Ended December 31
|----------------------------- | ------------------------------
|                              |                               
|(Dollars in thousands)        |                               
|                              |                               
|                             
|                              |                               
|                              |                               
|                              |                               
|Interest income               |                               
|Taxable securities            |                               
|Tax-exempt securities         |                               
|Loans                         |                               
|FHLB stock                    |                               
|Fed funds sold and other      |                               
|short-term investments        |                               
|                              |                               
|Total interest income         |                               
|                              |                               
|Interest expense              |                               
|NOWs and MMDAs                |                               
|Savings                       |                               
|IRAs                          |                               
|Time deposits                 |                               
|FHLB advances                 |                               
|Long-term debt                |                               
|Fed funds purchased and other |                               
|borrowings                    |                               
|                              |                               
|Total interest expense        |                               
|                              |                               
|Net interest income           |                               
|                              |                               

Provision for Loan Losses: The
provision for loan losses for 2005 was $3.7 million as compared to $7.9 million for 2004
and $4.1 million for 2003. For 2004, the provision for loan losses includes a $2.3 million
additional provision for the one commercial borrower described below under Portfolio Loans
and Asset Quality. When excluding this specific provision, the provision for loan losses
in 2005 still declined by $1.9 million primarily due to slower loan growth in 2005
compared to 2004. The amount of the loan loss provision in all periods is a byproduct of
establishing our allowance for loan losses at levels deemed necessary in our methodology
for determining the adequacy of the allowance. For more information about our allowance
for loan losses and our methodology for establishing its level, see the discussion under
the section Allowance for Loan Losses.

Noninterest Income:Noninterest income totaled $13.0 million during 2005, as compared to $10.0during 2004 and $10.2 million in 2003. The $3 million or 30% improvement over 2004
included increases in all individual components with the exception of trust fees which
were unchanged. Deposit service charge income increased $1.4 million or 46% and was the
primary reason for the increase in noninterest income. An overdraft privilege service
implemented at the beginning of the second quarter of 2005 continues to be well received
and is largely the reason for the increase in deposit service charge income. The increase
in deposit service charges of $398,000 or 16% during 2004 reflects the continued expansion
of our deposit customer account base as we have grown.

6

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Revenues from trust services were
unchanged at $2.9 million for 2005 and 2004 compared to $2.5 million for 2003. Trust fees
are, to a great extent, based on the underlying values of trust assets managed. Although
we are gaining new trust customers each year, fees remained relatively flat in 2005 due to
a decline in the market valuation of securities held in the trust accounts.

Other income increased $1.5 million
in 2005 and $564,000 in 2004. The increase in other income for both years included
increases in miscellaneous fee categories associated with volume increases as we have
grown. These fee categories include debit card and ATM processing income, revenues from
mutual fund and annuity sales, and income from title insurance sales. The increase in 2005
also included an additional $499,000 of income earned on bank-owned life insurance
purchased during the fourth quarter of 2004. Also included in other income for 2005 was
$348,000 in gains on the sale of two commercial properties, one previously held as other
real estate.

Gain on sales of loans primarily
includes gains on the sale of real estate mortgage loans, and to a lesser extent, gains on
the sale of the SBA guaranteed portion of certain commercial loans. We sell the majority
of the fixed-rate mortgage loans we originate. We do not retain the servicing rights for
the loans we sell. A summary of gain on sales of loans and related volume is as follows:

|For The Year Ended December 31                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|Gain on the sale of SBA guaranteed loans                                                                                         
|Net gain on the sale of real estate mortgage loans                                                                               
|                                                                                                                                 
|Gain on sales of loans                                                                                                           
|                                                                                                                                 
|                                                                                                                                 
|Real estate mortgage loans originated for sale                                                                                   
|Real estate mortgage loans sold                                                                                                  
|Net  gain on the  sale of real  estate  mortgage
loans as a percent of real  estate  mortgage  loans sold  ("Loan  sales margin")

Gain on sales of loans increased
$129,000 in 2005 compared to 2004, while 2004 decreased $1.5 million compared to 2003. The
generally higher levels of longer-term interest rates in 2005 and 2004 resulted in
significantly lower levels of residential refinancing and loan originations than in 2003
when longer-term interest rates reached historic lows and related refinancing activity was
at record highs. An improvement in the loan sales margin received on residential loans
sold during both 2005 and 2004 slightly offset the significant decline in volume since
2003. The general improvement in our loan sales margin since 2003 reflects an improvement
in our competitive position with our secondary market investors and greater discipline in
our pricing practices. Since mortgage interest rate levels have generally increased from
their historic lows in 2003, we expect the volume of originations going forward to be more
consistent with 2005 and 2004 levels.

Noninterest Expense:Noninterest expense totaled $41.4 million for 2005 as compared to $35.4 million for
2004 and $30.6 million for 2003. Salaries and benefits increased $3.2 million in 2005 over
2004 and $2.8 million in 2004 over 2003, comprising the majority of the increase in both
years.

The increase in salaries and benefits
for 2005 and 2004 is primarily related to additional staffing in each line of business and
in support departments consistent with growth of the Bank. Increased incentives associated
with strong performance also contributed to the increase in salaries and benefits during
2005. The increase in salaries and benefits for 2004 also reflects an increase in staffing
for the five new full-service branches that were opened during the period since the fourth
quarter of 2003 through the end of 2004. The consistent increase in salaries and benefits
reflects our attention to properly managing and supporting our growth and our interest in
creating a platform for strong future growth.

7

---



The increase in occupancy expense of
$586,000 in 2005 and $311,000 in 2004 and the increase in furniture and equipment expense
of $207,000 in 2005 and $180,000 in 2004 are consistent with our branch and facilities
expansion during these periods. We would expect the level of increase in these expense
categories to moderate and be commensurate with our plans for future branch expansion.

The increase in marketing and
promotion expense of $415,000 in 2005 and $264,000 in 2004 is consistent with the growth
in our company, and our interest in creating a more significant presence in the markets we
serve.

Data processing fees were up $510,000
in 2005 and $275,000 in 2004. In September of 2004, we outsourced our item processing
function which was the primary reason for the increase in 2005 and also contributed to the
increase in 2004. We expect future increases to decline and be more consistent with the
Companys growth.

Other expense increased $980,000 in
2005 and $1.1 million in 2004. The increase in both periods includes increases in various
expense categories consistent with the growth of our company. These categories include
expenses associated with debit card and ATM processing, customer and internal courier,
outside services, travel and state taxes. The increases for both 2005 and 2004 include
expenses associated with the implementation and additional ongoing costs of Section 404 of
the Sarbanes-Oxley Act.

Despite the increases in noninterest
expense, growth in net interest and noninterest revenues continue to outpace operating
expenses. The efficiency ratio has improved over the past three years, declining from
58.52% in 2003 to 57.04% in 2004 to 54.62% in 2005.

Federal Income Tax Expense:Our federal income tax expense has increased generally commensurate with our increase
in pre-tax earnings. Our federal income tax expense is lower than the amount computed by
applying our statutory federal income tax rate to our pre-tax earnings primarily due to
tax-exempt interest income. Our effective tax rate was 32.1%, 31.9% and 32.9% in 2005,
2004 and 2003, respectively.

# FINANCIAL CONDITION

Summary:Our total assets were
$1.87 billion at December 31, 2005, an increase of $197.4 million from $1.67 billion in
total assets at December 31, 2004. We believe the continued strong asset growth reflects
the acceptance of our full-service 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 and deepen relationships with existing customers
despite the strong competition from other locally based community banks and larger
regional banks. Total portfolio loans increased $151.5 million or 11% during 2005. The
growth in total assets also included growth in our cash and due from banks, investment
securities portfolio, and premises and equipment.

The increase in total assets was
principally funded by deposit growth. Deposits grew by $156.3 million during 2005, a 12%
growth rate. We attribute the deposit growth to our quality customer service, the desire
of our customers to bank with a locally run bank, and convenient accessibility through the
expansion of our branch network.

Cash and Cash Equivalents: Our
cash and cash equivalents, which include federal funds sold and short-term investments,
were $49.1 million at December 31, 2005, as compared to $31.7 million at December 31,
2004. The high balance at the end of 2005 was due to a large inflow of customer deposits
that occurred right at the end of the year.

8

---



Securities:Securities
increased $20.8 million or 15% to $160.6 million at December 31, 2005 from $139.8 million
at December 31, 2004. We maintain our security portfolio at a level to provide diversity
in the nature of our assets, to support our liquidity needs and to balance our interest
rate risk. Our portfolio consists primarily of high quality U.S government agency and
state and local municipal bonds classified as available for sale. These securities are
generally purchased at fixed rates to help offset the interest sensitivity of our variable
rate loan portfolio. We expect continued growth of our securities portfolio generally
consistent with the growth of our company to maintain the diversity of our assets and
support our liquidity and interest rate risk management.

Loan Portfolio and Asset Quality:Our total loan portfolio increased to $1.55 billion at December 31, 2005 from $1.40
billion at December 31, 2004. The $151.5 million increase in portfolio loans continues our
consistent pattern of growth. Each of our loan portfolios, including commercial and
commercial real estate, residential real estate and consumer loans grew during 2005,
however, the strongest growth was in the commercial and commercial real estate portfolios,
which grew by 14%. We believe the continued growth we have experienced in each of our loan
portfolios is a result of our focus on providing high quality customer service and
reflects the acceptance of our full-service community banking philosophy in the growing
communities we serve.

The majority of loans that we retain
in our portfolio are to small and mid-sized businesses in the form of commercial and
commercial real estate loans. Our combined commercial loan portfolios accounted for
approximately 74% and 73% of our total portfolio loans at December 31, 2005 and 2004,
respectively. The $1.15 billion in commercial and commercial real estate loans at December
31, 2005 represents an increase of $137.9 million over the $1.02 billion at December 31,
2004. We feel the consistent growth in commercial loans that we have been able to achieve
reflects the acceptance of our lending approach by our customers and the ability of our
lending team to respond to their needs effectively. Our commercial loan department is
built around a well-seasoned officer team and our lending approach involves an efficient
loan approval process focused around local decision-making.

The residential real estate portfolio
increased from $219.0 million at December 31, 2004 to $223.4 million at December 31, 2005.
Our residential real estate loan portfolio, which also includes residential construction
loans made to individual homeowners, comprised approximately 14% of portfolio loans at the
end of 2005. Our residential real estate portfolio represents only a small portion of our
residential origination loan volume, as we sell the majority of our fixed-rate obligations
on the secondary market with servicing released to reduce our exposure to interest rate
risk. We originated for sale $137.0 million in residential mortgages in 2005, $141.7
million in 2004, and $305.6 million in 2003. Loans held for sale were $2.3 million at
December 31, 2005 as compared to $3.2 million at December 31, 2004. The generally higher
levels of longer-term interest rates in 2005 and 2004 resulted in significantly lower
levels of residential refinancing and loan originations as compared to 2003 when
longer-term interest rates were at historic lows and related refinancing activity was at
record highs.

9

---



Our consumer loan portfolio includes
both loans secured by personal property, as well as home equity fixed term and line of
credit loans. Our consumer loan portfolio increased to $171.5 million at December 31, 2005
from $162.4 million at December 31, 2004. Consumer loans comprised approximately 11% of
our portfolio loans at the end of 2005.

