# To Our Shareholders:

Without
question, 2007 was the most challenging year in the history of Macatawa Bank. Since we
opened our doors a decade ago, our story has been one of growth, expansion, increased
profitability and dividends. Even as West Michigan began to move into an economic
downturn, we continued to add new customers, increase market share, and deliver strong
financial results.

Last
year proved to be different for Macatawa as well as for financial institutions across the
state and throughout the country. The economic downturn in Michigan resulted in lower
household income and job losses that accelerated throughout the year. This was compounded
by a national decline in home sales and values, which we feel significantly impacted West
Michigan.

As
a result, our 2007 performance was disappointing. The biggest factor contributing to these
results was an increase in our loan loss allowance related to residential land development
loans. Real estate developers use these loans to finance land and construction for
residential communities. While these loans are collateralized by real estate assets, the
current economic environment is putting downward pressure on prices and significantly
extending the payback periods of many projects.

The
marketplace dynamics are causing some of our loans to underperform. We took a fiscally
prudent step of increasing our loan loss provision during the third and fourth quarters,
which had a negative impact on our overall performance.

Given
the environment and the fact we had been a victim of loan fraud, we felt it was
appropriate to review our underwriting procedures to ensure we are properly managing our
loan portfolio. This review showed that our underwriting principles continue to be sound.
We used the opportunity to further improve our loan systems and procedures and to
implement emerging best practices in our industry. We also reviewed our
lending standards and, in light of the current economic conditions in West Michigan,
tightened some of our policies and requirements. We believe the measures we have taken
will allow us to continue to fulfill our mission as the go-to community bank for
mortgages, home-equity lines, manufacturing expansions and other loans that are good for
our economy  while building a growing and profitable bank.

Let
us be very clear: the majority of our loans continue to perform well. The bulk of our
underperforming loans can be traced to the struggling economy, particularly the housing
market, in West Michigan. Moving forward, we are committed to disciplined loan
underwriting. Our senior loan team has worked to analyze our loan portfolio and taken the
appropriate steps to identify and mitigate potential issues going forward.

We
strongly believe that 2008 will be a better year for Macatawa Bank. While the loan
situation will take some time to resolve, we have already set aside reserves for our most
significant issues. Our local economy has already begun to see bright spots in terms of
new jobs and increased manufacturing exports. The January cuts in the federal fund rates,
along with the much-anticipated growth stimulus package, will help spur our economic
recovery.

# Built From A Solid
Foundation

In
just 10 years, Macatawa Bank has grown to be a market leader. We have worked hard to
secure a significant market share, good growth in core accounts, great customer acceptance
and a group of exceptionally strong employees. We are building on our already-solid
foundations to ensure year-over-year financial improvements, continued growth and
long-term success.

Every
decision made over the last decade has been with these values and principles in mind. Our
philosophy continues to resonate with a wide variety of customers, from corporate CEOs
looking to fund expansions, to entrepreneurs financing start-up ventures, to prospective
retirees planning for the care of their nest egg and newlyweds looking to buy their first
homes. We have products and services to meet all of these needs and more. The depth and
breadth of our offerings, in combination with our blend of high-tech and high-touch
banking, earned us the leading deposit market share in Ottawa County, and moved us to
number two overall in the major West Michigan counties of Kent, Ottawa and Allegan.

---



# Focused for a Successful
Future

Despite
the economic challenges for our region, the team at Macatawa Bank is working to ensure
continued growth. Our goal is to help every customer be a partner for life. We continue to
emphasize our sales and service culture through face-to-face meetings with existing and
potential customers. From a product and services viewpoint, we are continually upgrading
our offerings to strengthen customer retention and open additional revenue opportunities.
Finally, we are managing our operating costs through process improvements, productivity
gains and an ongoing flow of revenue-generation and cost-savings ideas. We invite you to
learn more about our plans in the forthcoming pages.

We
believe in West Michigan. Macatawa Bank has strong roots in this community. We understand
its potential and are committed to its growth. By working with our customers and keeping
their best interests in mind during these rough times, we feel we will be well positioned
to grow with them when the economy does turn around  as we know it will.

There
is no doubt that 2007 was a tough year. Despite the challenging market conditions, we
continued to make progress  even if that progress was not as evident as it had been
in years past. We certainly cant control the economy. We can  and have 
positioned the Bank to minimize risk and maximize potential.

We
are appreciative for the commitment and support extended to us over the past 10 years by
our shareholders, customers, employees and the entire West Michigan community. We look
forward to many years of continued success and to sharing the fruits of that success with
our shareholders.

|Benjamin A. Smith III
Chairman & CEO Macatawa Bank Corporation | Philip J. Koning
President Macatawa Bank Corporation
President & CEO Macatawa Bank
|-------------------------------------------------------------- | ----------------------------------------------------------------------------------

---



# Financial Highlights

|As of and for the Year Ended December 31 
|-----------------------------------------
|                                         
|                                         
|                                         
|                                         
|Summary of Operations                    
|Net interest income                      
|Provision for loan losses (1) (2)        
|Noninterest income                       
|Noninterest expense                      
|Net income (1) (2)                       
|                                         
|Balance Sheet Data                       
|Total assets                             
|Loans                                    
|Deposits                                 
|Shareholders' equity                     
|Allowance for loan losses                
|                                         
|Key Ratios                               
|Return on average equity (1) (2)         
|Return on average assets (1) (2)         
|Average net interest margin              
|Efficiency ratio                         
|                                         
|Share Information*                       
|Basic earnings per common share (1) (2)  
|Diluted earnings per common share (1) (2)
|Book value per common share              
|Dividends per common share               
|Shares outstanding at end of period      

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

|(1) | Net income for 2007 includes the impact of approximately $11.6 million ($7.5
          million after tax, or $0.44 per share) of charges against earnings for
          additional provisions for loan losses to address risks associated with loans to
          residential developers.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Net income for 2006 includes the impact of a $4.7 million ($3.1 million after
          tax, or $0.18 per share) charge against earnings related to a commercial
          borrower whose loans became impaired.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Selected Consolidated
Financial DataThe 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, 2007 and 2006, and the
Consolidated Statements of Income for the years ended December 31, 2007, 2006, and 2005,
are included elsewhere in this Annual Report.

|As of and For the Year Ended December 31          
|--------------------------------------------------
|                                                  
|                                                  
|                                                  
|                                                  
|Financial Condition                               
|Total assets                                      
|Securities                                        
|Loans                                             
|Deposits                                          
|Other borrowed funds                              
|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 splits and dividends.

---



# Quarterly Financial Data
(unaudited)

A summary of selected quarterly results
of operations for the years ended December 31, 2007 and 2006 follows:

|Three Months Ended              
|--------------------------------
|                                
|                                
|                                
|                                
|2007                            
|Interest income                 
|Net Interest income             
|Provision for loan losses       
|Income before income tax expense
|Net income                      
|                                
|Net income per share*           
|Basic                           
|Diluted                         
|                                
|2006                            
|Interest income                 
|Net Interest income             
|Provision for loan losses       
|Income before income tax expense
|Net income                      
|                                
|Net income per share*           
|Basic                           
|Diluted                         

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

Net income for the third and fourth
quarters of 2007 includes the impact of $2.1 million ($1.4 million after tax, or $0.08 per
share) and $9.5 million ($6.2 million after tax, or $0.36 per share), respectively, of
charges against earnings for additional provisions for loan losses primarily to address
risks associated with loans to residential developers.

Net income for the fourth quarter of
2006 includes the impact of a $4.7 million ($3.1 million after tax, or $0.18 per share)
charge against earnings related to a commercial borrower whose loans became impaired.

---



# 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 a wholly owned subsidiary, Macatawa
Bank and for two trusts, Macatawa Statutory Trust I and Macatawa Statutory Trust II.
Effective November 1, 2006, Macatawa Investment Services, Inc., a wholly owned subsidiary
of Macatawa Bank Corporation, ceased doing business as a registered broker-dealer.
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-six 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. On November 1, 2006, Macatawa Bank began offering
brokerage services to its customers through an arrangement with Infinex Investments, Inc.
(Infinex). Infinex is a full service investment provider, a registered
broker-dealer and a member of the National Association of Securities Dealers (NASD) and
the Securities Investor Protection Corporation (SIPC). As more fully discussed in our Form
8-K dated October 11, 2006, Macatawa Bank Corporation entered into an Agreement and Plan
of Merger with the Smith & Associates investment advisory firm based in Holland,
Michigan. The Smith & Associates acquisition became effective on January 1, 2007 and
that business is now part of Macatawa Bank. 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.

We have experienced rapid and
substantial growth since opening Macatawa Bank in November of 1997 with assets reaching
$2.1 billion as of December 31, 2007. 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 quality
service standards.

The West Michigan markets within
which we operate continue to provide significant expansion opportunities for us. We opened
our twenty-sixth branch during the second quarter of 2007 on the southeast side of the
greater Grand Rapids area. 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 and Grand
Haven markets.We anticipate that we will continue to experience growth in our
balance sheet and in our earnings due to these expansion opportunities.

---



# RESULTS OF OPERATIONS

Summary:Net income totaled
$9.3 million or $0.54 per diluted share for 2007 compared to $19.8 million or $1.14 per
diluted share for 2006 and $20.9 million or $1.21 per diluted share for 2005. The results
for 2007 include charges against earnings of approximately $11.6 million ($7.5 million
after tax, or approximately $0.44 per share) for additional provisions for loan losses to
address risks associated with loans to residential developers. The results for 2006
include a charge against earnings of $4.7 million ($3.1 million after tax, or
approximately $0.18 per share), for a loss associated with an impaired commercial loan
relationship. Circumstances associated with these losses are described under Loan
Portfolio and Asset Quality and Allowance for Loan Losses.

Net Interest Income:Net
interest income totaled $62.9 million during 2007 compared to $67.4 million during 2006
and $62.8 million during 2005. The decrease in net interest income during 2007 compared to
2006 was primarily due to a decline in the net interest margin partially offset by an
increase in average earning assets. Average interest earning assets increased by $120.5
million, or 7%, to $1.96 billion for 2007. The net interest margin decreased 46 basis
points to 3.21% for 2007 from 3.67% for 2006 from both a decrease in the yield on earning
assets and an increase in the cost of funds.

The yield on earning assets decreased
15 basis points to 7.11% for 2007 from 7.26% for 2006. The impact of rising balances of
nonperforming loans during 2007 resulted in a decline of approximately 18 basis points and
was the primary reason for the overall decline. In addition, a shift to generally lower
rate fixed rate loans offset the impact of an increase in the yield on the variable rate
loan portfolio during the period from 2006 to 2007. The shift to fixed rate loan products
occurred throughout most of this period as long-term fixed rates were generally lower than
short-term rates. The impact from this shift was offset by a general rise in the yield on
variable rate loans from the increase in short-term rates that occurred through June of
2006. The recent 100 basis point decline in the prime rate that resulted from the Federal
funds rate cuts that began in late September of 2007 partially offset the increase in
yield on the variable rate loan portfolio.

The cost of funds increased 31 basis
points to 4.32% in 2007 from 4.01% in 2006. The general increase in rates paid on our
deposit accounts, the rollover of time deposits at higher rates and a shift to higher
costing funds within the generally high interest rate environment that occurred throughout
2006 and through the third quarter of 2007 are the primary reasons for the increase. The
rates paid on time deposits and other rate sensitive deposit products reached attractive
levels throughout most of 2007 causing deposit customers to shift funds from transaction
accounts, primarily non-interest demand and money market accounts, into these higher rate
accounts. The recent decrease in market rates that began in late September of 2007,
however, led to a decline in our cost of funds during the fourth quarter, partially
offsetting the increase in our cost of funds for the year.

The growth in net interest income
during 2006 compared to 2005 was largely driven by strong growth in average interest
earning assets, partially offset by a decline in the net interest margin. Average interest
earning assets increased by $180.5 million, or 11%, to $1.83 billion for 2006. The net
interest margin decreased by 14 basis points to 3.67% for 2006 from 3.81% for 2005 as the
increase in the cost of funds exceeded the increase in the yield on assets. The increases
in short-term market rates, including the Federal funds and prime rates, that continued
through the first half of 2006 was the primary reason for the increase in the yield on
interest earning assets of 89 basis points and the increase in the overall cost of funds
of 114 basis points during this period.

---



Anticipated growth in earning assets
is expected to continue at lower levels than we have experienced in the past due to the
generally weak economic conditions in Michigan. The declines in the Federal funds and
prime rates that began in September of 2007 and have continued into 2008 and potential
future rate cuts will have a negative impact on net interest income in the near term,
although over a full twelve month period the overall impact on earnings is expected to be
neutral. Our variable rate loan portfolio exceeds the level of variable rate funding, but
the fixed rate funding portfolio that reprices over the next twelve months is expected to
offset this excess.

The following table shows an analysis
of net interest margin for the years ended December 31, 2007, 2006 and 2005.

|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:                             
|Other borrowed funds                    
|Long-term debt                          
|Federal funds purchased                 
|                                        
|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 are included in interest income. Nonaccrual loans are included in
          average loans outstanding.

---



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            |                               
|Other borrowed funds     |                               
|Long-term debt           |                               
|Fed funds purchased      |                               
|                         |                               
|                         |                               
|Total interest expense   |                               
|                         |                               
|                         |                               
|Net interest income      |                               
|                         |                               

Provision for Loan Losses: The
provision for loan losses for 2007 was $15.8 million as compared to $7.7 million for 2006
and $3.7 million for 2005. The provision for loan losses in 2007 includes approximately
$11.6 million of extra provisions related primarily to loans to residential developers.
The provision for loan losses in 2006 includes a $4.7 million additional provision for one
commercial borrower whose loans were allegedly falsely secured by nonexistent collateral.
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 $16.1 million during 2007 compared to $14.2million
during 2006 and $13.0 million in 2006. The $1.9 million increase in 2007 included
increases from each major service category except gains on sold loans which decreased
$431,000 from $1.7 million to $1.3 million. The $1.2 million increase in 2006 also
included increases in each major service category except gains on sold loans which
decreased $615,000 from $2.3 million to $1.7 million.

Revenues from trust services
increased $1.3 million or 37% to $4.9 million for 2007 and $668,000 or 23% to $3.6 million
for 2006. The majority of the increase in trust fees in 2007 was related to the impact of
customer relationships added from the Smith & Associates acquisition on January 1 and
from the addition of new trust customers throughout 2007. In addition to customer account
levels, trust fees are also based on the underlying values of trust assets managed. For
2006, the increase in revenue was from both an increase in the market valuation of assets
held in trust accounts and an increase in new trust customers.

---



Deposit service charge income
increased $213,000 or 4% to $5.1 million for 2007 compared to $4.9 million for 2006 and
$4.3 million for 2005. The increase in each period primarily reflects the continued
expansion of our deposit customer account base.

Other income increased $822,000 in
2007 and $569,000 in 2006. Debit and ATM card processing income increased $443,000 in 2007
and $362,000 in 2006, representing the majority of the increase in other income. The
increase in debit and ATM card processing income reflects both an increase in usage from
current customers and an overall increase in the number of debit and ATM card customers.
Other fee categories included in other income that experienced growth in each period
include credit card commissions and fees from brokerage services. Also included in other
income for 2007 was a $288,000 unrealized gain on the Companys interest rate swaps
as more fully disclosed in the Notes to the Consolidated Financial Statements. The
increase in other income in 2007 was partially offset by a $171,000 decline in income from
bank-owned life insurance (BOLI) while the increase in 2006 included a
$373,000 increase in income from BOLI.

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 was 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
|a percent of real estate mortgage loans sold ("Loan    
|sales margin")                                         

Gain on sales of loans decreased
$431,000 and $615,000, respectively, in 2007 and 2006. The decline in both years was
impacted by lower sales volumes and a declining sales margin. Mortgage interest rate
levels had steadily increased since 2004, resulting in a continued decline in the level of
residential refinancing and new loan originations. As sales volumes have steadily
declined, competition has increased and resulted in a slight decline in our sales margin
since 2005. The decline in 2007 also reflects the Companys interest in holding more
of its mortgage loan volume in its portfolio as discussed more fully below under Loan
Portfolio and Asset Quality.

Noninterest Expense:
Noninterest expense totaled $50.3 million for 2007 as compared to $44.9 million for 2006
and $41.4 million for 2005. The increase of $5.4 million in 2007 included increases across
each major expense category. The primary increase in 2006 was a $2.4 million increase in
salaries and benefits.

Salaries and benefits increased
$708,000 in 2007 largely from an increase in staff associated with the opening of two new
branch locations and the addition of the new Asset Management Group from the acquisition
of Smith & Associates on January 1. The costs associated with these staffing increases
were partially offset by a reduction in performance incentives. The $2.4 million increase
in 2006 was related to additional staffing in each line of business and in support
departments consistent with growth of the Bank and from increased incentives associated
with strong operating performance in 2006. The 2006 increase also included $657,000 of
stock compensation expense associated with the adoption of FAS 123, Revised, on January 1,
2006.

---



Occupancy expense increased $627,000
in 2007 and $319,000 in 2006 and furniture and equipment expense increased $735,000 in
2007 and $246,000 in 2006. The increase in occupancy expense was consistent with our
branch and facility expansion. The Company opened four new facilities in 2007, including
two new branches and two branch relocations, and one new branch in 2006. The increase in
furniture and equipment expense relates to costs associated with improving our internal
and customer technologies, as well as costs associated with our facility expansion.

The $141,000 increase in legal and
professional fees in 2007 was primarily related to increased costs associated with higher
non-performing assets. Data processing fees were up $156,000 in 2007 and $172,000 in 2006,
consistent with new account growth.

Other expense increased $2.8 million
in 2007 and $279,000 in 2006. The increase in 2007 includes approximately $889,000 of
additional FDIC assessments related to a change by the FDIC in their charges for all banks
effective January 1, 2007. Costs associated with an increase in nonperforming assets
increased by approximately $609,000 and include losses on disposition, costs of property
appraisals and other carrying costs. The remaining increase in other expense includes
increases in various categories consistent with our customer account growth. These costs
include debit card and ATM processing, customer and internal courier, brokerage account
processing and outside service support.

Although we expect noninterest
expense levels to generally rise with our growth, we expect efficiency to improve by
better utilizing our capacity as we grow. We believe the additional capacity within our
branch network will continue to provide future growth opportunities without significant
additional costs.

Federal Income Tax Expense:Our federal income tax expense has fluctuated generally commensurate with changes in
pre-tax earnings. Our federal income tax expense was lower than the amount computed by
applying our statutory federal income tax rate of 35% to our pre-tax earnings primarily
due to tax-exempt interest income and income from bank-owned life insurance. Our effective
tax rate was 28.7%, 31.5% and 32.1% in 2007, 2006 and 2005, respectively.

# FINANCIAL CONDITION

Summary:Total assets were
$2.13 billion at December 31, 2007, an increase of $55.2 million from $2.08 billion at
December 31, 2006. We believe the continued asset growth reflects the acceptance of our
full-service community banking philosophy in the 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. The growth in total
assets was principally funded by growth in deposits from within the Companys markets
as discussed below.

Cash and Cash Equivalents: Our
cash and cash equivalents, which include federal funds sold and short-term investments,
were $49.8 million at December 31, 2007 compared to $39.9 million at December 31, 2006.
The balance at year-end 2007 was elevated due to a large inflow of customer deposits that
occurred at the end of the year.

Securities:Securities
increased $2.2 million to $203.4 million at December 31, 2007 from $201.3 million at
December 31, 2006. We maintain our security portfolio at a level to provide diversity in
the level of credit risk within our asset base, 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 growth of our securities
portfolio to be 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 $39.2 million to $1.75 billion at December 31, 2007
from $1.71 billion at December 31, 2006.

During 2007, residential mortgage
loans led our loan portfolio growth.Because of the relatively short duration of
our assets, we viewed the improvement in rates on residential mortgage loans as an
opportunity to hold more of these higher quality loans in our portfolio. The residential
mortgage loan portfolio grew $41.5 million to $266.3 million at December 31, 2007. Our
residential real estate loan portfolio, which also includes residential construction loans
made to individual homeowners, comprised approximately 15% and 13% of portfolio loans at
the end of 2007 and 2006, respectively.

Our residential real estate portfolio
represents only a portion of our residential origination loan volume, as we also sell a
portion of our fixed-rate obligations on the secondary market with servicing released. We
originated for sale $86.4 million in residential mortgages in 2007, $103.7 million in 2006
and $137.0 million in 2005. Loans held for sale were $3.1 million at December 31, 2007
compared to $1.5 million at December 31, 2006.

In our remaining portfolios,
commercial and industrial loans increased $22.6 million, commercial real estate loans
declined $19.8 million and consumer loans declined $5.1 million for 2007. The slower loan
growth in our commercial and consumer loan portfolios during 2007 was a reflection of the
weak economic conditions in West Michigan. In particular, deterioration in residential
land development has impacted both asset growth and asset quality.

Total commercial and commercial real
estate loans were $1.29 billion and $1.29 billion at December 31, 2007 and 2006,
respectively. This portfolio remains our largest loan segment and accounted for
approximately 74% and 76% of the total loan portfolio at December 31, 2007 and 2006,
respectively. Our commercial and commercial real estate portfolios are made up of loans to
small and mid-sized business. The commercial loan portfolio we have built 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.

During 2007, we focused more of our
resources on growing our commercial and industrial loans to help diversify our commercial
loan portfolio. Our commercial and industrial portfolio was $438.7 million at December 31,
2007 and represented 34% of our commercial portfolio, up from 32% at December 31, 2006. A
further breakdown of the composition of the commercial loans portfolio is shown in the
table below (in thousands):

|                                   | December 31, 2007 | December 31, 2006
|---------------------------------- | ----------------- | -----------------
|                                   |                   |                  
|                                   |                   |                  
|Construction/Land Development      |                   |                  
|Farmland and Agriculture           |                   |                  
|Nonfarm, Nonresidential            |                   |                  
|Multi-family                       |                   |                  
|                                   |                   |                  
|Total Commercial Real Estate Loans |                   |                  
|                                   |                   |                  
|Commercial and Industrial          |                   |                  
|                                   |                   |                  
|Total Commercial Loans             |                   |                  
|                                   |                   |                  

Approximately 42% of the balance of
commercial real estate loans at December 31, 2007 was owner-occupied while 58% was
non-owner occupied.

---



Loans for the development or sale of
1-4 family residential properties was approximately $235.8 million at December 31, 2007,
representing approximately 70% of the construction and land development portfolio. Of this
total, approximately $29.5 million was secured by vacant land, $125.6 million was secured
by developed residential land and $80.7 million was secured by 1-4 family properties held
for speculative purposes. Vacant land is land zoned for residential purposes but with no
further development. Developed residential land is land that has been further developed
for future residential construction, including but not limited to completed lot surveys,
road work, water, sewer and other utility preparation and general land grade. 1-4 family
properties held for speculative purposes are on developed residential lots and include
completed residential homes or residential homes in the process of construction.

Our consumer loan portfolio includes
loans secured by personal property and home equity fixed term and line of credit loans.
Our consumer loan portfolio decreased to $189.7 million at December 31, 2007 from $194.8
million at December 31, 2006. Consumer loans comprised approximately 11% of our portfolio
loans at the end of both 2007 and 2006.

Our loan portfolio is reviewed
regularly by an independent, internal 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.

Nonperforming assets are comprised of
nonperforming loans, foreclosed assets and repossessed assets. Nonperforming loans include
loans on non-accrual status, restructured loans and loans delinquent more than 90 days but
still accruing. Foreclosed and repossessed assets include assets acquired in settlement of
loans.

Nonperforming loans as of December
31, 2007 totaled $73.9 million or 4.22% of total portfolio loans compared to $22.3 million
or 1.30% of total portfolio loans at December 31, 2006.