As we continue to leverage our
expansive branch network and strengthen our presence in the markets we serve, we
anticipate further growth in each of our loan portfolios consistent with our historical
growth patterns.

Nonperforming assets are comprised of
nonperforming loans, foreclosed assets and repossessed assets. Our nonperforming loans
include loans on non-accrual status, restructured loans and loans delinquent more than 90
days but still accruing. Nonperforming loans as of December 31, 2005 totaled $4.2 million
or 0.27% of total portfolio loans compared to $4.0 million or 0.29% of total portfolio
loans at December 31, 2004.

The balance of nonperforming loans at
the end of 2005 consists of a number of smaller commercial loans on nonaccrual for which
we are considered to be well collateralized or adequately reserved. The majority of
nonperforming loans at the end of 2004 related to one commercial borrower. The loans
associated with this borrower became impaired due to fraud perpetrated by the borrower.
The borrower has since ceased operations. Proceeds from the liquidation of collateral,
payments on outstanding receivables and additional charge-offs reduced our balances from
this relationship to approximately $229,000 at the end of 2005, from $2.3 million at
year-end 2004.

Our loan portfolio 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 is reversed and charged against current earnings.

Foreclosed assets include assets
acquired in settlement of loans. As of December 31, 2005 foreclosed assets totaled
$527,000 compared to $1.9 million as of December 31, 2004. The balance at the end of 2004
related to one piece of commercial real estate for which no loss was experienced upon
disposition.

Total nonperforming assets amounted
to $4.9 million or 0.26% of total assets as of December 31, 2005 compared to $5.9 million
or 0.35% of total assets as of December 31, 2004. The following table shows the
composition and amount of our nonperforming assets.

|As of December 31                                  
|---------------------------------------------------
|                                                   
|                                                   
|                                                   
|Nonaccrual loans                                   
|Loans 90 days or more delinquent and still accruing
|Restructured loans                                 
|                                                   
|                                                   
|Total nonperforming loans                          
|                                                   
|                                                   
|Foreclosed assets                                  
|Repossessed assets                                 
|                                                   
|                                                   
|Total nonperforming assets                         
|                                                   
|                                                   
|Nonperforming loans to total loans                 
|Nonperforming assets to total assets               

10

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Allowance for Loan Losses: Our
allowance for loan losses as of December 31, 2005 was $21.0 million, representing
approximately 1.36% of total portfolio loans outstanding, compared to $19.3 million or
1.38% of total loans at December 31, 2004.

Our allowance for loan losses is
maintained at a level considered 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, 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 $333,000 at December 31, 2005 and $923,000 at
December 31, 2004. The specific allowance at the end of 2004 was primarily related to the
one commercial loan borrower previously described under Portfolio Loans and Asset Quality.

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. Because of the relatively unseasoned nature of our loan portfolio and
the rapid loan growth we have experienced since inception, our actual historical loan loss
experience remains limited. Accordingly, our loss factors are primarily based upon our
analysis of the banking industrys historical loan loss experience, including the
historical loan loss experience within the current markets we operate. These factors are
monitored against our loss experience as our portfolios age, 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 approximately $18.6 million
at December 31, 2005 and $16.4 million at December 31, 2004. The increase of $1.7 million
in the allowance for loan losses during 2005 was primarily related to this $2.2 million
increase in the formula allowance. The increase in the formula allowance is primarily
associated with the continuing growth in the commercial loan portfolio.

Groups of homogeneous loans, such as
residential real estate, open- and closed-end consumer loans, etc., receive general
allowance allocations 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 probable losses associated with 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 $2.1 million at December 31, 2005 and $1.7 million at December 31, 2004.

The continued increase in the
allowance was deemed necessary given the significant growth in loans. However, the
allowance for loan losses as a percent of total loans declined from 1.38% to 1.36%. A
reduction in reserves necessary for impaired loans and a general improvement in the credit
quality of our commercial loan portfolio were the main reasons for the decline. Based upon
our internal analysis, in our judgment, we have provided adequate allowances for loan
losses, although there can be no assurance that the allowance for losses on loans will be
adequate to cover all losses.

11

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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.

|As of December 31        
|-------------------------
|                         
|(Dollars in thousands)   
|                         
|                         
|                         
|Commercial and commercial
|real estate              
|Residential real estate  
|Consumer                 
|Unallocated              
|                         
|Total                    
|                         

The above allocations are not
intended to imply limitations on usage of the allowance. The entire allowance is available
for any loan losses without regard to loan type. The allocated portion of the allowance
amounted to $21.0 million at December 31, 2005. Of this total, 2% related to specific
allocations on impaired loans, 88% related to formula allocations and 10% related to
general allocations.

Net charge-offs totaled $1.9 million,
or 0.13% of average loans for 2005 compared to $4.7 million, or 0.37% of average loans for
2004. As previously noted under the section Loan Portfolio and Asset Quality, the increase
for 2004 relates primarily to a $2.8 million charge-off associated with the impaired loans
to one commercial borrower. The following is a summary of our loan balances, changes in
the allowance for loan losses and related ratios.

|December 31                                   
|----------------------------------------------
|                                              
|                                              
|                                              
|Loans:                                        
|Average daily balance of loans for the year   
|Amount of loans outstanding at end of period  
|                                              
|Allowance for loan losses:                    
|Balance at beginning of year                  
|Addition to allowance charged to operations   
|Loans charged-off:                            
|Commercial                                    
|Residential real estate                       
|Consumer                                      
|                                              
|Recoveries:                                   
|Commercial                                    
|Residential real estate                       
|Consumer                                      
|                                              
|Balance at end of year                        
|                                              
|Ratios:                                       
|Net charge-offs to average loans outstanding  
|Allowance for loan losses to loans outstanding
|at year end                                   

12

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Premises and Equipment:Premises and equipment totaled $53.0 million at December 31, 2005, an increase of $7.2
million from December 31, 2004. The increase included costs associated with the
construction of two new branch sites, one north of Grand Rapids in Rockford and one on the
east side of Zeeland. The new Zeeland office allowed us to replace a leased branch site
with a full service facility in a more favorable location. In addition, we began
construction in 2005 on a new regional facility in downtown Holland. The increase also
included the purchase of two pieces of land for two future branch sites. One site will
enhance our presence in Kent County and the other will allow us to relocate a current
leased facility into a more favorable location.

Deposits:Total deposits
increased $156.3 million to $1.51 billion at December 31, 2005, as compared to $1.35
billion at December 31, 2004. The majority of growth during the year was in checking
accounts and time deposits. Noninterest-bearing checking accounts increased $39.7 million
to $188.8 million and interest-bearing checking accounts grew $38.8 million to $207.9
million at the end of 2005. We are experiencing consistent growth in our core balances for
these types of accounts. Our continued focus on quality customer service, the desire of
customers to deal with a local bank, and the convenience of our expanding and maturing
branch network continues to be well received in our markets. We expect this trend of
growth in checking account deposits to continue. Time deposits increased $209.9 million to
$690.2 million at the end of 2005. An increase in brokered time deposits of $132.4 million
was a large part of the increase in this category. Because of their relatively lower cost
compared to other borrowings, brokered time deposits were utilized to support the growth
in assets during 2005. In addition, the rates paid on retail time deposits during 2005
reached levels that had not been seen in the past few years. This caused customers to
shift funds from money market accounts into these more attractive time deposits.

Noninterest bearing demand accounts
comprised approximately 12% of total deposits at December 31, 2005, as compared to
approximately 11% of total deposits at the end of 2004. Interest bearing demand, including
money markets, and savings accounts comprised approximately 42% of total deposits at
December 31, 2005, as compared to 53% at the end of last year. Time accounts as a
percentage of total deposits were approximately 46% at December 31, 2005, and were
approximately 36% at December 31, 2004.

Borrowed Funds:Borrowed funds
consist of advances from the Federal Home Loan Bank, long-term debt associated with the
issuance of trust preferred securities and federal funds purchased provided by our
correspondent banks.  Additionally, we have a
$10.0 million credit facility available for general corporate needs including
contributing capital to our subsidiary bank to enable it to maintain regulatory capital
at well-capitalized levels. This credit facility was unused during all of 2005 and 2004.

Borrowed funds totaled $212.2 million
at December 31, 2005, including $145.2 million of Federal Home Loan Bank advances, $41.2
million in long-term debt associated with trust preferred securities and $25.8 million in
federal funds purchased. Borrowed funds totaled $187.4 million at December 31, 2004
including $124.0 million of Federal Home Loan Bank advances and $41.2 million in long-term
debt associated with trust preferred securities and $22.1 million in federal funds
purchased. The increase in borrowed funds in 2005 was used to support growth in assets.

13

---



# CAPITAL RESOURCES AND
LIQUIDITY

Capital Resources: Total
shareholders equity was $141.7 million at December 31, 2005 compared to $129.1
million at December 31, 2004. The increase of $12.6 million was primarily the result of
retained net income (net of cash dividends paid) that was slightly offset by a reduction
in accumulated other comprehensive income. Net income generated during 2005 of $20.9
million was partially offset by cash dividends of $6.2 million, or $.61 per share. We
began paying cash dividends at the end of 2000 and have increased the amount of the
dividend each year since. It is anticipated that we will continue to pay quarterly cash
dividends in the future. We have also paid a stock dividend each year beginning in 2001. A
15% stock dividend was paid in May 2005, resulting in a transfer of $10.9 million from
retained earnings to common stock.

The change in accumulated other
comprehensive income was due to a decrease in both the market value of securities
available for sale and the derivative instruments associated with the Companys
interest rate swap arrangements due principally to the general rise in longer-term
interest rates during 2005. For more information regarding our interest rate swap
arrangements, see the Notes to the Consolidated Financial Statements.

The Corporation was categorized as
well capitalized for regulatory capital purposes at December 31, 2005 and
2004. The following table shows the Companys various capital ratios for 2005 and
2004.

|As of and for the year ended December 31, | 2005 | 2004
|----------------------------------------- | ---- | ----
|                                          |      |     
|Average equity to average assets          |      |     
|Total risk-based capital                  |      |     
|Tier 1 risk-based capital                 |      |     
|Tier 1 capital to average assets          |      |     

Our total capital to risk-weighted
assets was 11.1% at both December 31, 2005 and 2004. Our Tier 1 Capital as a percent of
average assets was 8.7% at December 31, 2005 and 8.3% at December 31, 2004. Growth in
capital from strong earnings in 2005 was consistent with the growth in assets resulting in
the stable capital ratios from 2004 to 2005. On March 18, 2004, we raised additional
regulatory capital by participating in a pooled trust preferred security issuance in the
amount of $20.0 million. Of the $40.0 million of trust preferred securities outstanding at
December 31, 2005, approximately $38.0 million qualified as Tier 1 capital with the
remaining qualifying as Tier 2 capital. For more information regarding the trust preferred
securities, please refer to the Notes to the Consolidated Financial Statements.

We believe the additional regulatory
capital provided by the trust preferred security issuances, as supplemented by our
improvement in earnings, will support our growth plans in the near future. Additional
capital may be necessary within the next three to four years if our growth continues at
its current pace. Capital sources include additional common stock offerings, trust
preferred securities offerings and subordinated debt.

14

---



Liquidity: The liquidity of a
financial institution reflects its ability to manage a variety of sources and uses of
funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into
operating, investing and financing activities. We primarily focus on developing access to
a variety of borrowing sources to supplement our deposit gathering activities and provide
funds for growing our investment and loan portfolios. Our sources of liquidity include our
borrowing capacity with the Federal Home Loan Bank and federal funds purchased lines with
our correspondent banks, loan payments by our borrowers, maturity and sales of our
securities available for sale, growth of our deposits and deposit equivalents, federal
funds sold, and the various capital resources discussed above. Liquidity management
involves the ability to meet the cash flow requirements of our customers. Our customers
may be either borrowers with credit needs or depositors wanting to withdraw funds. We feel
our liquidity position is sufficient to meet these needs.

In the normal course of business, we
enter into certain contractual obligations including obligations which are considered in
our overall liquidity management. The table below summarizes our significant contractual
obligations as December 31, 2005.

|1 year or less                            | 1-3 years | 4-5 years | After 5 years
|----------------------------------------- | --------- | --------- | -------------
|                                          |           |           |              
|Time deposit maturities                   |           |           | $            
|Federal funds purchased and FHLB advances |           |           |              
|Long-term debt                            |           |           |              
|                                          |           |           |              
|Total                                     |           |           | $            
|                                          |           |           |              

In addition to normal loan funding,
we also maintain liquidity to meet customer financing needs through unused lines of
credit, unfunded loan commitments and standby letters of credit. The level and fluctuation
of these commitments is also considered in our overall liquidity management. At December
31, 2005, we had a total of $460.8 million in unused lines of credit, $48.3 million in
unfunded loan commitments, and $24.5 million in standby letters of credit.

# SENSITIVITY TO MARKET
RISK

Our primary market risk exposure is
interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. Macatawa Bank has
only limited agricultural-related loan assets, and therefore has no significant exposure
to changes in commodity prices. Our market risk exposure is mainly comprised of our
sensitivity to interest rate risk. Our balance sheet has sensitivity, in various
categories of assets and liabilities, to changes in prevailing rates in the U.S. for prime
rate, mortgage rates, U.S. Treasury rates and various money market indexes. Our
asset/liability management process aids us in providing liquidity while maintaining a
balance between interest earning assets and interest bearing liabilities.

We use two interest rate risk
measurement techniques in our interest rate risk management. We first use a static gap
analysis. This measures the difference between the dollar amounts of interest sensitive
assets and liabilities that may be refinanced or repriced during a given time period. A
significant repricing gap could result in a negative impact to our net interest margin
during periods of changing market interest rates. The following table illustrates our
interest rate repricing gaps for selected maturity periods at December 31, 2005.

15

---



|Static Gap Analysis
(dollars in thousands) | 0 to 3 months | 4 to 12 months | 1 to 5 years | Over 5 Years | Total
|------------------------------------------ | ------------- | -------------- | ------------ | ------------ | -----
|                                           |               |                |              |              |      
|Assets:                                    |               |                |              |              |      
|Loans-fixed                                |               |                | $            | 33,534       |      
|Loans-variable                             |               |                |              | 918,204      |      
|Taxable securities                         |               |                |              | 2,060        |      
|Tax exempt securities                      |               |                |              | ---          |      
|Other securities                           |               |                |              | 13,910       |      
|Other assets, net                          |               |                |              | ---          |      
|                                           |               |                |              |              |      
|Total assets                               |               |                | $            | 967,708      |      
|                                           |               |               
|Liabilities:                               |               |               
|Time deposits                              |               |                | $            | 141,035      |      
|Savings                                    |               |                |              | 40,612       |      
|Other interest bearing deposits            |               |                |              | 588,163      |      
|Other borrowings                           |               |                |              | 72,247       |      
|Noninterest bearing deposits               |               |                |              | ---          |      
|Other liabilities & equity                 |               |                |              | ---          |      
|                                           |               |                |              |              |      
|Total liabilities & equity                 |               |                | $            | 842,057      |      
|                                           |               |               
|Period gap                                 |               |                | $            | 125,651      |      
|Cumulative gap                             |               |                | $            | 125,651      |      
|Cumulative gap/total assets                |               |                |              | 6.72         | %    

The above table shows that total
assets maturing or repricing within three months exceeded liabilities maturing within the
same time period by $127 million indicating that we are asset sensitive in this time
horizon. The above gap analysis is limited, however, in that cash flows and repricing
characteristics for various categories of assets and liabilities are subject to
competitive pressures, consumer sentiments and other influences that are beyond our
control and are not reflected in this static analysis. As a result, various assets and
liabilities indicated as maturing or repricing within a stated period may reprice at
different levels and mature or reprice in other periods or at different volumes.

The analysis also does not consider
the extent of repricing for certain assets or liabilities shown as re-priceable within
twelve months or reflect the magnitude of interest rate changes on net interest income, or
consider certain interest rate swaps utilized to mitigate some of our interest rate risk.

Accordingly, we also utilize a
simulation model to assess the direction and magnitude of variations in net interest
income and the economic value of equity (EVE) resulting from potential changes
in market interest rates. Key assumptions in the model include contractual cash flows and
maturities of interest-sensitive assets and interest-sensitive liabilities, prepayment
speeds on certain assets, and changes in market conditions impacting loan and deposit
pricing. We also assume certain levels of rate sensitivity of our non-maturing transaction
deposits based upon our historical sensitivity under previous interest rate cycles, and we
include pricing floors on discretionary priced liability products which limit how low
various checking and savings products could go under declining interest rates. These
assumptions reflect our pricing philosophy in response to changing interest rates.

The simulation analysis also
considers the interest rate swaps we have entered into which have the effect of converting
$80.0 million in variable rate loans repricing immediately into fixed rate loans repricing
in one to five years. The interest rate swaps are not reflected in the table above and are
more fully discussed in the Notes to the Consolidated Financial Statements.

16

---



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

The following table shows the impact
of changes in interest rates on net interest income over the next twelve months and EVE
based on our balance sheet as of December 31, 2005 (dollars in thousands).

|Interest Rate Scenario   | Economic Valueof Equity | PercentChange | Net InterestIncome | PercentChange
|------------------------ | ----------------------- | ------------- | ------------------ | -------------
|                         |                         |               |                    |              
|Change in Interest Rates |                         |              
|200 basis point rise     |                         |               | $                  | 178,755      
|100 basis point rise     |                         |               |                    | 185,481      
|Base-rate scenario       |                         |               |                    | 189,490      
|100 basis point decline  |                         |               |                    | 194,132      
|200 basis point decline  |                         |               |                    | 197,408      

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

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

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

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

# CRITICAL ACCOUNTING AND
POLICIES ESTIMATES:

To prepare financial statements in
conformity with accounting principles generally accepted in the United States of America,
management makes estimates and assumptions based on available information. These estimates
and assumptions affect the amounts reported in the financial statements and future results
could differ. The allowance for loan loss and the status of contingencies are deemed
critical due to the required level of management judgment and the use of estimates, making
them particularly subject to change.

Our methodology for determining the
allowance for loan loss and the related provision for loan losses is described above in
the Allowance for Loan Loss discussion. This area of accounting requires
significant judgment due to the number of factors which can influence the collectibility
of a loan. Unanticipated changes in these factors could significantly change the level of
the allowance for loan losses and the related provision for loan losses. Although, based
upon our internal analysis, and in our judgment, we have provided an adequate allowance
for loan losses, there can be no assurance that our analysis has properly identified all
of the probable losses in our loan portfolio.

17

---



Loss contingencies, including the
legal actions involving Trade Partners as described in Note 17 of the financial
statements, are recorded as liabilities when the likelihood of loss is probable and an
amount or range of loss can be reasonably estimated. This, too, is an accounting area that
involves significant judgment. Although, based upon our judgment and internal analysis we
have properly accounted for loss contingencies, future changes in the status of such
contingencies could result in a significant change in the level of contingent liabilities
and a related impact to operating earnings.

Forward-Looking Statements:This report contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We intend such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the Private Securities
Reform Act of 1995, and are including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions and
describe our future plans, strategies, and expectations are generally identifiable by use
of the words believe, expect, intend, anticipate, estimate, project, may or similar
expressions. The presentation and discussion of the provision and allowance for loan
losses, statements concerning future profitability or future growth or increases, and
statements about the adequacy of our capital resources are examples of inherently
forward-looking statements in that they involve judgments and statements of belief as to
the outcome of future events. Our ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a material
adverse affect on our operations and future prospects include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition, demand for
financial services in our market area and accounting principles, policies, and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further information
concerning us and our business, including additional factors that could materially affect
our financial results, is included in our filings with the Securities and Exchange
Commission.

18

---



Quarterly Stock Price Information:The Companys common stock is quoted on the Nasdaq National Market under the
symbol MCBC. High and low sales prices (as reported on the Nasdaq National Market) for
each quarter for the years ended December 31, 2005 and 2004 are set forth in the table
below. This information has been restated for the 15% stock dividend paid in May 2005 and
the 5% stock dividend paid in May 2004.

|               | 2005 | 2004
|-------------- | ---- | ----
|               |      |     
|
|               |      |     
|First Quarter  |      |     
|Second Quarter |      |     
|Third Quarter  |      |     
|Fourth Quarter |      |     

Quarterly cash dividends totaling
$.35 were paid during 2003, and a 5% stock dividend was declared during the second quarter
of 2003. Quarterly cash dividends totaling $.43 were paid during 2004, and a 5% stock
dividend was declared during the second quarter of 2004. Quarterly cash dividends totaling
$.61 were paid during 2005, and a 15% stock dividend was declared during the second
quarter of 2005.

19

---



# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                                 | 
|---------------------------------------------------------------- | 
|MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING | 
|                                                                 | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON       | 
|INTERNAL CONTROL OVER FINANCIAL REPORTING                        | 
|                                                                 | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON       | 
|FINANCIAL STATEMENTS                                             | 
|                                                                 | 
|CONSOLIDATED FINANCIAL STATEMENTS                                | 
|                                                                 | 
|CONSOLIDATED BALANCE SHEETS                                      | 
|                                                                 | 
|CONSOLIDATED STATEMENTS OF INCOME                                | 
|                                                                 | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY       | 
|                                                                 | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                            | 
|                                                                 | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       | 

---



# MANAGEMENTS
REPORT ON INTERNALCONTROL OVER FINANCIAL REPORTING

The management of the Company is
responsible for establishing and maintaining adequate internal control over financial
reporting. The Companys internal control system was designed to provide reasonable
assurance to the Companys management and board of directors regarding the
preparation and fair presentation of published financial statements. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.

Company management assessed the
effectiveness of the Companys internal control over financial reporting as of
December 31, 2005. In making this assessment, it used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment we believe that, as of December 31,
2005; the Companys internal control over financial reporting is effective based on
those criteria.

The Companys independent
auditors have issued an audit report on our assessment of the Companys internal
control over financial reporting.