Loans for the development or sale of
1-4 family residential properties were approximately $57.4 million or 78% of total
non-performing loans at December 31, 2007. Of this total, approximately $3.2 million was
secured by vacant land, $40.8 million was secured by developed residential land and $13.4
million was secured by 1-4 family properties held for speculative purposes. The remaining
balance of nonperforming loans at the end of 2007 consist of a number of commercial loans
most of which are on nonaccrual for which we consider to be well collateralized or
adequately reserved.

The majority of the balance of
nonperforming loans at December 31, 2006 related to one commercial relationship totaling
approximately $15.2 million. At December 31, 2007, approximately $15 million remained
outstanding for this borrower and was included in the balance of nonperforming loans.

Foreclosed assets totaled $5.7
million at December 31, 2007 compared to $3.2 million at December 31, 2006. The balance at
the end of 2007 was comprised of a number of real estate properties for which no loss is
expected upon disposition.

---



Total nonperforming assets amounted
to $79.8 million or 3.75% of total assets compared to $25.6 million or 1.23% as of
December 31, 2006. 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               

Allowance for Loan Losses: Our
allowance for loan losses at December 31, 2007 was $33.4 million, or 1.91% of total
portfolio loans, compared to $23.3 million or 1.36% of total portfolio loans at December
31, 2006.

The increase in the level of the
allowance was primarily related to the migration of loans to residential developers for
the development or sale of 1-4 family residential properties to an impaired status, and a
related increase in the level of reserves for these loans. During the third and fourth
quarters of 2007, the allowance for loan losses was increased by approximately $11.6
million of additional provisions for loan losses associated with these loans. 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.

Our allowance for loan losses is
maintained at a level considered appropriate based upon our regular, quarterly assessment
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,
general allocations based on historical trends for pools of similar loan types and under
certain circumstances, reserves related to current market conditions that are pertinent to
certain aspects of the loan portfolio.

During the fourth quarter of 2006,
regulatory authorities reached a conceptual consensus on the method for determining the
allowance. In addition to reaffirming the importance of experience grounded, objectively
determinable amounts, they acknowledged the appropriateness of considering other
subjective factors in determining the proper level of the allowance. We believe our
process conforms to this guidance.

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 may be 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 $15.8 million at December 31, 2007 and $400,000
at December 31, 2006. The increase in the specific allowance for impaired loans was
primarily related to the increase in impaired loans associated with the development or
sale of 1-4 family residential properties.

---



Impaired loans increased $93.2
million to $99.0 million at December 31, 2007. Approximately $62.3 million or 63% of
impaired loans were for the development or sale of 1-4 family residential properties. Of
this total, approximately $3.3 million was secured by vacant land, $42.5 million was
secured by developed residential land and $16.5 million was secured by 1-4 family
properties held for speculative purposes.

The allowance allocated to commercial
loans that are not considered to be impaired 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 grade assigned to a loan category, the
greater the allocation percentage that is applied. Changes in risk grade of loans affect
the amount of the allowance allocation. The determination of our loss factors is based
upon our actual loss history by loan grade, and adjusted for consideration of significant
factors that, in managements judgment, affect the collectibility of the portfolio as
of the analysis date. The commercial loan allowance was $15.3 million at December 31, 2007
compared to $21.0 million at December 31, 2006. The decrease in the commercial loan
allowance was driven primarily by the migration of loans and allocated allowance to
impaired status.

Groups of homogeneous loans, such as
residential real estate, open- and closed-end consumer loans, etc., receive general
allowance allocations based on a review of loss trends by specific loan segments. These
loss allocations are then adjusted based upon past due status, and consideration for
general economic and business conditions, collateral values, seasoning of the portfolios
and most recent loss experience for similar pools of loans. The general allowance was $2.3
million at December 31, 2007 and $1.8 million at December 31, 2006. The increase was
largely related to an increase in the balance of residential real estate loans and a
slight increase in the past due status of these loans.

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. Of the $33.4 million allowance at
December 31, 2007, 47% related to specific allocations on impaired loans, 46% related to
commercial loan portfolio allocations and 7% related to general allocations for
homogeneous loans.

Net charge-offs totaled $5.6 million
or 0.32% of average loans for 2007 compared to $5.4 million, or 0.33% of average loans for
2006 and $1.9 million or 0.13% of average loans for 2005. Net charge-offs in 2007 include
charges associated with various loans, primarily related to impaired loans to residential
developers. These charge-offs were considered necessary to bring loan balances to levels
considered collectible based upon current information. Net charge-offs in 2006 include a
$4.7 million charge-off related to one commercial borrower whose loans were allegedly
falsely secured by nonexistent collateral. The Company filed a lawsuit against this
borrower in 2007 that is still pending.

---



The following is a summary of our
portfolio loan balances and changes in the allowance for loan losses and related ratios.

|December 31                                   
|----------------------------------------------
|                                              
|                                              
|                                              
|                                              
|Portfolio 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                                   

Premises and Equipment:Premises and equipment totaled $64.6 million at December 31, 2007, an increase of $3.8
million from December 31, 2006. The increase included costs associated with the opening of
four new facilities in 2007, including a new regional facility in downtown Holland, the
relocation of a branch site and two new branches in Kent County.

Deposits:Total deposits
decreased $144.0 million to $1.52 billion at December 31, 2007, as compared to $1.67
billion at December 31, 2006. The decrease was primarily due to a decline of $147 million
in money market balances from one of the Companys institutional depositors during
the last half of 2007. The withdrawals were associated with planned distributions and the
depositor remains an excellent customer for the Company.

The Company also reduced its holdings
of deposits generated from out-of-market brokers during the year. Brokered deposits
declined $70.1 million during 2007. Accordingly, growth from deposits within the
Companys markets was approximately $73.1 million during 2007. The increase in local
deposits, combined with an increase in other borrowings at more attractive terms and
pricing, allowed the Company to reduce its reliance on brokered deposits. The growth in
deposits within the Companys markets was primarily from an increase of $25.1 million
in money market accounts and an increase of $34.4 million in certificates of deposit, as
deposit customers preferred such accounts within the generally high rate environment. With
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, we expect
further growth in our core transaction deposits.

---



Noninterest bearing demand accounts
comprised approximately 12% of total deposits at December 31, 2007, as compared to
approximately 11% of total deposits at the end of 2006. Interest bearing demand, including
money market and savings accounts, comprised approximately 43% of total deposits at
December 31, 2007, as compared to 46% at the end of 2006. Time accounts as a percentage of
total deposits were approximately 45% at December 31, 2007, as compared to 43% at the end
of 2006.

Borrowed Funds: Borrowed funds
consist of advances from the Federal Home Loan Bank, securities sold under agreements to
repurchase (repo borrowings), long-term debt associated with the issuance of
trust preferred securities and federal funds purchased provided by our correspondent
banks.

Borrowed funds totaled $441.8 million
at December 31, 2007, including $244.1 million of Federal Home Loan Bank advances, $110.0
million in repo borrowings, $41.2 million in long-term debt associated with trust
preferred securities and $46.5 million in federal funds purchased. Borrowed funds totaled
$245.2 million at December 31, 2006 including $172.0 million of Federal Home Loan Bank
advances, $20.0 million in repo borrowings, $41.2 million in long-term debt associated
with trust preferred securities and $12.0 million in federal funds purchased. The increase
in borrowed funds in 2007 was used primarily to offset a large portion of the decline in
brokered deposits and institutional deposits discussed above.

# CAPITAL RESOURCES AND
LIQUIDITY

Capital Resources: Total
shareholders equity was $160.6 million at December 31, 2007 compared to $156.8
million at December 31, 2006. The increase of $3.8 million was primarily from a $3.0
million increase in accumulated other comprehensive income. Net income generated during
2007 of $9.3 million was primarily offset by cash dividends of $8.8 million, or $.51 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 5% stock dividend was paid in May 2007, resulting in a transfer of $9.5 million
from retained earnings to common stock.

The increase in accumulated other
comprehensive income was due to an increase in the market value of both securities
available for sale and the derivative instruments associated with the Companys
interest rate swap arrangements. The market value increases were related to a decrease in
market interest rates for similar instruments. For more information regarding our interest
rate swaps, see the Notes to the Consolidated Financial Statements.

Capital levels for the Company
continue to be maintained at levels well in excess of regulatory minimums for bank holding
companies. The following table shows the Companys various capital ratios for 2007
and 2006.

|2007                             | 2006
|-------------------------------- | ----
|                                 |     
|                                 |     
|Average equity to average assets |     
|Total risk-based capital         |     
|Tier 1 risk-based capital        |     
|Tier 1 capital to average assets |     

The regulatory ratios declined
slightly in 2007 as assets grew slightly faster than retained capital for 2007. The entire
$40.0 million of trust preferred securities outstanding at December 31, 2007 qualified as
Tier 1 capital. For more information regarding the trust preferred securities, please
refer to the Notes to the Consolidated Financial Statements.

Capital sources include, but are not
limited to, additional common stock offerings, trust preferred securities offerings and
subordinated debt.

---



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, federal funds purchased lines and
other secured borrowing sources 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 at December 31, 2007.

|1 year or less          | 2-3 years | 4-5 years | After 5 years
|----------------------- | --------- | --------- | -------------
|                        |           |           |              
|                        |           |           |              
|Time deposit maturities |           |           | $            
|Other borrowed funds    |           |           |              
|Federal funds purchased |           |           |              
|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, 2007, we had a total of $424.6 million in unused lines of credit, $44.0 million in
unfunded loan commitments and $21.6 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.,
including the Federal funds rate, the prime rate, mortgage rates, U.S. Treasury rates and
various money market indexes. As part of our asset/liability management process, we
identify and evaluate opportunities to structure our balance sheet to maximize our
earnings while balancing our liquidity and interest rate risk within established
parameters.

We utilize a simulation model as our
primary measurement technique in our interest rate risk management. Our simulation
analyses monitors 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
the repricing of cash flows and maturities of interest-sensitive assets and
interest-sensitive liabilities at current market rates, prepayment speeds on certain
assets, and changes in market conditions impacting loan and deposit pricing. We also
assume certain levels of rate sensitivity to changes in market rates 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
$60.0 million in variable rate loans repricing immediately into fixed rate loans with a
weighted average maturity of 1.5 years. The interest rate swaps are more fully discussed
in the Notes to the Consolidated Financial Statements.

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, 2007 (dollars in thousands).

|Interest Rate Scenario   | Economic Valueof Equity | PercentChange | Net InterestIncome | PercentChange
|------------------------ | ----------------------- | ------------- | ------------------ | -------------
|                         |                         |               |                    |              
|                         |                         |               |                    |              
|Change in Interest Rates |                         |              
|200 basis point rise     |                         |               | $                  | 163,685      
|100 basis point rise     |                         |               |                    | 180,190      
|Base-rate scenario       |                         |               |                    | 193,137      
|100 basis point decline  |                         |               |                    | 199,241      
|200 basis point decline  |                         |               |                    | 203,161      

This analysis suggests that we are
well-balanced, with limited fluctuations in net interest income under each scenario 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.

Loss contingencies, including the
legal actions involving Trade Partners as described in Note 16 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.

---



Quarterly Stock Price Information:The Companys common stock is quoted on the Nasdaq Global Select Market under the
symbol MCBC. High and low sales prices (as reported on the Nasdaq Global Select Market)
for each quarter for the years ended December 31, 2007 and 2006 are set forth in the table
below. This information has been restated to reflect the impact of all previously paid
stock dividends and splits.

|               | 2007 | 2006
|-------------- | ---- | ----
|               |      |     
|               |      |     
|               |      |     
|               |      |     
|Quarter        |      |     
|First Quarter  |      |     
|Second Quarter |      |     
|Third Quarter  |      |     
|Fourth Quarter |      |     

Quarterly cash dividends totaling
$.37 were paid during 2005, and a 15% stock dividend was declared during the second
quarter of 2005. Quarterly cash dividends totaling $.46 were paid during 2006, and a 5%
stock dividend and a 3-for-2 stock split were declared during the second quarter of 2006.
Quarterly cash dividends totaling $.51 were paid during 2007, and a 5% stock dividend was
declared during the second quarter of 2007.