---

F-2

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
ShareholdersMacatawa Bank CorporationHolland, Michigan

We have audited managements
assessment, included in the accompanying Managements Report on Internal Control Over
Financial Reporting, that Macatawa Bank Corporation maintained effective internal control
overfinancial reporting as of December 31, 2005, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Macatawa Bank Corporations
management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on managements assessment and
an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, managements
assessment that Macatawa Bank Corporation maintained effective internal control over
financial reporting as of December 31, 2005, is fairly stated, in all material respects,
based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, Macatawa Bank Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Macatawa Bank Corporation as of December 31, 2005 and 2004
and the related consolidated statements of income, changes in shareholders equity
and cash flows for each of the three years in the period ended December 31, 2005 and our
report dated February 10, 2006 expressed an unqualified opinion on those consolidated
financial statements.

| | /s/ Crowe Chizek
and Company LLC
| | --------------------------------

Grand Rapids, MichiganFebruary
10, 2006

---

F-3

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
ShareholdersMacatawa Bank CorporationHolland, Michigan

We have audited the accompanying
consolidated balance sheets of Macatawa Bank Corporation as of December 31, 2005 and 2004,
and the related statements of income, changes in shareholders equity and cash flows
for each of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Macatawa Bank Corporation at December 31, 2005 and 2004, and the
results of its operations and its cash flows for each of the three years in the period
ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of Macatawa Bank Corporations internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 10, 2006 expressed an unqualified
opinion thereon.

| | /s/ Crowe Chizek
and Company LLC
| | --------------------------------

Grand Rapids, MichiganFebruary
10, 2006

---

F-4

---



MACATAWA BANK
CORPORATIONCONSOLIDATED BALANCE SHEETS December 31, 2005 and
2004(Dollars in thousands)

---

|                                                       | 2005 | 2004         
|------------------------------------------------------ | ---- | -------------
|                                                       |      |              
|ASSETS                                                 |      |              
|Cash and due from banks                                |      | $      49,101
|                                                       |      |              
|Total cash and cash equivalents                        |      | 49,101       
|Securities available for sale, at fair value           |      | 156,696      
|Securities held to maturity (fair value 2005 - $3,974, |     
|2004 - $2,662)                                         |      | 3,907        
|Federal Home Loan Bank (FHLB) stock                    |      | 13,910       
|Loans held for sale                                    |      | 2,331        
|Total loans                                            |      | 1,547,879    
|Allowance for loan losses                              |      | (20,992      
|                                                       |      |              
|                                                       |      | 1,526,887    
|Premises and equipment - net                           |      | 53,028       
|Accrued interest receivable                            |      | 8,366        
|Goodwill                                               |      | 23,915       
|Acquisition intangibles                                |      | 1,941        
|Bank-owned life insurance                              |      | 20,814       
|Other assets                                           |      | 9,094        
|                                                       |      |              
|Total assets                                           |      | $ 1,869,990  
|                                                       |      |              
|LIABILITIES AND SHAREHOLDERS' EQUITY                   |     
|Deposits                                               |     
|Noninterest-bearing                                    |      | $    188,762 
|Interest-bearing                                       |      | 1,319,010    
|                                                       |      |              
|Total                                                  |      | 1,507,772    
|Federal funds purchased                                |      | 25,809       
|FHLB advances                                          |      | 145,161      
|Long-term debt                                         |      | 41,238       
|Accrued expenses and other liabilities                 |      | 8,266        
|                                                       |      |              
|Total liabilities                                      |      | 1,728,246    
|Shareholders' equity                                   |     
|Preferred stock, no par value, 500,000 shares          |     
|authorized; no shares issued and outstanding           |     
|Common stock, no par value, 20,000,000 shares          |     
|authorized; 10,227,992 and 8,823,902 shares            |     
|issued and outstanding at  December 31, 2005           |     
|and 2004, respectively                                 |      | 136,583      
|Retained earnings                                      |      | 8,040        
|Accumulated other comprehensive income (loss)          |      | (2,879       
|                                                       |      |              
|Total shareholders' equity                             |      | 141,744      
|                                                       |      |              
|Total liabilities and shareholders' equity             |      | $ 1,869,990  
|                                                       |      |              

---

See accompanying notes
to consolidated financial statements.

F-5

---



MACATAWA BANK
CORPORATIONCONSOLIDATED STATEMENTS OF INCOME Years ended December
31, 2005, 2004 and 2003 (Dollars in thousands, except per share data)

---

|                                                    | 2005 | 2004        | 2003
|--------------------------------------------------- | ---- | ----------- | ----
|                                                    |      |             |     
|Interest income                                     |      |             |     
|Loans, including fees                               |      | $  98,031   |     
|Securities                                          |     
|Taxable                                             |      | 4,392       |     
|Tax-exempt                                          |      | 2,084       |     
|FHLB stock                                          |      | 573         |     
|Federal funds sold and other short-term investments |      | 315         |     
|                                                    |      |             |     
|Total interest income                               |      | 105,395     |     
|Interest expense                                    |     
|Deposits                                            |      | 32,060      |     
|FHLB advances                                       |      | 6,599       |     
|Long-term debt                                      |      | 2,603       |     
|Federal funds purchased and other borrowings        |      | 1,296       |     
|                                                    |      |             |     
|Total interest expense                              |      | 42,558      |     
|                                                    |      |             |     
|Net interest income                                 |      | 62,837      |     
|Provision for loan losses                           |      | 3,675       |     
|                                                    |      |             |     
|Net interest income after provision for loan losses |      | 59,162      |     
|Noninterest income                                  |     
|Service charges and fees                            |      | 4,323       |     
|Gain on sales of loans                              |      | 2,336       |     
|Trust fees                                          |      | 2,921       |     
|Other                                               |      | 3,424       |     
|                                                    |      |             |     
|Total noninterest income                            |      | 13,004      |     
|Noninterest expense                                 |     
|Salaries and benefits                               |      | 22,388      |     
|Occupancy of premises                               |      | 3,239       |     
|Furniture and equipment                             |      | 2,975       |     
|Legal and professional fees                         |      | 786         |     
|Marketing and promotion                             |      | 1,625       |     
|Supplies                                            |      | 587         |     
|Data processing fees                                |      | 1,584       |     
|Other                                               |      | 8,239       |     
|                                                    |      |             |     
|Total noninterest expenses                          |      | 41,423      |     
|                                                    |      |             |     
|Income before income tax expense                    |      | 30,743      |     
|                                                    |      |             |     
|Income tax expense                                  |      | 9,854       |     
|                                                    |      |             |     
|Net income                                          |      | $  20,889   |     
|                                                    |      |             |     
|Basic earnings per share                            |      | $      2.05 |     
|                                                    |      |             |     
|Diluted earnings per share                          |      | $      2.00 |     
|                                                    |      |             |     
|Cash dividends per share                            |      | $       .61 |     
|                                                    |      |             |     

---

See accompanying notes
to consolidated financial statements.

F-6

---



MACATAWA BANK
CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITYYears ended December
31, 2005, 2004 and 2003 (Dollars in thousands, except per share data)

---

|                                            | Common  Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders'Equity
|------------------------------------------- | ------------- | ----------------- | --------------------------------------------- | -------------------------
|                                            |               |                   |                                               |                          
|Balance, January 1, 2003                    |               | $105,201          |                                               | $   5,931                
|Net income                                  |               |                   |                                               | 11,780                   
|Other comprehensive income (loss):          |              
|Net change in unrealized gain (loss)        |              
|on derivative instruments, net              |              
|of tax of ($13)                             |               |                   |                                               |                          
|Net change in unrealized gain (loss)        |              
|on securities available for sale, net       |              
|of tax of ($423)                            |               |                   |                                               |                          
|                                            |               |                   |                                               |                          
|Comprehensive income                        |               |                   |                                               |                          
|Issued 397,664 shares in payment of         |              
|5% stock dividend                           |               | 8,926             |                                               | (8,940                   
|Issued 80,907 shares for stock              |              
|option exercises                            |               | 441               |                                               |                          
|Cash dividends at $.35 per share            |               |                   |                                               | (3,471                   
|                                            |               |                   |                                               |                          
|Balance, December 31, 2003                  |               | 114,568           |                                               | 5,300                    
|Net income                                  |               |                   |                                               | 12,776                   
|Other comprehensive income (loss):          |              
|Net change in unrealized gain (loss)        |              
|on derivative instruments, net              |              
|of tax of ($366)                            |               |                   |                                               |                          
|Net change in unrealized gain (loss)        |              
|on securities available for sale, net       |              
|of tax of ($509)                            |               |                   |                                               |                          
|                                            |               |                   |                                               |                          
|Comprehensive income                        |               |                   |                                               |                          
|Issued 418,263 shares in payment of         |              
|5% stock dividend                           |               | 9,330             |                                               | (9,355                   
|Issued 35,566 shares for stock              |              
|option exercises (net of 5,249 shares       |              
|exchanged and including $97 of tax benefit) |               | 491               |                                               |                          
|Cash dividends at $.43 per share            |               |                   |                                               | (4,444                   
|                                            |               |                   |                                               |                          
|Balance, December 31, 2004                  |               | 124,389           |                                               | 4,277                    

---

See accompanying notes
to consolidated financial statements.

F-7

---



MACATAWA BANK
CORPORATION CONSOLIDATED  STATEMENTS
OF CHANGES IN SHAREHOLDERS EQUITY (continued) Years ended December 31, 2005, 2004
and 2003  (Dollars
in thousands, except per share data)

---

|                                                     | Common  Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders'Equity
|---------------------------------------------------- | ------------- | ----------------- | --------------------------------------------- | -------------------------
|                                                     |               |                   |                                               |                          
|Net income                                           |               |                   |                                               | 20,889                   
|Other comprehensive income (loss):                   |              
|Net change in unrealized gain (loss)                 |              
|on derivative instruments, net                       |              
|of tax of ($725)                                     |               |                   |                                               |                          
|Net change in unrealized gain (loss)                 |              
|on securities available for sale, net                |              
|of tax of ($1,046)                                   |               |                   |                                               |                          
|                                                     |               |                   |                                               |                          
|Comprehensive income                                 |               |                   |                                               |                          
|Shares Earned (5,000) under Stock Compensation Plans |               | 176               |                                               |                          
|Issued 1,328,409 shares in payment of                |              
|15% stock dividend                                   |               | 10,863            |                                               | (10,898                  
|Issued 70,681 shares for stock option exercises      |              
|(net of 6,017 shares exchanged and including         |              
|$275 of tax benefit)                                 |               | 1,155             |                                               |                          
|Cash dividends at $.61 per share                     |               |                   |                                               | (6,228                   
|                                                     |               |                   |                                               |                          
|Balance, December 31, 2005                           |               | $136,583          |                                               | $8,040                   
|                                                     |               |                   |                                               |                          

---

See accompanying notes
to consolidated financial statements.