# SHAREHOLDER RETURN
PERFORMANCE GRAPH

The following graph shows the cumulative
total shareholder return on an investment in the Companys common stock compared to
the Hemscott Group Index of Regional-Midwest Banks and the Russell 2000 Index. The
comparison assumes a $100 investment on December 31, 2002 at the initial price of $9.90
per share (adjusted for all stock dividends and splits) and assumes that dividends are
reinvested. The comparisons in this table are set forth in response to Securities and
Exchange Commission (SEC) disclosure requirements, and therefore are not intended to
forecast or be indicative of future performance of the common stock.

# COMPARISON OF 5-YEAR
TOTAL CUMULATIVE TOTAL RETURN AMONG MACATAWA BANK CORPORATION, RUSSELL 2000 INDEX AND
HEMSCOTT GROUP INDEX



ASSUMES $100 INVESTED
ON DEC. 31, 2002 ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDED DEC. 31, 2007

|                     | 2002 | 2003 | 2004 | 2005   | 2006 | 2007
|-------------------- | ---- | ---- | ---- | ------ | ---- | ----
|                     |      |      |      |        |      |     
|                     |      |      |      |        |      |     
|Macatawa Bank        |      |     
|Corporation          |      |      |      | 100.00 |      |     
|                     |      |     
|Hemscott Group Index |      |      |      | 100.00 |      |     
|                     |      |     
|Russell 2000 Index   |      |      |      | 100.00 |      |     

---



# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                                 |     
|---------------------------------------------------------------- | ----
|MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING | F-2 
|                                                                
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON      
|INTERNAL CONTROL OVER FINANCIAL REPORTING                        | F-3 
|                                                                
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON      
|FINANCIAL STATEMENTS                                             | F-4 
|                                                                
|CONSOLIDATED FINANCIAL STATEMENTS                               
|                                                                
|CONSOLIDATED BALANCE SHEETS                                      | F-5 
|                                                                
|CONSOLIDATED STATEMENTS OF INCOME                                | F-6 
|                                                                
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY       | F-7 
|                                                                
|CONSOLIDATED STATEMENTS OF CASH FLOWS                            | F-9 
|                                                                
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       | F-11
|                                                                 |     

---



# MANAGEMENTS
REPORT ON INTERNAL CONTROL 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, 2007. 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,
2007, the Companys internal control over financial reporting is effective based on
those criteria.

| |  | /s/ Benj. A. Smith, III
Benj. A. Smith, IIIChief Executive Officer
/s/ Jon W. Swets
Jon W. SwetsChief Financial Officer
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

F-2

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
ShareholdersMacatawa Bank CorporationHolland, Michigan

We have audited Macatawa Bank
Corporations internal control overfinancial reporting as of December 31,
2007, 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 included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on
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, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, 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, Macatawa Bank
Corporation maintained in all material respects, effective internal control over financial
reporting as of December 31, 2007, 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, 2007 and 2006
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, 2007 and our
report dated February 21, 2008 expressed an unqualified opinion on those consolidated
financial statements.

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

Grand Rapids, MichiganFebruary 21,
2008

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, 2007 and 2006,
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, 2007. 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, 2007 and 2006, and the
results of its operations and its cash flows for each of the three years in the period
ended December 31, 2007, 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, 2007, 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 21, 2008 expressed an unqualified
opinion thereon.

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

Grand Rapids, MichiganFebruary 21,
2008

F-4

---



MACATAWA
BANK CORPORATION CONSOLIDATED BALANCE
SHEETS December 31, 2007 and
2006 (Dollars in thousands)

---

|                                                       | 2007 | 2006
|------------------------------------------------------ | ---- | ----
|                                                       |      |     
|ASSETS                                                 |      |     
|Cash and due from banks                                |      |     
|                                                       |      |     
|Securities available for sale, at fair value           |      |     
|Securities held to maturity (fair value 2007 - $1,961, |      |     
|2006 - $2,762)                                         |      |     
|Federal Home Loan Bank (FHLB) stock                    |      |     
|Loans held for sale                                    |      |     
|Total loans                                            |      |     
|Allowance for loan losses                              |      |     
|                                                       |      |     
|                                                       |      |     
|Premises and equipment - net                           |      |     
|Accrued interest receivable                            |      |     
|Goodwill                                               |      |     
|Acquisition intangibles                                |      |     
|Bank-owned life insurance                              |      |     
|Other assets                                           |      |     
|                                                       |      |     
|                                                       |      |     
|Total assets                                           |      |     
|                                                       |      |     
|                                                       |      |     
|LIABILITIES AND SHAREHOLDERS' EQUITY                   |      |     
|Deposits                                               |      |     
|Noninterest-bearing                                    |      |     
|Interest-bearing                                       |      |     
|                                                       |      |     
|Total                                                  |      |     
|Federal funds purchased                                |      |     
|Other borrowed funds                                   |      |     
|Long-term debt                                         |      |     
|Accrued expenses and other liabilities                 |      |     
|                                                       |      |     
|Total liabilities                                      |      |     
|                                                       |      |     
|Shareholders' equity                                   |      |     
|Preferred stock, no par value, 500,000 shares          |      |     
|authorized; no shares issued and outstanding           |      |     
|Common stock, no par value, 40,000,000 shares          |      |     
|authorized; 16,968,398 and 16,254,619 shares           |      |     
|issued and outstanding at December 31, 2007            |      |     
|and 2006, respectively                                 |      |     
|Retained earnings (deficit)                            |      |     
|Accumulated other comprehensive income (loss)          |      |     
|                                                       |      |     
|Total shareholders' equity                             |      |     
|                                                       |      |     
|                                                       |      |     
|Total liabilities and shareholders' equity             |      |     
|                                                       |      |     

---

See accompanying notes
to consolidated financial statements.

F-5

---



MACATAWA BANK CORPORATION CONSOLIDATED STATEMENTS
OF INCOME Years ended December
31, 2007, 2006 and 2005 (Dollars in thousands,
except per share data)

---

|                                                    | 2007 | 2006 | 2005
|--------------------------------------------------- | ---- | ---- | ----
|                                                    |      |      |     
|Interest income                                     |      |      |     
|Loans, including fees                               |      |      | $   
|Securities                                          |      |     
|Taxable                                             |      |      |     
|Tax-exempt                                          |      |      |     
|FHLB stock                                          |      |      |     
|Federal funds sold and other short-term investments |      |      |     
|                                                    |      |      |     
|                                                    |      |     
|Total interest income                               |      |      |     
|                                                    |      |     
|Interest expense                                    |      |     
|Deposits                                            |      |      |     
|Other borrowings                                    |      |      |     
|Long-term debt                                      |      |      |     
|Federal funds purchased                             |      |      |     
|                                                    |      |      |     
|                                                    |      |     
|Total interest expense                              |      |      |     
|                                                    |      |      |     
|                                                    |      |     
|Net interest income                                 |      |      |     
|                                                    |      |     
|Provision for loan losses                           |      |      |     
|                                                    |      |      |     
|                                                    |      |     
|Net interest income after provision for loan losses |      |      |     
|                                                    |      |     
|Noninterest income                                  |      |     
|Service charges and fees                            |      |      |     
|Gain on sales of loans                              |      |      |     
|Trust fees                                          |      |      |     
|Other                                               |      |      |     
|                                                    |      |      |     
|Total noninterest income                            |      |      |     
|                                                    |      |     
|Noninterest expense                                 |      |     
|Salaries and benefits                               |      |      |     
|Occupancy of premises                               |      |      |     
|Furniture and equipment                             |      |      |     
|Legal and professional fees                         |      |      |     
|Marketing and promotion                             |      |      |     
|Data processing fees                                |      |      |     
|Other                                               |      |      |     
|                                                    |      |      |     
|Total noninterest expenses                          |      |      |     
|                                                    |      |      |     
|                                                    |      |     
|Income before income tax expense                    |      |      |     
|                                                    |      |     
|Income tax expense                                  |      |      |     
|                                                    |      |      |     
|                                                    |      |     
|Net income                                          |      |      | $   
|                                                    |      |      |     
|Basic earnings per share                            |      |      | $   
|                                                    |      |      |     
|Diluted earnings per share                          |      |      | $   
|                                                    |      |      |     
|Cash dividends per share                            |      |      | $   
|                                                    |      |      |     

---

See accompanying notes
to consolidated financial statements.

F-6

---



MACATAWA BANK CORPORATIONCONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS EQUITY Years ended December 31, 2007, 2006 and 2005
(Dollars in thousands, except per share data)

---

|                                                                                                                        | Common Stock | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity
|----------------------------------------------------------------------------------------------------------------------- | ------------ | --------------------------- | --------------------------------------------- | --------------------------
|                                                                                                                        |              |                             |                                               |                           
|                                                                                                                        |              |                             |                                               |                           
|Balance, January 1, 2005                                                                                                |              |                             | $                                             | 124,389                   
|                                                                                                                        |              |                            
|Net income                                                                                                              |              |                             |                                               |                           
|                                                                                                                        |              |                            
|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                                                                                                    |              |                             |                                               |                           
|                                                                                                                        |              |                            
|Stock compensation expense (includes 
      5,000 shares earned under       Stock Compensation Plan)                    |              |                             |                                               | 176                       
|                                                                                                                        |              |                            
|Issued 1,328,409 shares in payment                                                                                      |              |                            
|OF 15% stock dividend                                                                                                   |              |                             |                                               | 10,863                    
|                                                                                                                        |              |                            
|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 $.37 per share                                                                                        |              |                             |                                               |                           
|                                                                                                                        |              |                             |                                               |                           
|                                                                                                                        |              |                            
|Balance, December 31, 2005                                                                                              |              |                             |                                               | 136,583                   
|                                                                                                                        |              |                            
|Net income                                                                                                              |              |                             |                                               |                           
|                                                                                                                        |              |                            
|Other comprehensive income (loss):                                                                                      |              |                            
|Net change in unrealized gain (loss)                                                                                    |              |                            
|on derivative instruments, net                                                                                          |              |                            
|of tax of $135                                                                                                          |              |                             |                                               |                           
|                                                                                                                        |              |                            
|Net change in unrealized gain (loss)                                                                                    |              |                            
|on securities available for sale, net                                                                                   |              |                            
|of tax of $490                                                                                                          |              |                             |                                               |                           
|                                                                                                                        |              |                             |                                               |                           
|Comprehensive income                                                                                                    |              |                             |                                               |                           
|                                                                                                                        |              |                            
|Issued 513,283 shares in payment of                                                                                     |              |                            
|5% stock dividend                                                                                                       |              |                             |                                               | 15,127                    
|                                                                                                                        |              |                            
|Issued 5,401,190 shares in payment of 3-for-2 stock split                                                               |              |                            
|                                                                                                                        |              |                            
|Stock compensation expense                                                                                              |              |                             |                                               | 657                       
|                                                                                                                        |              |                            
|Issued 90,714 shares for stock option
  exercises (net of 4,994 shares   exchanged and including   $258 of tax benefit) |              |                             |                                               | 1,361                     
|                                                                                                                        |              |                            
|Cash dividends at $.46 per share                                                                                        |              |                             |                                               |                           
|                                                                                                                        |              |                             |                                               |                           
|                                                                                                                        |              |                            
|Balance, December 31, 2006                                                                                              |              |                             | $                                             | 153,728                   
|                                                                                                                        |              |                             |                                               |                           

---

See accompanying notes
to consolidated financial statements.

F-7

---



MACATAWA BANK CORPORATIONCONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS EQUITY (continued) Years ended December 31, 2007, 2006
and 2005 (Dollars in thousands, except per share data)

---

|                                         | Common Stock | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity
|---------------------------------------- | ------------ | --------------------------- | --------------------------------------------- | --------------------------
|                                         |              |                             |                                               |                           
|                                         |              |                             |                                               |                           
|Net income                               |              |                             |                                               |                           
|                                         |              |                            
|Other comprehensive income (loss):       |              |                            
|Net change in unrealized gain (loss)     |              |                            
|on derivative instruments, net           |              |                            
|of tax of $617                           |              |                             |                                               |                           
|                                         |              |                            
|Net change in unrealized gain (loss)     |              |                            
|on securities available for sale, net    |              |                            
|of tax of $1,015                         |              |                             |                                               |                           
|                                         |              |                             |                                               |                           
|Comprehensive income                     |              |                             |                                               |                           
|                                         |              |                            
|Issued 819,223 shares in payment of      |              |                            
|5% stock dividend                        |              |                             |                                               | 9,518                     
|                                         |              |                            
|Issued 136,936 shares for acquisition of |              |                            
|Smith & Associates                       |              |                             |                                               | 3,150                     
|                                         |              |                            
|Stock compensation expense               |              |                             |                                               | 591                       
|                                         |              |                            
|Issued 54,272 shares for stock option    |              |                            
|exercises (net of 3,833 shares exchanged |              |                            
|and including $89 of tax benefit)        |              |                             |                                               | 431                       
|                                         |              |                            
|Repurchase 298,500 shares of stock       |              |                             |                                               | (3,896                    
|                                         |              |                            
|Cash dividends at $.51 per share         |              |                             |                                               |                           
|                                         |              |                             |                                               |                           
|                                         |              |                            
|Balance, December 31, 2007               |              |                             | $                                             | 163,522                   
|                                         |              |                             |                                               |                           

---

See accompanying notes
to consolidated financial statements.

F-8

---



MACATAWA BANK CORPORATION CONSOLIDATED STATEMENTS
OF CASH FLOWS Years ended December
31, 2007, 2006 and 2005 (Dollars in thousands)

---

|                                                                | 2007 | 2006 | 2005
|--------------------------------------------------------------- | ---- | ---- | ----
|                                                                |      |      |     
|Cash flows from operating activities                            |      |      |     
|Net income                                                      |      |      | $   
|Adjustments to reconcile net income                             |      |     
|to net cash from operating activities                           |      |     
|Depreciation and amortization                                   |      |      |     
|Stock compensation expense                                      |      |      |     
|Stock dividends on FHLB stock                                   |      |      |     
|Provision for loan losses                                       |      |      |     
|Origination of loans for sale                                   |      |      |     
|Proceeds from sales of loans originated for sale                |      |      |     
|Gain on sales of loans                                          |      |      |     
|Net change in                                                   |      |     
|Accrued interest receivable and other assets                    |      |      |     
|Bank-owned life insurance                                       |      |      |     
|Accrued expenses and other liabilities                          |      |      |     
|                                                                |      |      |     
|Net cash from operating activities                              |      |      |     
|                                                                |      |     
|Cash flows from investing activities                            |      |     
|Loan originations and payments, net                             |      |      |     
|Purchase of FHLB stock                                          |      |      |     
|Repurchase by FHLB of FHLB stock                                |      |      |     
|Purchases of securities available for sale                      |      |      |     
|Purchases of securities held to maturity                        |      |      |     
|Maturities and calls of securities available for sale           |      |      |     
|Maturities and calls of securities held to maturity             |      |      |     
|Principal paydowns on securities                                |      |      |     
|Additions to premises and equipment                             |      |      |     
|                                                                |      |      |     
|Net cash from investing activities                              |      |      |     
|                                                                |      |     
|Cash flows from financing activities                            |      |     
|Net increase (decrease) in deposits                             |      |      |     
|Net increase (decrease) in short-term borrowings                |      |      |     
|Proceeds from other borrowed funds                              |      |      |     
|Repayments of other borrowed funds                              |      |      |     
|Fractional shares purchased                                     |      |      |     
|Cash dividends paid                                             |      |      |     
|Repurchase of stock                                             |      |      |     
|Proceeds from exercises of stock options, including tax benefit |      |      |     
|                                                                |      |      |     
|Net cash from financing activities                              |      |      |     
|                                                                |      |      |     
|                                                                |      |     
|Net change in cash and cash equivalents                         |      |      |     
|                                                                |      |     
|Beginning cash and cash equivalents                             |      |      |     
|                                                                |      |      |     
|                                                                |      |     
|Ending cash and cash equivalents                                |      |      | $   
|                                                                |      |      |     

---

See accompanying notes
to consolidated financial statements.

F-9

---



MACATAWA BANK CORPORATION CONSOLIDATED STATEMENTS
OF CASH FLOWS (continued)Years ended December
31, 2007, 2006 and 2005 (Dollars in thousands)

---

|                                          | 2007 | 2006 | 2005
|----------------------------------------- | ---- | ---- | ----
|                                          |      |      |     
|Supplemental cash flow information:       |      |      |     
|Interest paid                             |      |      | $   
|Income taxes paid                         |      |      |     
|                                          |      |     
|Supplemental noncash disclosures:         |      |     
|Transfers from loans to other real estate |      |      |     
|                                          |      |     
|Acquisition of Smith & Associates:        |      |     
|Acquisition intangibles recorded          |      |     
|Other liabilities assumed                 |      |      |     
|Value of common stock issued              |      |      |     
|                                          |      |      |     

---

See accompanying notes
to consolidated financial statements.

F-10

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2007 and 2006

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Macatawa Bank and
Macatawa Investment Services, Inc., as well as Macatawa Banks wholly-owned
subsidiary, Macatawa Bank Mortgage Company. Macatawa Investment Services, Inc. ceased
doing business effective November l, 2006 as discussed below. All significant intercompany
accounts and transactions have been eliminated in consolidation.

The Company also owns all of the
common securities 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.

Macatawa Bank is a Michigan chartered
bank with depository accounts insured by the Federal Deposit Insurance Corporation. The
Bank operates 26 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, a broker/dealer that provided various brokerage services including discount
brokerage, personal financial planning and consultation regarding individual stocks and
mutual funds ceased doing business as a registered broker-dealer effective November 1,
2006. On November 1, 2006, Macatawa Bank began offering brokerage services to its
customers through an arrangement with Infinex Investments, Inc. (Infinex).
Infinex is a full service investment provider, a registered broker-dealer and a member of
the National Association of Securities Dealers (NASD) and the Securities Investor
Protection Corporation (SIPC). As more fully discussed in the companys Form 8-K
dated October 11, 2006, on October 11, 2006, Macatawa Bank Corporation entered into an
Agreement and Plan of Merger with Benj. A. Smith & Associates, Ltd. and Benj. A.
Smith, III. Smith & Associates is an investment advisory firm based in Holland,
Michigan. The transaction was structured as a merger of Smith & Associates into
Macatawa, which in turn contributed the business to Macatawa Bank. The transaction closed
effective as of January 1, 2007. 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. Under generally accepted accounting
principles, these trusts are not consolidated into the financial statements of the
Company.

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 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.

---

(Continued)

F-11

---



NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, net of tax.

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. In estimating other-than-temporary losses, management considers: the length of
time and extent that fair value has been less than cost, the financial condition and near
term prospects of the issuer, and 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 that management
has the intent and ability to hold for the foreseeable future or until maturity or payoff
are reported at the principal balance outstanding, net of unearned interest, deferred loan
fees and costs and an 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
unpaid 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, past loan loss experience, information about specific borrower situations
and estimated collateral values, 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.

The allowance consists of specific
and general components. The specific component relates to loans that are individually
classified as impaired or loans otherwise classified substandard or doubtful. The general
component covers non-classified loans and is based on historical loss experience adjusted
for current factors.

---

(Continued)

F-12

---



NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Transfers of Financial Assets:
Transfers of financial assets are accounted for as sales, when control over the assets has
been relinquished. Control over transferred assets is deemed to be surrendered when the
assets have been isolated from the Company, the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange
the transferred assets, and the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity.

Foreclosed Assets: Assets
acquired through or instead of loan foreclosure are initially recorded at fair value less
costs to sell 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 $5.7 million in foreclosed assets at December 31, 2007 and $3.2 million in
foreclosed assets at December 31, 2006.

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.

Furniture, fixtures and equipment are
depreciated using the straight-line method with useful lives ranging from 3 to 15 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.

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 to sixteen
years. These assets are reviewed for impairment when events indicate the carrying amount
may not be recoverable.

Long-term Assets: Premises and
equipment, core deposit and other intangible assets, and other long-term assets are
reviewed for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Loan Commitments and Related
Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial 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.

---

(Continued)

F-13

---



NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivatives: Derivative
financial instruments are recognized as assets or liabilities at fair value. The
accounting for changes in the fair value of derivatives depends on the use of the
derivatives and whether the derivatives qualify for hedge accounting. The Companys
derivatives consist of interest rate swap agreements, which are used as part of its asset
liability management to help manage interest rate risk. The Company does not use
derivatives for trading purposes.

Changes in the fair value of
derivatives that are designated as a hedge of the variability of cash flows to be received
on various loans and are effective are reported in other comprehensive income and later
reclassified into earnings in the same periods during which the hedged transaction affects
earnings. If hedge accounting does not apply, changes in the fair value of derivatives are
recognized immediately in current earnings as noninterest income or loss.

If designated as a hedge, the Company
formally documents the relationship between derivatives as hedged items, as well as the
risk-management objective and the strategy for undertaking hedge transactions. This
documentation includes linking cash flow hedges to specific assets on the balance sheet.
If designated as a hedge, the Company also formally assesses, both at the hedges
inception and on an ongoing basis, whether the derivative instruments that are used are
highly effective in offsetting changes in cash flows of the hedged items. The Company
discontinues hedge accounting when it determines the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item, the derivative is settled or
terminates, or treatment of the derivative as a hedge is no longer appropriate or
intended.

During 2007, the Company determined
that its use of hedge accounting for five interest rate swaps was in error. See Note 17
for additional details.

---

(Continued)

F-14

---



NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation:
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123(R), Share-based Payment, using the modified prospective
transition method. Accordingly, the Company has recorded stock-based compensation cost
using the fair value method starting in 2006.

Prior to January 1, 2006, employee
compensation expense for stock options was reported using the intrinsic value method.
Accordingly, no compensation cost related to stock options was recognized during 2005, 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 for the year ended December 31, 2005 would have been the pro forma
amounts indicated below (dollars in thousands, except per share data).

|                                         | 
|---------------------------------------- | 
|Net income as reported                   | 
|Deduct: Stock-based compensation expense | 
|using fair value method                  | 
|                                         | 
|                                         | 
|Pro forma net income                     | 
|                                         | 
|                                         | 
|Basic earnings per share as reported     | 
|Pro forma basic earnings per share       | 
|Diluted earnings per share as reported   | 
|Pro forma diluted earnings per share     | 

All share and per share amounts under
stock compensation plans are restated for all stock splits and dividends through the date
of issue of the financial statements.

The Companys stock compensation
plan allows for the issuance of restricted stock awards. Compensation cost is based upon
the market price of the Companys stock at the date of grant and is recognized over
the vesting period.

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.

The Company adopted FASB
Interpretation 48, Accounting for Uncertainty in Income Taxes
(FIN 48), as of January 1, 2007. A tax position is recognized as a
benefit only if it is more likely than not that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely of being
realized on examination. For tax positions not meeting the more likely than
not test, no tax benefit is recorded. The adoption had no effect on the
Companys financial statements.

The Company recognizes interest
and/or penalties related to income tax matters in income tax expense.

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

---

(Continued)

F-15

---



NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.

Restrictions on Cash: Cash on
hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve
and clearing requirements. These balances do not earn interest.

Stock Splits and Dividends:
The fair value of shares issued for stock dividends of 20% or less is transferred from
retained earnings to common stock, to the extent of available retained earnings. No
transfer is recorded for stock dividends or splits in excess of 20%. All share and per
share amounts are retroactively adjusted for stock splits and dividends.

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.

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 couldsignificantly 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.

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 and
brokerage 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.