F-8

---



MACATAWA BANK
CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS  Years ended December
31, 2005, 2004 and 2003 (Dollars in thousands)

---

|                                                      | 2005 | 2004       | 2003
|----------------------------------------------------- | ---- | ---------- | ----
|Cash flows from operating activities                  |      |            |     
|Net income                                            |      | $   20,889 |     
|Adjustments to reconcile net income                   |     
|to net cash from operating activities                 |     
|Depreciation and amortization                         |      | 3,100      |     
|Stock compensation expense                            |      | 176        |     
|Stock dividends on FHLB stock                         |      | (249       | )   
|Provision for loan losses                             |      | 3,675      |     
|Origination of loans for sale                         |      | (137,028   | )   
|Proceeds from sales of loans originated for sale      |      | 140,083    |     
|Gain on sales of loans                                |      | (2,336     | )   
|Net change in                                         |     
|Accrued interest receivable and other assets          |      | (487       | )   
|Bank-owned life insurance                             |      | (657       | )   
|Accrued expenses and other liabilities                |      | 5,649      |     
|                                                      |      |            |     
|Net cash from operating activities                    |      | 32,815     |     
|Cash flows from investing activities                  |     
|Loan originations and payments, net                   |      | (156,004   | )   
|Purchase of FHLB stock                                |      | (1,422     | )   
|Purchases of securities available for sale            |      | (37,770    | )   
|Purchases of securities held to maturity              |      | (1,430     | )   
|Maturities and calls of securities available for sale |      | 15,298     |     
|Principal paydowns on securities                      |      | 133        |     
|Purchase of bank-owned life insurance                 |      | 0          |     
|Additions to premises and equipment                   |      | (9,957     | )   
|                                                      |      |            |     
|Net cash from investing activities                    |      | (191,152   | )   
|Cash flows from financing activities                  |     
|Net increase in deposits                              |      | 156,256    |     
|Net increase (decrease) in short-term borrowings      |      | 3,678      |     
|Proceeds from long-term debt and other borrowings     |      | 0          |     
|Repayments on other borrowings                        |      | 0          |     
|Proceeds from FHLB advances                           |      | 475,000    |     
|Repayments on FHLB advances                           |      | (453,824   | )   
|Fractional shares purchased                           |      | (35        | )   
|Cash dividends paid                                   |      | (6,228     | )   
|Proceeds from exercises of stock options              |      | 880        |     
|                                                      |      |            |     
|Net cash from financing activities                    |      | 175,727    |     
|Net change in cash and cash equivalents               |      | 17,390     |     
|Beginning cash and cash equivalents                   |      | 31,711     |     
|                                                      |      |            |     
|Ending cash and cash equivalents                      |      | $   49,101 |     
|                                                      |      |            |     
|Supplemental cash flow information:                   |     
|Interest paid                                         |      | $   40,806 |     
|Income taxes paid                                     |      | 9,000      |     
|Supplemental noncash disclosures:                     |     
|Transfers from loans to other real estate             |      | 2,677      |     

---

See accompanying notes
to consolidated financial statements.

F-9

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005 and
2004

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Macatawa Bank, and its wholly-owned subsidiary, Macatawa
Bank Mortgage Company; and Macatawa Investment Services, Inc. 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 are discussed in a separate
note.

Nature of Operations: Macatawa
Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit
Insurance Corporation. The Bank operates 23 full service branch offices providing a full
range of commercial and consumer banking and trust services in Kent County, Ottawa County,
and northern Allegan County, Michigan. Macatawa Bank Mortgage Company originates and sells
residential mortgage loans into the secondary market on a servicing released basis.
Macatawa Investment Services is a broker/dealer providing various brokerage services
including discount brokerage, personal financial planning and consultation regarding
individual stocks and mutual funds. Macatawa Statutory Trust I and Macatawa Statutory
Trust II are grantor trusts that were established on July 15, 2003 and March 18, 2004
through which trust preferred securities were issued.

The Company is a financial holding
company pursuant to Title I of the Gramm-Leach-Bliley Act. At the present time, the
Company has no plans to engage in any of the expanded activities permitted under these
regulations.

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

Concentration of Credit Risk:
Loans are granted to, and deposits are obtained from, customers primarily in the western
Michigan area as described above. Substantially all loans are secured by specific items of
collateral, including residential real estate, commercial real estate, commercial assets
and consumer assets. Other financial instruments, which potentially subject the Company to
concentrations of credit risk, include deposit accounts in other financial institutions.

Cash Flow Reporting: Cash and
cash equivalents include cash on hand, demand deposits with other financial institutions
and short-term securities (securities with maturities of equal to or less than 90 days and
federal funds sold). Cash flows are reported net for customer loan and deposit
transactions, interest-bearing time deposits with other financial institutions and
short-term borrowings with maturities of 90 days or less.

Securities: Securities are
classified as held to maturity and carried at amortized cost when management has the
positive intent and ability to hold them to maturity. Securities available for sale
consist of those securities which might be sold prior to maturity due to changes in
interest rates, prepayment risks, yield and availability of alternative investments,
liquidity needs or other factors. Securities classified as available for sale are reported
at their fair value and the related unrealized holding gain or loss is reported in other
comprehensive income.

Interest income includes amortization
of purchase premium or discount. Premiums and discounts on securities are amortized on the
level yield method without anticipating prepayments. Gains and losses on sales are based
on the amortized cost of the security sold. Declines in the fair value of securities below
their cost that are other than temporary are reflected as realized losses.

---

(Continued)

F-10

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

In estimating other-than-temporary
losses, management considers: (1) the length of time and extent that fair value has been
less than cost, (2) the financial condition and near term prospects of the issuer, and (3)
the Companys ability and intent to hold the security for a period sufficient to
allow for any anticipated recovery in fair value.

Federal Home Loan Bank (FHLB)
Stock: The Bank is a member of the FHLB system. Members are required to own a certain
amount of stock based on the level of borrowings and other factors, and may invest in
additional amounts. FHLB stock is carried at cost, classified as a restricted security,
and periodically evaluated for impairment. Because this stock is viewed as a long term
investment, impairment is based on ultimate recovery of par value. Both cash and stock
dividends are reported as income.

Loans: Loans are reported at
the principal balance outstanding, net of the allowance for loan losses. Loans held for
sale are reported at the lower of cost or market, on an aggregate basis. Loans are sold
servicing released, therefore no mortgage servicing right assets are established.

Interest income is accrued on the
principal balance and includes amortization of net deferred loan fees and costs over the
loan term using the level yield method without anticipating prepayments. Interest income
is not reported when full loan repayment is in doubt, typically when the loan is impaired
or payments are past due over 90 days (180 days for residential mortgages). Consumer loans
are typically charged-off no later than 120 days past due. Past due status is based on the
contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off
at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received
for loans placed on nonaccrual is reversed against interest income. Interest received on
such loans is accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are reasonably
assured.

Allowance for Loan Losses: The
allowance for loan losses is a valuation allowance for probable incurred credit losses,
increased by the provision for loan losses and recoveries, and decreased by charge-offs.
Management estimates the allowance balance required based on known and inherent risks in
the portfolio, economic conditions and other factors. Allocations of the allowance may be
made for specific loans, but the entire allowance is available for any loan that, in
managements judgment, should be charged-off. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed.

Loan impairment is reported when full
payment under the loan terms is not expected. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loans existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or when the internal
grading system indicates a doubtful classification. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are collectively
evaluated for impairment, and accordingly, they are not separately identified for
impairment disclosures.

Foreclosed Assets: Assets
acquired through or instead of loan foreclosure are initially recorded at fair value when
acquired, establishing a new cost basis. If fair value declines, a valuation allowance is
recorded through expense. Costs after acquisition are expensed. The Company held $527,000
in foreclosed assets at December 31, 2005 and $1,850,000 in foreclosed assets at December
31, 2004.

Premises and Equipment: Land
is carried at cost. Premises and equipment are stated at cost less accumulated
depreciation. Buildings and related components are depreciated using the straight-line
method with useful lives ranging from 5 to 40 years.

---

(Continued)

F-11

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

Furniture, fixtures and equipment are
depreciated using the straight-line method with useful lives ranging from 3 to 5 years.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. These assets are reviewed for
impairment when events indicate the carrying amount may not be recoverable.

Bank-Owned Life Insurance: The
Bank has purchased life insurance policies on certain officers. Bank-owned life insurance
is recorded at its currently realizable cash surrender value. Changes in cash surrender
value are recorded in other income.

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

Fair Values of Financial
Instruments: Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed separately. Fair value
estimates involve uncertainties and matters of significant judgment regarding interest
rates, credit risk, prepayments and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on-and
off-balance sheet financial instruments do not include the value of anticipated future
business or the values of assets and liabilities not considered financial instruments.

Earnings Per Share: Basic
earnings per share is net income divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share include the dilutive
effect of additional potential common shares issuable under stock options. Earnings and
dividends per share are restated for all stock splits and dividends through the date of
issue of the financial statements.

Stock Compensation: Employee
compensation expense under stock option plans is reported using the intrinsic value
method. No compensation cost related to stock options was recognized during 2005, 2004 or
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).

|                                         | 2005 | 2004            | 2003
|---------------------------------------- | ---- | --------------- | ----
|                                         |      |                 |     
|Net income as reported                   |      | $      20,889   |     
|Deduct: Stock-based compensation expense |     
|using fair value method                  |      | (508            | )   
|                                         |      |                 |     
|Pro forma net income                     |      | $      20,381   |     
|                                         |      |                 |     
|Basic earnings per share as reported     |      | $          2.05 |     
|Pro forma basic earnings per share       |      | 2.00            |     
|Diluted earnings per share as reported   |      | 2.00            |     
|Pro forma diluted earnings per share     |      | 1.95            |     
|Weighted-average fair value of options   |     
|granted during the period                |      | 9.44            |     

---

(Continued)

F-12

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

The pro forma effects are computed
using option pricing models, using the following weighted-average assumptions as of grant
date.

|                                | 2005 | 2004  | 2003
|------------------------------- | ---- | ----- | ----
|Risk-free interest rate         |      | 4.27  | %   
|Expected option life            |      | 6.2 y | ears
|Expected stock price volatility |      | 23.98 | %   
|Dividend yield                  |      | 2.01  | %   

Beginning  January 1,
2006,  employee  compensation  cost for stock  options  will be recorded  per FAS 123,
 Revised (FAS 123(R)).  FAS 123(R) requires all public  companies to record  compensation
 cost for stock options  provided to employees in return for  employee  service.  The
cost is measured at the fair value of the options  when  granted,  and this cost is
expensed  over the  employee  service  period,  which is normally the vesting  period of
the  options.  This will apply to awards  granted or modified  beginning  January 1,
2006.  Compensation  cost will also be recorded for prior option grants that vest after
this date.  The effect on results of  operations  will depend on the level of future
option grants and the calculation  of the fair value of the  options  granted at such
future  date,  as well as the  vesting  periods  provided. Existing  options that will
vest after the  adoption  date are expected to result in  additional  compensation
 expense of approximately $570,000 in 2006 and $356,000 in 2007.

The Company's stock
 compensation plan allows for the issuance of restricted stock awards.  Compensation
 expense is based upon the  market  price of the  Company's  stock at the date of grant
and is  recognized  over the  vesting  period of the awards.  During 2005,  5,000 shares
of common stock were awarded  under the plan.  These shares  vested  immediately  upon
grant.  Compensation  expense for stock  awarded in 2005  amounted  to  $176,000.  There
were no stock  awards in 2004 and 2003.

Comprehensive Income:
 Comprehensive income consists of net income and other comprehensive income (loss).
 Other comprehensive income (loss) includes unrealized gains and losses on securities
available for sale and unrealized gains and losses on cash flow hedges which are also
recognized as separate components of equity.

Segment Reporting:  The
Company, through the branch network of the Bank, provides a broad range of financial
services to individuals and companies in western Michigan.  These services include
demand, time and savings deposits; lending; ATM processing; cash management; and trust
services.  While the Company's management team monitors the revenue streams of the
various Company products and services, operations are managed and financial performance
is evaluated on a Company-wide basis.  Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable operating
segment.

Off Balance Sheet
Financial Instruments:  Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit, issued to
meet customer financing needs.  The face amount for these items represents the exposure
to loss, before considering customer collateral or ability to repay.  Such financial
instruments are recorded when they are funded.