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

Adoption of New
Accounting Standards:

In February 2006, the FASB issued
Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid
Financial Instruments (SFAS No. 155), which permits fair value remeasurement for
hybrid financial instruments that contain an embedded derivative that otherwise would
require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for
beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a
securitization will require an assessment in accordance with SFAS No. 133 to determine if
an embedded derivative exists within the instrument. In January 2007, the FASB issued
Derivatives Implementation Group Issue B40, Application of Paragraph 13(b) to
Securitized Interests in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40
provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133
for instruments that would otherwise require bifurcation if the test is met solely because
of a prepayment feature included within the securitized interest and prepayment is not
controlled by the security holder. SFAS No. 155 and DIG Issue B40 did not have a material
impact on the Companys consolidated financial position or results of operations.

---

(Continued)

F-16

---



NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

Effect of Newly Issued
But Not Yet Effective Accounting Standards:

In September 2006, the FASB issued
Statement No. 157, Fair Value Measurements. This Statement defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about the assumptions used
to measure fair value and clarifies assumptions about risk and the effect of a restriction
on the sale or use of an asset. The standard is effective for fiscal years beginning after
November 15, 2007. The impact of adoption is not expected to be material.

In February 2007, the FASB issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. The standard provides companies with an option to report selected
financial assets and liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. The new standard is
effective for the Company on January 1, 2008. The Company did not elect the fair value
option for any financial assets or financial liabilities as of January 1, 2008.

On November 5, 2007, the SEC issued
Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through
Earnings (SAB 109). Previously, SAB 105, Application of Accounting Principles
to Loan Commitments, stated that in measuring the fair value of a derivative loan
commitment, a company should not incorporate the expected net future cash flows related to
the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the
expected net future cash flows related to the associated servicing of the loan should be
included in measuring fair value for all written loan commitments that are accounted for
at fair value through earnings. SAB 105 also indicated that internally-developed
intangible assets should not be recorded as part of the fair value of a derivative loan
commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan
commitments issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect the impact of this standard to be material.

# NOTE 2  ACQUISITION

On January 1, 2007,  the
 Company  completed  the  acquisition  of Benj.  A.  Smith &  Associates,  Ltd.  (Smith &Associates).

Under the terms of the transaction,
Smith & Associates was merged into the Company in exchange for 143,783 shares of
common stock. The Company in turn contributed the business to Macatawa Bank. The value of
the common stock was based on the average closing price during the month of September 2006
($21.91 per share). Share and per share amounts have been adjusted for the 5% stock
dividend distributed on May 30, 2007.

The acquisition was accounted for
under the purchase method of accounting. Accordingly, customer relationship intangibles
valued at $1,920,000 are being amortized in proportion to estimated future revenue over
its estimated useful life. The resulting goodwill was $2,004,000 which will be assessed
annually for impairment, with any subsequent impairment recognized in the income
statement.

Under the terms of the transaction,
one $300,000 contingent payment will also be made if revenue from transferred account
balances, principal additions to transferred account balances generated by Mr. Smith and
new accounts generated by Mr. Smith exceeds $1,600,000 in 2007 and an additional $300,000
contingent payment will be paid if such revenue exceeds $1,700,000 in 2008. If the
contingencies are met, payments will be paid in the form of common stock of Macatawa Bank
Corporation. For 2007 revenue did not exceed the $1,600,000 target, therefore the
contingent payment for this period will not be made.

---

(Continued)

F-17

---



# NOTE 3  SECURITIES

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

|                          | AmortizedCost | GrossUnrealizedGains | GrossUnrealizedLosses | FairValue
|------------------------- | ------------- | -------------------- | --------------------- | ---------
|                          |               |                      |                       |          
|Available for Sale 2007   |               |                      |                       |          
|U.S. Treasury and federal |               |                     
|agency securities         |               |                      | $                     | 149,021  
|State and municipal bonds |               |                      |                       | 49,460   
|Other equity securities   |               |                      |                       | 1,000    
|                          |               |                      |                       |          
|                          |               |                      | $                     | 199,481  
|                          |               |                      |                       |          
|Held to Maturity 2007     |               |                     
|State and municipal bonds |               |                      | $                     | 1,917    
|                          |               |                      |                       |          
|                          |               |                      | $                     | 1,917    
|                          |               |                      |                       |          
|Available for Sale 2006   |               |                     
|U.S. Treasury and federal |               |                     
|agency securities         |               |                      | $                     | 148,753  
|State and municipal bonds |               |                      |                       | 49,676   
|Other equity securities   |               |                      |                       | 1,000    
|                          |               |                      |                       |          
|                          |               |                      | $                     | 199,429  
|                          |               |                      |                       |          
|Held to Maturity 2006     |               |                     
|State and municipal bonds |               |                      | $                     | 2,711    
|                          |               |                      |                       |          
|                          |               |                      | $                     | 2,711    
|                          |               |                      |                       |          

Securities with unrealized losses at year-end
2007 and 2006, 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, 2007          |                     |                  
|                           |                     |                  
|U.S. Treasury and federal  |                     |                  
|agency securities          |                     |                   | $    
|State and municipal bonds  |                     |                   |      
|Other equity securities    |                     |                   |      
|                           |                     |                   |      
|                           |                     |                  
|Total temporarily impaired |                     |                   | $    
|                           |                     |                   |      

---

(Continued)

F-18

---



NOTE 3  SECURITIES
(Continued)

|                           | Less than 12 Months | 12 Months or More | Total
|-------------------------- | ------------------- | ----------------- | -----
|                           |                     |                   |      
|                           |                     |                   |      
|                           |                     |                   |      
|                           |                     |                   |      
|December 31, 2006          |                     |                  
|                           |                     |                  
|U.S. Treasury and federal  |                     |                  
|agency securities          |                     |                   | $    
|State and municipal bonds  |                     |                   |      
|Other equity securities    |                     |                   |      
|                           |                     |                   |      
|Total temporarily impaired |                     |                   | $    
|                           |                     |                   |      

For unrealized losses on securities,
no loss has been recognized into income in either 2007 or 2006 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, 2007 were as follows (dollars in thousands):

|                           | Held-to-Maturity Securities | Available-for-Sale Securities
|-------------------------- | --------------------------- | -----------------------------
|                           |                             |                              
|                           |                             |                              
|                           |                             |                              
|Due in one year or less    |                             |                              
|Due from one to five years |                             |                              
|Due from five to ten years |                             |                              
|Due after ten years        |                             |                              
|                           |                             |                              
|                           |                             |                              
|                           |                             |                              
|                           |                             |                              

There were no sales of securities for
the years ended December 31, 2007, 2006 and 2005.

At December 31, 2007 and 2006,
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. At December 31, 2007
and 2006, securities with a carrying value of approximately $120,263,000 and $21,399,000
were pledged as collateral for securities sold under agreements to repurchase.

---

(Continued)

F-19

---



# NOTE 4  LOANS

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

|                     | 2007 | 2006
|-------------------- | ---- | ----
|                     |      |     
|Commercial           |      |     
|Commercial mortgage  |      |     
|Residential mortgage |      |     
|Consumer             |      |     
|                     |      |     
|                     |      |     
|                     |      |     

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

|                          | 2007 | 2006 | 2005
|------------------------- | ---- | ---- | ----
|                          |      |      |     
|Beginning balance         |      |      | $   
|Provision for loan losses |      |      |     
|Loans charged-off         |      |      |     
|Recoveries                |      |      |     
|                          |      |      |     
|                          |      |     
|Ending balance            |      |      | $   
|                          |      |      |     

The provision for loan losses in 2007
includes approximately $11.6 million of extra provisions made in the third and fourth
quarters for losses related primarily to loans to residential developers. Loans charged
off in 2006 include a $4.7 million charge related to one commercial borrower whose loans
were allegedly falsely secured by nonexistent collateral. Accordingly, the provision for
loan losses for 2006 also included a $4.7 million additional provision related to this
borrower. The Company filed a lawsuit against this borrower in 2007 that is still pending.

Impaired loans were as follows
(dollars in thousands):

|                                   | 2007 | 2006
|---------------------------------- | ---- | ----
|                                   |      |     
|Loans with no allocated allowance  |      |     
|for loan losses                    |      |     
|Loans with allocated allowance for |      |     
|loan losses                        |      |     
|                                   |      |     
|                                   |      |     
|                                   |      |     
|                                   |      |     
|                                   |      |     
|Amount of the allowance for loan   |      |     
|losses allocated                   |      |     
|                                   |      |     

|                                             | 2007 | 2006 | 2005
|-------------------------------------------- | ---- | ---- | ----
|                                             |      |      |     
|Average of impaired loans during the period  |      |      | $   
|Interest income recognized during impairment |      |      |     
|Cash-basis interest income recognized        |      |      |     

---

(Continued)

F-20

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

# NOTE 4  LOANS
(Continued)

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

|                                             | 2007 | 2006
|-------------------------------------------- | ---- | ----
|                                             |      |     
|                                             |      |     
|Loans past due over 90 days still on accrual |      |     
|Nonaccrual loans                             |      |     
|Renegotiated loans                           |      |     
|                                             |      |     
|                                             |      |     
|                                             |      |     

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

The balance of impaired and
nonperforming loans at the end of 2007 includes approximately $62.3 and $57.4 million,
respectively, of loans for the development or sale of 1-4 family residential properties.
The balance of nonperforming loans at the end of 2006 includes one commercial relationship
with loans totaling approximately $15.2 million for the development or sale of 1-4 family
residential properties. Approximately $15.0 million remained outstanding for this borrower
and is included in the balance of nonperforming loans at December 31, 2007.

# NOTE 5  PREMISES
AND EQUIPMENT  NET

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

|                              | 2007 | 2006
|----------------------------- | ---- | ----
|                              |      |     
|                              |      |     
|Land                          |      |     
|Building                      |      |     
|Leasehold improvements        |      |     
|Furniture and equipment       |      |     
|Construction in progress      |      |     
|                              |      |     
|                              |      |     
|Less accumulated depreciation |      |     
|                              |      |     
|                              |      |     
|                              |      |     
|                              |      |     

The balance of construction in
progress at December 31, 2007 primarily relates to a facility expected to open in 2008.
The balance of construction in progress at December 31, 2006 primarily related to four
facilities that opened in 2007. Depreciation expense was $3,290,000, $2,949,000 and
$2,713,000 for each of the years ending December 31, 2007, 2006 and 2005.

The Bank leases certain office and
branch premises and equipment under operating lease agreements. Total rental expense for
all operating leases aggregated to $359,000, $382,000 and $380,000 for each of the years
ending December 31, 2007, 2006 and 2005. Future minimum rental expense under noncancelable
operating leases as of December 31, 2007 is as follows (dollars in thousands):

|     |  |  |   |     | 
|---- |  |  | - | --- | 
|2008 |  |  | $ | 298 | 
|2009 |  |  |   | 166 | 
|2010 |  |  |   | 104 | 
|2011 |  |  |   | 84  | 
|2012 |  |  |   | 6   | 
|     |  | 
|     |  |  |   |     | 
|     |  |  | $ | 658 | 
|     |  | 

---

(Continued)

F-21

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 6 
ACQUISITION INTANGIBLES

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

|                              | 2007 | 2006
|----------------------------- | ---- | ----
|                              |      |     
|                              |      |     
|Core deposits                 |      |     
|Trust relationships           |      |     
|Customer relationships        |      |     
|                              |      |     
|                              |      |     
|Less accumulated amortization |      |     
|                              |      |     
|                              |      |     
|                              |      |     

Amortization expense for the years
ended December 31, 2007, 2006 and 2005 was $460,000, $378,000 and $406,000. Estimated
amortization expense for the next five years is as follows (dollars in thousands):

|     | 
|---- | 
|2008 | 
|2009 | 
|2010 | 
|2011 | 
|2012 | 

# NOTE 7  DEPOSITS

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

|                           | 2007 | 2006
|-------------------------- | ---- | ----
|                           |      |     
|                           |      |     
|Noninterest-bearing demand |      |     
|Money market               |      |     
|NOW and Super NOW          |      |     
|Savings                    |      |     
|Certificates of deposit    |      |     
|                           |      |     
|                           |      |     
|                           |      |     
|                           |      |     

The following table depicts the
maturity distribution of certificates of deposit at December 31, 2007 (dollars in
thousands):

|           | 
|---------- | 
|2008       | 
|2009       | 
|2010       | 
|2011       | 
|2012       | 
|Thereafter | 
|           | 
|           | 
|           | 

---

(Continued)

F-22

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 7  DEPOSITS
(Continued)

Approximately $457,769,000 and
$504,274,000 in certificates of deposit were in denominations of $100,000 or more at
December 31, 2007 and 2006.

Brokered deposits totaled
approximately $202,839,000 and $272,896,000 at December 31, 2007 and 2006. At December 31,
2007 and 2006, brokered deposits had interest rates ranging from 3.65% to 5.20% and 3.30%
to 5.49%, respectively, and at year-end 2007, maturities ranging from March 2008 to August
2010.

# NOTE 8  OTHER
BORROWED FUNDS

Other borrowed funds include advances
from the Federal Home Loan Bank and securities sold under agreements to repurchase.

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

|Principal Terms                     | Advance Amount | Range of Maturities | Weighted Average Interest Rate
|----------------------------------- | -------------- | ------------------- | ------------------------------
|                                    |                |                     |                               
|                                    |                |                     |                               
|December 31, 2007                   |                |                    
|                                    |                |                    
|Single maturity fixed rate advances |                |                     | $                             
|Daily variable rate advance         |                |                     |                               
|Putable advances                    |                |                     |                               
|Amortizable mortgage advances       |                |                     |                               
|                                    |                |                     |                               
|                                    |                |                     | $                             
|                                    |                |                     |                               
|December 31, 2006                   |                |                    
|                                    |                |                    
|Single maturity fixed rate advances |                |                     | $                             
|Putable advances                    |                |                     |                               
|Amortizable mortgage advances       |                |                     |                               
|                                    |                |                     |                               
|                                    |                |                     | $                             
|                                    |                |                     |                               

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 residential and commercial real estate loans totaling $611,055,000 and $596,829,000
under a blanket lien arrangement at December 31, 2007 and 2006.

Maturities as of December 31, 2007
were as follows (in thousands):

|           | 
|---------- | 
|2008       | 
|2009       | 
|2010       | 
|2011       | 
|2012       | 
|Thereafter | 
|           | 
|           | 
|           | 

---

(Continued)

F-23

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 8  OTHER
BORROWED FUNDS (Continued)

# Securities Sold Under
Agreements to Repurchase

Securities sold under agreements to
repurchase (repo borrowings) are financing arrangements secured by U.S.
federal agency securities. These borrowings were collateralized by securities that had a
carrying amount of approximately $120,263,000 and $21,399,000 at December 31, 2007 and
2006. At maturity, the securities underlying the arrangements are returned to the company.
At year-end, these borrowings were as follows (dollars in thousands):

|Principal Terms          | Amount | Range of Maturities | Weighted Average Interest Rate
|------------------------ | ------ | ------------------- | ------------------------------
|                         |        |                     |                               
|                         |        |                     |                               
|December 31, 2007        |        |                    
|                         |        |                    
|Fixed rate borrowings    |        |                     | $                             
|Floating rate borrowings |        |                     |                               
|                         |        |                     |                               
|                         |        |                     | $                             
|                         |        |                     |                               
|                         |        |                    
|December 31, 2006        |        |                    
|                         |        |                    
|Floating rate borrowings |        |                     | $                             
|                         |        |                     |                               

Maturities as of December 31, 2007
were as follows (in thousands):

|     | 
|---- | 
|2009 | 
|2010 | 
|     | 
|     | 
|     | 

# NOTE 9  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 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 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 the 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, 2007 and 2006, 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, 2007 and 2006, $40
million and $38 million, respectively, of the $40 million of Preferred Securities issued
qualified as Tier 1 capital for regulatory capital purposes.

---

(Continued)

F-24

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 10  RELATED
PARTY TRANSACTIONS

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

|                        | 2007 | 2006
|----------------------- | ---- | ----
|                        |      |     
|                        |      |     
|Beginning balance       |      |     
|New loans and renewals  |      |     
|Repayments and renewals |      |     
|                        |      |     
|                        |      |     
|Ending balance          |      |     
|                        |      |     

Deposits from principal officers,
directors, and their affiliates at December 31, 2007 and 2006 were $5,787,000 and
$4,324,000.

On October 11, 2006, Macatawa Bank
Corporation (Macatawa) entered into an Agreement and Plan of Merger with Benj.
A. Smith & Associates, Ltd. (Smith & Associates) and Benj. A. Smith,
III (Mr. Smith). On October 11, 2006, Macatawa also entered into a
Noncompetition Agreement with Mr. Smith. Macatawa completed the acquisition of Smith &
Associates on January 1, 2007.

Smith & Associates was an
investment advisory firm based in Holland, Michigan. Mr. Smith was the owner of Smith
& Associates. Mr. Smith is also the founder and Chairman of Macatawa Bank Corporation.
The transaction was structured as a merger of Smith & Associates into Macatawa, which
in turn contributed the business to Macatawa Bank. For further details regarding the
transaction, refer to Note 2, Acquisition.

# NOTE 11 
STOCK-BASED COMPENSATION

The Company has stock-based
compensation plans for its employees (the Employees Plans) and directors (the
Directors Plans). The Employees Plans permit the grant of stock options or the
issuance of restricted stock for up to 1,917,210 shares of common stock. The
Directors Plans permit the grant of stock options or the issuance of restricted
stock for up to 473,278 shares of common stock. There were 783,588 shares under the
Employees Plans and 175,711 shares under the Directors Plans available for
future issuance as of December 31, 2007. The Company issues new shares under its
stock-based compensation plans from its authorized but unissued shares.

# Stock Options

Option awards are granted with an
exercise price equal to the market price at the date of grant. Option awards have vesting
periods ranging from one to three years and have ten year contractual terms.

The fair value of each option award
is estimated on the date of grant using a closed form option valuation (Black-Scholes)
model that uses the assumptions noted in the table below. Expected volatilities are based
on historical volatilities of the Companys common stock. The Company uses historical
data to estimate option exercise and post-vesting termination behavior. The expected term
of options granted is based on historical data and represents the period of time that
options granted are expected to be outstanding, which takes into account that the options
are not transferable. The Company expects that all options granted will vest and become
exercisable. The risk-free interest rate for the expected term of the option is based on
the U.S. Treasury yield curve in effect at the time of the grant.

---

(Continued)

F-25

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

NOTE 11  STOCK-BASED
COMPENSATION(Continued)

There were no options granted during
2007. The fair value of options granted during 2006 and 2005 was determined using the
following weighted-average assumptions as of grant date.

|                                               | 2006 | 2005
|---------------------------------------------- | ---- | ----
|                                               |      |     
|                                               |      |     
|Risk-free interest rate                        |      |     
|Expected option life                           |      |     
|Expected stock price volatility                |      |     
|Dividend yield                                 |      |     
|Weighted average fair value of options granted |      |     

A summary of option activity in the
plans is as follows (dollars in thousands, except per option data):

|Options                          | Number Outstanding | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Life in Years | Aggregate Intrinsic Value
|-------------------------------- | ------------------ | ------------------------------- | ---------------------------------------------------- | -------------------------
|                                 |                    |                                 |                                                      |                          
|                                 |                    |                                 |                                                      |                          
|Outstanding at January 1, 2007   |                    |                                 |                                                      | 1,025,771                
|Exercised                        |                    |                                 |                                                      | (59,106                  
|Forfeited                        |                    |                                 |                                                      | (8,900                   
|Outstanding at December 31, 2007 |                    |                                 |                                                      | 957,765                  
|                                 |                    |                                 |                                                      |                          
|                                 |                    |                                
|Exercisable at December 31, 2007 |                    |                                 |                                                      | 709,626                  
|                                 |                    |                                 |                                                      |                          

Information related to
stock options during each year follows:

|                                           | 2007 | 2006 | 2005
|------------------------------------------ | ---- | ---- | ----
|                                           |      |      |     
|                                           |      |      |     
|Intrinsic value of options exercised       |      |      | $   
|Cash received from option exercises        |      |      |     
|Tax benefit realized from option exercises |      |      |     

Compensation cost for stock options was
$446,000 or $400,000 after tax, representing $0.02 per share for 2007 and $657,000 or
$522,000 after tax, representing $0.03 per share for 2006.

As of December 31, 2007, there was
approximately $555,000 of total unrecognized compensation cost related to nonvested stock
options granted under the Companys stock-based compensation plans. The cost is
expected to be recognized over a weighted-average period of 1.4 years.

# Stock Awards

Stock awards have vesting periods of
up to four years. A summary of changes in the Companys nonvested stock awards for
the year follows:

|Nonvested Stock Awards           | Shares | Weighted-Average Grant-Date Fair Value
|-------------------------------- | ------ | --------------------------------------
|                                 |        |                                       
|                                 |        |                                       
|Outstanding at January 1, 2007   |        |                                       
|Granted                          |        |                                       
|Vested                           |        |                                       
|Forfeited                        |        |                                       
|                                 |        |                                       
|                                 |        |                                       
|Outstanding at December 31, 2007 |        |                                       
|                                 |        |                                       

---

(Continued)

F-26

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

NOTE 11  STOCK-BASED
COMPENSATION(Continued)

Compensation cost for stock awarded
in 2007 and 2005 was $145,000 and $176,000. Compensation cost for stock awarded in 2006
was nominal.

As of December 31, 2007, there was
$309,000 of total unrecognized compensation cost related to nonvested shares granted under
the Companys stock-based compensation plans. The cost is expected to be recognized
over a weighted-average period of 2.0 years. There were no shares vested during the years
ended December 31, 2007 and 2006. The total fair value of shares vested during the year
ended December 31, 2005 was $176,000.

# NOTE 12  EMPLOYEE
BENEFITS

The Company sponsors a 401(k) plan
which covers substantially all employees. Employees may elect to contribute to the plan up
to the maximum percentage of compensation and dollar amount 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, 2007, 2006 and 2005 were
approximately $767,000, $691,000 and $620,000.

The Company sponsors an Employee
Stock Purchase Plan which covers substantially all employees. Employees are allowed to
direct the Company to withhold payroll dollars and purchase Company stock at market price
on a payroll by payroll basis. The Company has reserved 210,000 shares of common stock to
be issued under the plan. The plan allows for shares to be issued directly from the
Company or purchased on the open market.

# NOTE 13 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):

|                                  | 2007 | 2006 | 2005
|--------------------------------- | ---- | ---- | ----
|                                  |      |      |     
|                                  |      |      |     
|Basic earnings per share          |      |     
|Net income                        |      |      | $   
|Weighted average common shares    |      |     
|outstanding                       |      |      |     
|                                  |      |      |     
|                                  |      |     
|Basic earnings per share          |      |      | $   
|                                  |      |      |     
|                                  |      |     
|Diluted earnings per share        |      |     
|Net income                        |      |      | $   
|Weighted average common shares    |      |     
|outstanding                       |      |      |     
|Add:  Dilutive effects of assumed |      |     
|exercises of stock options        |      |      |     
|                                  |      |      |     
|Weighted average common and       |      |     
|dilutive potential common         |      |     
|shares outstanding                |      |      |     
|                                  |      |      |     
|                                  |      |     
|Diluted earnings per share        |      |      | $   
|                                  |      |      |     

Stock options and nonvested stock
awards for 507,562, 335,959, and 237,313 shares of common stock were not considered in
computing diluted earnings per share for December 31, 2007, 2006 and 2005, respectively,
because they were antidilutive.