Loss Contingencies:  Loss
contingencies, including claims and legal actions arising in the ordinary course of
business, are recorded as liabilities when the likelihood of loss is probable and an
amount or range of loss can be reasonably estimated.

(Continued)

F-13

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivative instruments
and hedging activities:  All derivative instruments are recorded at their fair values.
 If derivative instruments are designated as hedges of fair values, both the change in
the fair value of the hedge and the hedged item are included in current earnings.  Fair
value adjustments related to cash flow hedges are recorded in other comprehensive income
and reclassified to earnings when the hedged transaction is reflected in earnings.
 Ineffective portions of hedges are reflected in income currently.

Goodwill:
 Goodwill results from prior business acquisitions and represents the excess of the
purchase price over the fair value of acquired tangible assets and liabilities and
identifiable intangible assets. Goodwill is assessed at least annually for impairment and
any such impairment will be recognized in the period identified.

Acquisition Intangibles:
 Acquisition intangibles consist of core deposit and acquired customer relationship
intangible assets arising from acquisitions.  They are initially measured at fair value
and then are amortized on an accelerated method with estimated useful lives of ten years.
 These assets are reviewed for impairment when events indicate the carrying amount may
not be recoverable.

Dividend Restriction:
 Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the Bank to the Company or by the Company to shareholders.

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

(Continued)

F-14

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 2 - CASH AND DUE
FROM BANKS

The Company was required
to have $3,592,000 and $2,670,000 of cash on hand or on deposit with the Federal Reserve
Bank to meet regulatory reserve and clearing requirements at year-end 2005 and 2004.
 These balances do not earn interest.

# NOTE 3 - SECURITIES

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

|                          | AmortizedCost | GrossUnrealizedGains | GrossUnrealized Losses | Fair Value
|------------------------- | ------------- | -------------------- | ---------------------- | ----------
|                          |               |                      |                        |           
|Available for Sale 2005   |               |                      |                        |           
|U.S. Treasury and federal |              
|agency securities         |               | $111,102             |                        | $    103  
|State and municipal bonds |               | 46,878               |                        | 609       
|Other equity securities   |               | 1,000                |                        | --        
|                          |               |                      |                        |           
|                          |               | $158,980             |                        | $    712  
|                          |               |                      |                        |           
|Held to Maturity 2005     |              
|State and municipal bonds |               | $    3,907           |                        | $      80 
|                          |               |                      |                        |           
|                          |               | $    3,907           |                        | $      80 
|                          |               |                      |                        |           
|Available for Sale 2004   |              
|U.S. Treasury and federal |              
|agency securities         |               | $  91,394            |                        | $    447  
|State and municipal bonds |               | 45,152               |                        | 907       
|                          |               |                      |                        |           
|                          |               | $136,546             |                        | $ 1,354   
|                          |               |                      |                        |           
|Held to Maturity 2004     |              
|State and municipal bonds |               | $    2,552           |                        | $    110  
|                          |               |                      |                        |           
|                          |               | $    2,552           |                        | $    110  
|                          |               |                      |                        |           

Securities with unrealized losses at
year-end 2005 and 2004, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, are as follows
(dollars in thousands):

|                           | Less than 12 Months | 12 Months or More | Total
|-------------------------- | ------------------- | ----------------- | -----
|                           |                     |                   |      
|                           |                     |                   |      
|December 31, 2005          |                     |                   |      
|U.S. Treasury and federal  |                    
|agency securities          |                     | $70,531           |      
|State and municipal bonds  |                     | 16,419            |      
|Other equity securities    |                     | 993               |      
|                           |                     |                   |      
|Total temporarily impaired |                     | $87,943           |      
|                           |                     |                   |      

---

(Continued)

F-15

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 3  SECURITIES
(Continued)

|                           | Less than 12 Months | 12 Months or More | Total
|-------------------------- | ------------------- | ----------------- | -----
|                           |                     |                   |      
|                           |                     |                   |      
|December 31, 2004          |                     |                   |      
|U.S. Treasury and federal  |                    
|agency securities          |                     | $32,610           |      
|State and municipal bonds  |                     | 10,870            |      
|                           |                     |                   |      
|Total temporarily impaired |                     | $43,480           |      
|                           |                     |                   |      

For unrealized losses on securities,
no loss has been recognized into income in either 2005 or 2004 because management has the
intent and ability to hold these securities for the foreseeable future and the declines
are largely due to differences in market interest rates as compared to those of the
underlying securities. The declines in fair value are considered temporary and are
expected to recover as the bonds approach their maturity date.

Contractual maturities of debt
securities at December 31, 2005 were as follows (dollars in thousands):

|                           | Held-to-Maturity Securities | Available-for-Sale Securities
|-------------------------- | --------------------------- | -----------------------------
|                           |                             |                              
|                           |                             |                              
|Due in one year or less    |                             | $   715                      
|Due from one to five years |                             | 715                          
|Due from five to ten years |                             | 452                          
|Due after ten years        |                             | 2,025                        
|                           |                             |                              
|                           |                             | $3,907                       
|                           |                             |                              

There were no sales of securities for
the years ended December 31, 2005, 2004 and 2003.

At December 31, 2005 and 2004,
securities with a carrying value of approximately $1,000,000 were pledged as security for
public deposits and for other purposes required or permitted by law. In addition,
securities totaling $107,581,000 and $90,392,000 at December 31, 2005 and 2004 were used
as collateral for advances from the Federal Home Loan Bank.

# NOTE 4  LOANS

Year-end loans were as follows
(dollars in thousands):

|                     | 2005 | 2004       
|-------------------- | ---- | -----------
|Commercial           |      | $   359,036
|Commercial mortgage  |      | 793,919    
|Residential mortgage |      | 223,390    
|Consumer             |      | 171,534    
|                     |      |            
|                     |      | $1,547,879 
|                     |      |            

---

(Continued)

F-16

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

NOTE 4  LOANS
(Continued)

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

|                          | 2005 | 2004     | 2003
|------------------------- | ---- | -------- | ----
|Beginning balance         |      | $ 19,251 |     
|Provision for loan losses |      | 3,675    |     
|Loans charged-off         |      | (2,237   | )   
|Recoveries                |      | 303      |     
|                          |      |          |     
|Ending balance            |      | $ 20,992 |     
|                          |      |          |     

Loans charged-off for 2004 included a
third quarter charge of $2,800,000 related to one borrower whose loans, totaling
$5,900,000, became impaired due to fraud perpetrated by the borrower. After this
charge-off, approximately $3,100,000 of the loan balances remained outstanding. Subsequent
to this initial charge-off, proceeds from the liquidation of certain collateral, payments
on outstanding receivables, and additional charge-offs of $125,000 in 2004 and $789,000 in
2005, reduced the balance to approximately $2,300,000 at December 31, 2004 and $229,000 at
December 31, 2005.

Impaired loans were as follows
(dollars in thousands):

|                                   | 2005 | 2004   
|---------------------------------- | ---- | -------
|Loans with no allocated allowance  |      |        
|for loan losses                    |      | $2,061 
|Loans with allocated allowance for |     
|loan losses                        |      | 1,297  
|                                   |      |        
|                                   |      | $3,358 
|                                   |      |        
|Amount of the allowance for loan   |     
|losses allocated                   |      | $   333
|                                   |      |        

|                                             | 2005 | 2004   | 2003
|-------------------------------------------- | ---- | ------ | ----
|Average of impaired loans during the period  |      | $2,833 |     
|Interest income recognized during impairment |      | 0      |     
|Cash-basis interest income recognized        |      | 0      |     

|2005                                         | 2004
|-------------------------------------------- | ----
|Loans past due over 90 days still on accrual |     
|Nonaccrual loans                             |     
|                                             |     
|                                             |     
|                                             |     

Nonperforming loans include both
smaller balance homogeneous loans that are collectively evaluated for impairment and
individually classified impaired loans.

---

(Continued)

F-17

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 5  PREMISES
AND EQUIPMENT  NET

Year-end premises and equipment were
as follows (dollars in thousands):

|                              | 2005 | 2004    
|----------------------------- | ---- | --------
|Land                          |      | $ 14,252
|Building                      |      | 32,765  
|Leasehold improvements        |      | 1,231   
|Furniture and equipment       |      | 15,571  
|Construction in progress      |      | 925     
|                              |      |         
|                              |      | 64,744  
|Less accumulated depreciation |      | (11,716 
|                              |      |         
|                              |      | $ 53,028
|                              |      |         

Depreciation expense was $2,713,000, $2,546,000
and $2,301,000 for each of the years ending December 31, 2005, 2004 and 2003.

The Bank leases certain office and
branch premises and equipment under operating lease agreements. Total rental expense for
all operating leases aggregated $380,000, $452,000 and $586,000 for each of the years
ending December 31, 2005, 2004 and 2003. Future minimum rental expense under noncancelable
operating leases as of December 31, 2005 is as follows (dollars in thousands):

|     | 
|---- | 
|2006 | 
|2007 | 
|2008 | 
|2009 | 
|2010 | 
|     | 
|     | 
|     | 

# NOTE 6 
ACQUISITION INTANGIBLES

Intangible assets recorded for the
April 1, 2002 acquisition of Grand Bank Financial Corporation were as follows as of
December 31 (dollars in thousands):

|                              | 2005 | 2004   
|----------------------------- | ---- | -------
|Core deposits                 |      | $ 3,185
|Trust relationships           |      | 478    
|                              |      |        
|                              |      | $ 3,663
|Less accumulated amortization |      | (1,772 
|                              |      |        
|                              |      | $ 1,891
|                              |      |        

Both the core deposits and trust
relationships intangibles are being amortized on an accelerated basis over a period of ten
years. Amortization expense for the years ended December 31, 2005, 2004 and 2003 was
$406,000, $440,000 and $484,000. Estimated amortization expense for the next five years is
as follows (dollars in thousands):

|     | 
|---- | 
|2006 | 
|2007 | 
|2008 | 
|2009 | 
|2010 | 

---

(Continued)

F-18

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005 and
2004

---

# NOTE 7  DEPOSITS

Deposits at year-end were as follows
(dollars in thousands):

|                           | 2005 | 2004       
|-------------------------- | ---- | -----------
|Noninterest-bearing demand |      | $   188,762
|Money market               |      | 380,216    
|NOW and Super NOW          |      | 207,947    
|Savings                    |      | 40,612     
|Certificates of deposit    |      | 690,235    
|                           |      |            
|                           |      | $1,507,772 
|                           |      |            

The following table depicts the
maturity distribution of certificates of deposits at December 31, 2005 (dollars in
thousands):

|           | 
|---------- | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|2010       | 
|Thereafter | 
|           | 
|           | 
|           | 

Approximately $515,772,000 and
$331,677,000 in time certificates of deposit were in denominations of $100,000 or more at
December 31, 2005 and 2004.

Brokered deposits totaled
approximately $284,201,000 and $151,789,000 at December 31, 2005 and 2004. At December 31,
2005 and 2004, brokered deposits had interest rates ranging from 2.70% to 4.55% and 1.50%
to 5.25%, respectively, and at year-end 2005, maturities ranging from one month to
fifty-six months.

---

(Continued)

F-19

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 8  FEDERAL
HOME LOAN BANK ADVANCES

At year-end, advances from the
Federal Home Loan Bank were as follows (dollars in thousands):

|Principal Terms                     | Advance Amount | Range of Maturities | Weighted AverageInterest Rate
|----------------------------------- | -------------- | ------------------- | -----------------------------
|December 31, 2005                   |                |                     |                              
|Single maturity fixed rate advances |                | $104,200            |                              
|Putable advances                    |                | 31,000              |                              
|Amortizable mortgage advances       |                | 9,961               |                              
|                                    |                |                    
|                                    | $145,161       |                    
|                                    |                |                    
|December 31, 2004                   |               
|Single maturity fixed rate advances |                | $  72,100           |                              
|Putable advances                    |                | 41,000              |                              
|Amortizable mortgage advances       |                | 10,885              |                              
|                                    |                |                    
|                                    |                | $123,985            |                              
|                                    |                |                    

Each advance is payable at its maturity
date and contains a prepayment penalty. Putable advances are fixed rate advances that can
be changed to a variable rate at the option of the FHLB. If the FHLB exercises that
option, these advances may be repaid without penalty. These advances were collateralized
by securities totaling $107,581,000 and $90,392,000 at December 31, 2005 and 2004, and
residential and commercial real estate loans totaling $526,066,000 and $544,472,000 under
a blanket lien arrangement at December 31, 2005 and 2004.

Maturities as of December 31, 2005
were as follows (in thousands):

|           | 
|---------- | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|2010       | 
|Thereafter | 
|           | 
|           | 
|           | 

# NOTE 9  OTHER
BORROWINGS

The Company has a $10,000,000 credit
facility to provide liquidity for the parent company and additional capital for the Bank
as necessary. There were no advances outstanding on this credit facility as of December
31, 2005 and 2004.

---

(Continued)

F-20

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 10  LONG-TERM
DEBT

The Company has issued $40.0 million
of pooled trust preferred securities (Preferred Securities) through its
wholly-owned subsidiary grantor trusts. Macatawa Statutory Trust I issued $619,000 of
common securities to the Company and $20.0 million of Preferred Securities on July 15,
2003 at a floating interest rate of the three-month LIBOR plus 3.05%. Macatawa Statutory
Trust II issued $619,000 of common securities and $20.0 million of Preferred Securities on
March 18, 2004 at a floating interest rate of the three-month LIBOR plus 2.75%.

The Company issued subordinated
debentures (Debentures) to each trust in exchange for the proceeds of the
offerings, which Debentures represent the sole asset of each trust. The Preferred
Securities represent an interest in our Companys subordinated debentures, which have
terms that are similar to the Preferred Securities. As provided in each trusts
indenture, the Preferred Securities accrue and pay distributions quarterly at a specified
rate and are subject to mandatory redemption upon the maturity of the Debentures, 30 years
from the date of issuance, or upon earlier redemption. The Company has the right to redeem
the Debentures in whole or in part beginning five years from the date of issuance at a
redemption price specified in each trusts indenture.

At December 31, 2005 and 2004, the
Debentures totaling $41,238,000 are reported in liabilities as Long-term debt, and the
common securities of $1,238,000 and unamortized debt issuance costs are included in other
assets.

At December 31, 2005, approximately
$38 million of the $40 million of Preferred Securities issued qualified as Tier 1 capital
for regulatory capital purposes. At December 31, 2004, approximately $32 million of the
$40 million of Preferred Securities issued qualified as Tier 1 capital for regulatory
capital purposes.

# NOTE 11  RELATED
PARTY TRANSACTIONS

Loans to principal officers,
directors, and their affiliates were as follows (dollars in thousands).

|                        | 2005 | 2004    
|----------------------- | ---- | --------
|Beginning balance       |      | $ 14,778
|New loans and renewals  |      | 12,781  
|Repayments and renewals |      | (11,567 
|                        |      |         
|Ending balance          |      | $ 15,992
|                        |      |         

Deposits from principal officers,
directors, and their affiliates at December 31, 2005 and 2004 were $6,199,000 and
$9,487,000.

---

(Continued)

F-21

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005 and
2004

---

# NOTE 12  STOCK
OPTIONS

Options to buy stock are granted to
officers and employees under the Employee Stock Option Plan (the Employees Plan),
which provides for issue of up to 659,295 options. Options are also granted to directors
under the Directors Stock Option Plan (the Directors Plan), which provides for
issuance of up to 186,185 options. The exercise price is the market price at the date of
grant for all plans. The maximum option term is ten years. The vesting schedule is over a
one-year period for both the Employees Plan and the Directors Plan for all
grants through the third quarter 2005. Beginning with grants in the fourth quarter of
2005, the vesting schedule was increased to three years. The amount of options available
for future grants at year-end 2005 is 52,750. A summary of the activity in the plans is as
follows.

|                             | Options   Outstanding | Weighted
 Average
ExercisePrice
|---------------------------- | --------------------- | -------------------------------
|Balance at January 1, 2003   |                       | 468,695                        
|Granted                      |                       | 159,895                        
|Exercised                    |                       | (102,190                       
|Forfeited                    |                       | (3,795                         
|                             |                       |                                
|Balance at December 31, 2003 |                       | 522,605                        
|Granted                      |                       | 113,908                        
|Exercised                    |                       | (48,033                        
|Forfeited                    |                       | (3,306                         
|                             |                       |                                
|Balance at December 31, 2004 |                       | 585,174                        
|Granted                      |                       | 148,100                        
|Exercised                    |                       | (83,092                        
|Forfeited                    |                       | (2,563                         
|                             |                       |                                
|Balance at December 31, 2005 |                       | 647,619                        
|                             |                       |                                

There were 499,519, 471,265 and
363,343 options exercisable at year-end 2005, 2004, and 2003. Options exercisable had a
weighted average exercise price of $17.16, $14.62 and $11.73 at year-end 2005, 2004 and
2003.

Options outstanding at year-end 2005
were as follows.

|                        | ---------------Outstanding---------------- | -------Exerciseable-------
|----------------------- | ------------------------------------------ | --------------------------
|
|$3.00-$10.00            |                                            | 64,974                    
|$10.01-$13.00           |                                            | 72,803                    
|$13.01-$17.00           |                                            | 158,546                   
|$17.01-$23.00           |                                            | 97,640                    
|$23.01-$28.00           |                                            | 105,556                   
|$28.01-$33.00           |                                            | 4,600                     
|$33.01-$38.00           |                                            | 143,500                   
|                        |                                            |                           
|Outstanding at year end |                                            | 647,619                   
|                        |                                            |                           

---

(Continued)

F-22

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 13  EMPLOYEE
BENEFITS

The Company sponsors a 401(k) plan
which covers substantially all employees. Employees may elect to contribute to the plan
from 1% to 15% of their salary subject to statutory limitations. The Company makes
matching contributions equal to 100% of the first 3% of employee contributions and 50% of
employee contributions in excess of 3%, up to 6%. The Companys contributions for the
years ended December 31, 2005, 2004 and 2003 were approximately $620,000, $560,000 and
$450,000.

The Company sponsors an employee
stock purchase plan which allows employees to defer after-tax payroll dollars and purchase
Company stock on a quarterly basis. The Company has reserved 25,000 shares of common stock
to be issued and purchased under the plan, however, the plan allows for shares to be
purchased directly from the Company or on the open market.

Grand Bank had a defined benefit
pension plan covering substantially all of its employees. The plan was curtailed in
conjunction with the acquisition of Grand Bank effective April 1, 2002. Financial
information regarding the plan was as follows, as of December 31, 2004 (dollars in
thousands).

|                                      | 2004
|------------------------------------- | ----
|Benefit obligation at year-end        |     
|Fair value of plan assets at year-end |     
|                                      |     
|Funded status                         |     
|                                      |     
|Net benefit cost                      |     
|Employer contributions                |     
|Benefits paid                         |     

In March of 2005, the plan was
terminated and all appropriate distributions to plan participants were made. The plan was
sufficiently funded at the time of termination, therefore the final distributions had no
material impact on the Companys results of operations for 2005.

---

(Continued)

F-23

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005 and
2004

---

# NOTE 14 EARNINGS
PER SHARE

A reconciliation of the numerators
and denominators of basic and diluted earnings per share are as follows (dollars in
thousands except per share data):

|                                  | 2005 | 2004             | 2003
|--------------------------------- | ---- | ---------------- | ----
|Basic earnings per share          |      |                  |     
|Net income                        |      | $       20,889   |     
|Weighted average common shares    |     
|outstanding                       |      | 10,197,207       |     
|                                  |      |                  |     
|Basic earnings per share          |      | $           2.05 |     
|                                  |      |                  |     
|Diluted earnings per share        |     
|Net income                        |      | $       20,889   |     
|Weighted average common shares    |     
|outstanding                       |      | 10,197,207       |     
|Add:  Dilutive effects of assumed |     
|exercises of stock options        |      | 269,504          |     
|                                  |      |                  |     
|Weighted average common and       |     
|dilutive potential common         |     
|shares outstanding                |      | 10,466,711       |     
|                                  |      |                  |     
|Diluted earnings per share        |      | $           2.00 |     
|                                  |      |                  |     

Stock options for 143,500, 111,608,
and 111,090 shares of common stock were not considered in computing diluted earnings per
share for December 31, 2005, 2004 and 2003 because they were antidilutive.

---

(Continued)

F-24

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005 and
2004

---

# NOTE 15  FEDERAL
INCOME TAXES

The consolidated provision for income
taxes was as follows (dollars in thousands):

|                           | 2005 | 2004      | 2003
|-------------------------- | ---- | --------- | ----
|Current                    |      | $ 10,503  |     
|Deferred (benefit) expense |      | (649      | )   
|                           |      |           |     
|                           |      | $   9,854 |     
|                           |      |           |     

The difference between the financial
statement tax expense and amount computed by applying the statutory federal tax rate to
pretax income was reconciled as follows (dollars in thousands):

|                                              | 2005 | 2004      | 2003
|--------------------------------------------- | ---- | --------- | ----
|Statutory rate                                |      | 35        | %   
|Statutory rate applied to income before taxes |      | $ 10,760  |     
|Add (deduct)                                  |     
|Tax-exempt interest income                    |      | (647      | )   
|Bank-owned life insurance                     |      | (230      | )   
|Other, net                                    |      | (29       | )   
|                                              |      |           |     
|                                              |      | $   9,854 |     
|                                              |      |           |     

The net deferred tax asset recorded
included the following amounts of deferred tax assets and liabilities (dollars in
thousands):

|                                                 | 2005 | 2004   
|------------------------------------------------ | ---- | -------
|Deferred tax asset                               |      |        
|Allowance for loan losses                        |      | $ 7,347
|Unrealized loss on derivative instruments        |      | 751    
|Unrealized loss on securities available for sale |      | 800    
|Other                                            |      | 378    
|                                                 |      |        
|                                                 |      | 9,276  
|Deferred tax liabilities                         |     
|Depreciation                                     |      | (1,966 
|Purchase accounting adjustments                  |      | (744   
|Unrealized gain on securities available for sale |      | 0      
|Other                                            |      | (602   
|                                                 |      |        
|                                                 |      | (3,312 
|                                                 |      |        
|Net deferred tax asset                           |      | $ 5,964
|                                                 |      |        

A valuation allowance related to
deferred tax assets is required when it is considered more likely than not that all or
part of the benefit related to such assets will not be realized. Based on the levels of
taxable income in the current and prior years which would be available to absorb the
benefit, management has determined that no valuation allowance was required at December
31, 2005 or 2004.

---

(Continued)

F-25

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005 and
2004

---

# NOTE 16 
COMMITMENTS AND OFF-BALANCE-SHEET RISK

Some financial instruments are used
to meet customer financing needs and to reduce exposure to interest rate changes. These
financial instruments include commitments to extend credit and standby letters of credit.
These involve, to varying degrees, credit and interest-rate risk in excess of the amount
reported in the financial statements.

Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition
established in the commitment, and generally have fixed expiration dates. Standby letters
of credit are conditional commitments to guarantee a customers performance to a
third party. Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of credit.
Collateral or other security is normally not obtained for these financial instruments
prior to their use, and many of the commitments are expected to expire without being used.

A summary of the notional or
contractual amounts of financial instruments with off-balance-sheet risk was as follows
(dollars in thousands):

|                          | December 31,
|------------------------- | ------------
|
|Commitments to make loans |             
|Letters of credit         |             
|Unused lines of credit    |             

At year-end 2005, approximately 43%
of the Banks commitments to make loans were at fixed rates, offered at current
market rates. The majority of the variable rate commitments noted above were tied to prime
and expire within 30 days. The majority of the unused lines of credit were at variable
rates tied to prime.

The Bank conducts substantially all
of its business operations in western Michigan.

# NOTE 17 
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, which the Company acquired effective April 1, 2002. 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 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. In late July 2005 another purported class action was
filed against the Company by the counsel to the Trade Partners receiver making allegations
similar to those in the first class action, but on behalf of a class which the suit claims
comprises all persons who made any kind of investment with Trade Partners. 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.

---

(Continued)

F-26

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005 and
2004

---

# NOTE 17 
CONTINGENCIES (Continued)

Trade Partners is now in
receivership. The supervising court authorized the receiver 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. No draws were
made against the line, and the line expired during the fourth quarter of 2004.

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 have not progressed to trial 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.

# NOTE 18  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
analysis. 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, 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
interest rate 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 2005 and 2004. It is anticipated that approximately $578,000 net of tax, of
unrealized losses on these cash flow hedges will be reclassified to earnings over the next
twelve months.

Summary information about interest
rate swaps at year-end follows (dollars in thousands).

|                                               | December 31
|---------------------------------------------- | -----------
|
|Notional amounts                               |            
|Weighted average pay rates                     |            
|Weighted average receive rates                 |            
|Weighted average maturity                      |            
|Unrealized loss related to interest rate swaps |            

---

(Continued)

F-27

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 19 
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 measures
of assets, liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action that could have a direct material effect on
the financial statements.

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

At December 31, 2005 and 2004, actual
capital levels (dollars in thousands) and minimum required levels were:

|                                         | Actual | Minimum Required 
For CapitalAdequacy Purposes | To Be Well
  Capitalized Under
  Prompt CorrectiveAction Regulations
|---------------------------------------- | ------ | ---------------------------------------------- | --------------------------------------------------------------------
|
|December 31, 2005                        |        |                                                |                                                                     
|Total capital (to risk weighted assets)  |       
|Consolidated                             |        | $179,756                                       |                                                                     
|Bank                                     |        | 173,481                                        |                                                                     
|Tier 1 capital (to risk weighted assets) |       
|Consolidated                             |        | 157,450                                        |                                                                     
|Bank                                     |        | 153,210                                        |                                                                     
|Tier 1 capital (to average assets)       |       
|Consolidated                             |        | 157,450                                        |                                                                     
|Bank                                     |        | 153,210                                        |                                                                     
|December 31, 2004                        |       
|Total capital (to risk weighted assets)  |       
|Consolidated                             |        | $161,367                                       |                                                                     
|Bank                                     |        | 147,500                                        |                                                                     
|Tier 1 capital (to risk weighted assets) |       
|Consolidated                             |        | 135,226                                        |                                                                     
|Bank                                     |        | 129,384                                        |                                                                     
|Tier 1 capital (to average assets)       |       
|Consolidated                             |        | 135,226                                        |                                                                     
|Bank                                     |        | 129,384                                        |                                                                     

The Company and Bank were categorized as
well capitalized at December 31, 2005 and 2004. There are no conditions or events since
that notification that management believes have changed either institutions
category.

Banking regulations limit capital
distributions. Generally, capital distributions are limited to undistributed net income
for the current and prior two years. At December 31, 2005 and 2004, approximately
$50,126,000 and $35,516,000 was available to pay dividends to the holding company.

---

(Continued)

F-28

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 20  FAIR
VALUES OF FINANCIAL INSTRUMENTS

Carrying amount and estimated fair
values of financial instruments were as follows at year-end (dollars in thousands).

|                                       | 2005 | 2004         
|-------------------------------------- | ---- | -------------
|
|Financial assets                       |      |              
|Cash and cash equivalents              |      | $      49,101
|Securities available for sale          |      | 156,696      
|Securities held to maturity            |      | 3,907        
|FHLB stock                             |      | 13,910       
|Loans held for sale                    |      | 2,331        
|Loans, net                             |      | 1,526,887    
|Accrued interest receivable            |      | 8,366        
|Bank-owned life insurance              |      | 20,814       
|Financial liabilities                  |     
|Deposits                               |      | (1,507,772   
|Federal funds purchased                |      | (25,809      
|FHLB  advances                         |      | (145,161     
|Long-term debt                         |      | (41,238      
|Interest rate swaps                    |      | (2,146       
|Accrued interest payable               |      | (4,528       
|Off-balance sheet credit-related items |     
|Loan commitments                       |      | 0            

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

Carrying amount is the estimated fair
value for cash and cash equivalents, short-term borrowings, Federal Home Loan Bank stock,
accrued interest receivable and payable, bank-owned life insurance, demand deposits,
short-term debt, and variable rate loans or deposits that reprice frequently and fully.
Security fair values are based on market prices or dealer quotes, and if no such
information is available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits with
infrequent repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying collateral
values. Fair value of loans held for sale is based on market quotes. Fair value of debt is
based on current rates for similar financing. The fair value of interest rate swaps is
based on market prices or dealer quotes. The fair value of off-balance sheet
credit-related items is not significant.

---

(Continued)

F-29

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005 and
2004

---

# NOTE 21  CONDENSED
FINANCIAL STATEMENTS (PARENT COMPANY ONLY)

Following are condensed parent
company only financial statements (dollars in thousands):

CONDENSED BALANCE SHEETS

|                                              | 2005 | 2004       
|--------------------------------------------- | ---- | -----------
|ASSETS                                        |      |            
|Cash and cash equivalents                     |      | $     4,550
|Investment in Bank subsidiary                 |      | 175,511    
|Investment in other subsidiaries              |      | 2,103      
|Other assets                                  |      | 1,158      
|                                              |      |            
|Total assets                                  |      | $ 183,322  
|                                              |      |            
|LIABILITIES AND SHAREHOLDERS' EQUITY          |     
|Long-term debt                                |      | $   41,238 
|Other liabilities                             |      | 340        
|                                              |      |            
|Total liabilities                             |      | 41,578     
|Shareholders' equity                          |     
|Common stock                                  |      | 136,583    
|Retained earnings                             |      | 8,040      
|Accumulated other comprehensive income (loss) |      | (2,879     
|                                              |      |            
|Total shareholders' equity                    |      | 141,744    
|                                              |      |            
|Total liabilities and shareholders' equity    |      | $ 183,322  
|                                              |      |            

---

(Continued)

F-30

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

NOTE 21  CONDENSED
FINANCIAL STATEMENTS (PARENT COMPANY ONLY)  (Continued)

CONDENSED STATEMENTS OF
INCOME

|                                         | 2005 | 2004         | 2003
|---------------------------------------- | ---- | ------------ | ----
|Income                                   |      |              |     
|Interest income                          |      | $          0 |     
|                                         |      |              |     
|Total income                             |      | 0            |     
|                                         |      |              |     
|Expense                                  |     
|Interest expense                         |      | 2,603        |     
|Other expense                            |      | 661          |     
|                                         |      |              |     
|Total expense                            |      | 3,264        |     
|Loss before income tax and equity in     |     
|undistributed net income of subsidiaries |      | (3,264       | )   
|Equity in undistributed net income       |     
|of subsidiaries                          |      | 23,010       |     
|                                         |      |              |     
|Income before income tax                 |      | 19,746       |     
|Income tax benefit                       |      | (1,143       | )   
|                                         |      |              |     
|Net income                               |      | $ 20,889     |     
|                                         |      |              |     

---

(Continued)

F-31

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

NOTE 21  CONDENSED
FINANCIAL STATEMENTS (PARENT COMPANY ONLY)  (Continued)

CONDENSED STATEMENTS OF
CASH FLOWS

|                                                 | 2005 | 2004      | 2003
|------------------------------------------------ | ---- | --------- | ----
|Cash flows from operating activities             |      |           |     
|Net income                                       |      | $ 20,889  |     
|Adjustments to reconcile net income to net cash  |     
|provided by (used in) operating activities:      |     
|Equity in undistributed earnings of subsidiaries |      | (23,010   | )   
|(Increase) decrease in other assets              |      | (1,126    | )   
|Increase (decrease) in other liabilities         |      | (45       | )   
|                                                 |      |           |     
|Net cash from operating activities               |      | (3,292    | )   
|Cash flows from investing activities             |     
|Loan originations and payments                   |      | 0         |     
|Investment in subsidiaries                       |      | (126      | )   
|                                                 |      |           |     
|Net cash from investing activities               |      | (126      | )   
|Cash flows from financing activities             |     
|Other borrowings                                 |      | 0         |     
|Proceeds from issuance of long-term debt         |      | 0         |     
|Proceeds from exercises of stock options         |      | 880       |     
|Fractional shares purchased                      |      | (35       | )   
|Cash dividends paid                              |      | (6,228    | )   
|                                                 |      |           |     
|Net cash from financing activities               |      | (5,383    | )   
|Net change in cash and cash equivalents          |      | (8,801    | )   
|Cash and cash equivalents at beginning of year   |      | 13,351    |     
|                                                 |      |           |     
|Cash and cash equivalents at end of year         |      | $   4,550 |     
|                                                 |      |           |     

---

(Continued)

F-32

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and
2004

---

# NOTE 22  QUARTERLY
FINANCIAL DATA (Unaudited)

|               |  |         |  | Earnings Per Share
|-------------- |  | ------- |  | ------------------
|
|
|
|2005           |  |         |  |                   
|First quarter  |  | $23,198 |  | $14,844           
|Second quarter |  | 25,357  |  | 15,487            
|Third quarter  |  | 27,752  |  | 16,105            
|Fourth quarter |  | 29,087  |  | 16,401            
|              
|2004           | 
|First quarter  |  | $17,305 |  | $11,392           
|Second quarter |  | 18,636  |  | 12,570            
|Third quarter  |  | 20,345  |  | 13,619            
|Fourth quarter |  | 22,043  |  | 14,439            

Net income for the third quarter of
2004 includes the impact of a $2.3 million ($1.5 million after-tax, or $0.15 per share)
charge against earnings related to the one borrower whose loans became impaired as
previously described in Note 4.

---

F-33