---

(Continued)

F-27

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 14  FEDERAL
INCOME TAXES

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

|                           | 2007 | 2006 | 2005
|-------------------------- | ---- | ---- | ----
|                           |      |      |     
|                           |      |      |     
|Current                    |      |      | $   
|Deferred (benefit) expense |      |      |     
|                           |      |      |     
|                           |      |      | $   
|                           |      |      |     

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):

|                                              | 2007 | 2006 | 2005
|--------------------------------------------- | ---- | ---- | ----
|                                              |      |      |     
|                                              |      |      |     
|Statutory rate                                |      |      |     
|Statutory rate applied to income before taxes |      |      | $   
|Add (deduct)                                  |      |     
|Tax-exempt interest income                    |      |      |     
|Bank-owned life insurance                     |      |      |     
|Other, net                                    |      |      |     
|                                              |      |      |     
|                                              |      |     
|                                              |      |      | $   
|                                              |      |      |     

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

|                                                 | 2007 | 2006
|------------------------------------------------ | ---- | ----
|                                                 |      |     
|                                                 |      |     
|Deferred tax asset                               |      |     
|Allowance for loan losses                        |      |     
|Nonaccrual loan interest                         |      |     
|Unrealized loss on derivative instruments        |      |     
|Unrealized loss on securities available for sale |      |     
|Other                                            |      |     
|                                                 |      |     
|                                                 |      |     
|Deferred tax liabilities                         |      |     
|Depreciation                                     |      |     
|Purchase accounting adjustments                  |      |     
|Unrealized gain on derivative instruments        |      |     
|Unrealized gain on securities available for sale |      |     
|Other                                            |      |     
|                                                 |      |     
|                                                 |      |     
|                                                 |      |     
|                                                 |      |     
|Net deferred tax asset                           |      |     
|                                                 |      |     

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, 2007 or 2006.

There were no unrecognized tax
benefits at December 31, 2007, and the Company does not expect the total amount of
unrecognized tax benefits to significantly increase or decrease in the next twelve months.

The Company is no longer subject to
examination by the Internal Revenue Service for years before 2004.

---

(Continued)

F-28

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 15 
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 at
year-end (dollars in thousands):

|                          | 2007 | 2006
|------------------------- | ---- | ----
|                          |      |     
|                          |      |     
|Commitments to make loans |      |     
|Letters of credit         |      |     
|Unused lines of credit    |      |     

At year-end 2007, approximately 61%
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.

# NOTE 16 
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 claims against Grand Bank and the Company in this lawsuit have been
settled and dismissed with prejudice. In May 2003 a purported class action complaint was
filed against the Company. As amended, this suit alleges that Grand Bank breached escrow
agreements and fiduciary duties and violated the Michigan Uniform Securities Act with
respect to the investments secured by the purported class in viaticals and in interests in
limited partnerships which made loans to Trade Partners secured by viaticals, and with
respect to loans made by purported class members directly to Trade Partners. The Company
has answered the complaint denying the material allegations and raising certain
affirmative defenses. In November 2006 the court denied class certification in this case.
The Company believes that the class action, if it had been approved by the court, might
have involved as many as 2,000 to 3,000 individual claimants. Since that denial of class
certification, nine new actions, none of which is a class action, raising substantially
the same allegations as the former class action have been filed in several jurisdictions
on behalf of approximately 1,300 Trade Partners investors. Management believes the Company
has strong defenses and will vigorously defend the cases.

---

(Continued)

F-29

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

---

NOTE 16 
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.
Federal Insurance Company 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. Federal Insurance Company on July 21,
2006 notified the Company that it had filed an Arbitration Demand with the American
Arbitration Association, seeking a declaration that based on its asserted coverage
defenses its policy does not cover this matter. The Company and Federal Insurance Company
have agreed to defer any proceedings with respect to this Arbitration Demand. The Company
believes that Federal Insurance Company is obligated to provide coverage, and the Company
intends to vigorously pursue its rights under the insurance policy. 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.

---

(Continued)

F-30

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 17  INTEREST
RATE SWAPS

The Company entered into five
interest rate swap agreements, each with a notional amount of $20,000,000 during 2002,
2003, and 2004. Swaps with a notional amount of $60,000,000 remained in effect at December
31, 2007. A large portion of the Companys assets are loans on which the interest
rates are variable. The Company entered into these interest rate swap agreements to
convert the variable rate interest cash inflows on certain of its loans to fixed rates of
interest. These interest rate swap agreements pay interest to the Company at a fixed rate
and require interest payments from the Company at a variable rate.

Prior to December 31, 2007, these
interest rate swap agreements were reported, and had been since their inception, as cash
flow hedges as the Company believed the critical terms of the swap agreements matched the
critical terms of the variable rate loans and concluded that interest rate swap agreements
were effective cash flow hedges. As of December 31, 2007, the Company has now determined
that accounting for these agreements as cash flow hedges was in error because the Company
did not de-designate existing swap agreements as hedges when a new swap agreement was
added and then redesignate the agreements as hedges. Additionally, a critical term did not
match because the Company did not designate the swap agreements to pools of variable rate
loans with like spreads to prime rate, such as prime plus .25%, prime plus .50%, etc., but
did so only in total. Therefore, fluctuations in the fair value of the interest rate swaps
should have been recorded in other income instead of in other comprehensive income. As of
December 31, 2007, the remaining interest rate swaps had a fair value of $288,000, which
amount has been reversed out of other comprehensive income and is reported in noninterest
income. Changes in the fair value of these interest rate swaps in the future will be
recorded as noninterest income or loss. The Company has determined the effect on prior
periods of its use of hedge accounting for these interest rate swap agreements was not
material and, accordingly, prior period financial statements have not been restated to
correct the error.

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         |            
|Fair value of interest rate swaps |            

---

(Continued)

F-31

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 18 
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.

Actual capital levels (dollars in
thousands) and minimum required levels were as follows at year-end:

|                                         | Actual | Minimum Required For Capital Adequacy Purposes | To Be Well Capitalized
Under Prompt Corrective Action Regulations
|---------------------------------------- | ------ | ---------------------------------------------- | -----------------------------------------------------------------
|                                         |        |                                                |                                                                  
|                                         |        |                                                |                                                                  
|                                         |        |                                                |                                                                  
|                                         |        |                                                |                                                                  
|December 31, 2007                        |        |                                               
|Total capital (to risk weighted assets)  |        |                                               
|Consolidated                             |        |                                                | $                                                                
|Bank                                     |        |                                                |                                                                  
|Tier 1 capital (to risk weighted assets) |        |                                               
|Consolidated                             |        |                                                |                                                                  
|Bank                                     |        |                                                |                                                                  
|Tier 1 capital (to average assets)       |        |                                               
|Consolidated                             |        |                                                |                                                                  
|Bank                                     |        |                                                |                                                                  
|                                         |        |                                               
|December 31, 2006                        |        |                                               
|Total capital (to risk weighted assets)  |        |                                               
|Consolidated                             |        |                                                | $                                                                
|Bank                                     |        |                                                |                                                                  
|Tier 1 capital (to risk weighted assets) |        |                                               
|Consolidated                             |        |                                                |                                                                  
|Bank                                     |        |                                                |                                                                  
|Tier 1 capital (to average assets)       |        |                                               
|Consolidated                             |        |                                                |                                                                  
|Bank                                     |        |                                                |                                                                  

The Bank was categorized as well
capitalized at December 31, 2007 and 2006. There are no conditions or events since
December 31, 2007 that management believes have changed its category.

Banking regulations limit capital
distributions. Generally, capital distributions are limited to undistributed net income
for the current and prior two years. The Bank paid dividends to the holding company
totaling $10 million in 2007 and 2006. At December 31, 2007 and 2006, approximately
$37,659,000 and $50,145,000 was available to pay dividends to the holding company.

---

(Continued)

F-32

---



MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

---

# NOTE 19  FAIR
VALUES OF FINANCIAL INSTRUMENTS

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

|                                       | 2007 | 2006
|-------------------------------------- | ---- | ----
|                                       |      |     
|                                       |      |     
|                                       |      |     
|                                       |      |     
|Financial assets                       |      |     
|Cash and cash equivalents              |      |     
|Securities available for sale          |      |     
|Securities held to maturity            |      |     
|FHLB stock                             |      |     
|Loans held for sale                    |      |     
|Loans, net                             |      |     
|Accrued interest receivable            |      |     
|Interest rate swaps                    |      |     
|Bank-owned life insurance              |      |     
|                                       |      |     
|Financial liabilities                  |      |     
|Deposits                               |      |     
|Federal funds purchased                |      |     
|Other borrowed funds                   |      |     
|Long-term debt                         |      |     
|Interest rate swaps                    |      |     
|Accrued interest payable               |      |     
|                                       |      |     
|Off-balance sheet credit-related items |      |     
|Loan commitments                       |      |     

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.

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(Continued)

F-33

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MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

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# NOTE 20  CONDENSED
FINANCIAL STATEMENTS (PARENT COMPANY ONLY)

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

CONDENSED BALANCE SHEETS

|                                           | 2007 | 2006
|------------------------------------------ | ---- | ----
|                                           |      |     
|                                           |      |     
|ASSETS                                     |      |     
|                                           |      |     
|Cash and cash equivalents                  |      |     
|Investment in Bank subsidiary              |      |     
|Investment in other subsidiaries           |      |     
|Other assets                               |      |     
|                                           |      |     
|                                           |      |     
|Total assets                               |      |     
|                                           |      |     
|                                           |      |     
|LIABILITIES AND SHAREHOLDERS' EQUITY       |      |     
|                                           |      |     
|Long-term debt                             |      |     
|Other liabilities                          |      |     
|                                           |      |     
|                                           |      |     
|Total liabilities                          |      |     
|                                           |      |     
|Total shareholders' equity                 |      |     
|                                           |      |     
|                                           |      |     
|Total liabilities and shareholders' equity |      |     
|                                           |      |     

CONDENSED STATEMENTS OF
INCOME

|                                              | 2007 | 2006 | 2005
|--------------------------------------------- | ---- | ---- | ----
|                                              |      |      |     
|                                              |      |      |     
|Income                                        |      |     
|Dividends from subsidiaries                   |      |      | $   
|                                              |      |     
|Expense                                       |      |     
|Interest expense                              |      |      |     
|Other expense                                 |      |      |     
|                                              |      |      |     
|                                              |      |     
|Total expense                                 |      |      |     
|                                              |      |     
|Income (Loss) before income tax and equity in |      |     
|undistributed net income of subsidiaries      |      |      |     
|                                              |      |     
|Equity in undistributed net income            |      |     
|of subsidiaries                               |      |      |     
|                                              |      |      |     
|                                              |      |     
|Income before income tax                      |      |      |     
|                                              |      |     
|Income tax benefit                            |      |      |     
|                                              |      |      |     
|                                              |      |     
|Net income                                    |      |      | $   
|                                              |      |      |     

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(Continued)

F-34

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MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

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NOTE 20  CONDENSED
FINANCIAL STATEMENTS (PARENT COMPANY ONLY)(Continued)

CONDENSED STATEMENTS OF
CASH FLOWS

|                                                 | 2007 | 2006 | 2005
|------------------------------------------------ | ---- | ---- | ----
|                                                 |      |      |     
|                                                 |      |      |     
|Cash flows from operating activities             |      |     
|Net income                                       |      |      | $   
|Adjustments to reconcile net income to net cash  |      |     
|provided by (used in) operating activities:      |      |     
|Equity in undistributed earnings of subsidiaries |      |      |     
|Stock compensation expense                       |      |      |     
|(Increase) decrease in other assets              |      |      |     
|Increase (decrease) in other liabilities         |      |      |     
|                                                 |      |      |     
|Net cash from operating activities               |      |      |     
|                                                 |      |     
|Cash flows from investing activities             |      |     
|Investment in subsidiaries                       |      |      |     
|Net cash received from dissolution of subsidiary |      |      |     
|                                                 |      |      |     
|Net cash from investing activities               |      |      |     
|                                                 |      |     
|Cash flows from financing activities             |      |     
|Proceeds from exercises of stock options         |      |      |     
|Fractional shares purchased                      |      |      |     
|Cash dividends paid                              |      |      |     
|Repurchase of stock                              |      |      |     
|                                                 |      |      |     
|Net cash from financing activities               |      |      |     
|                                                 |      |      |     
|                                                 |      |     
|                                                 |      |     
|Net change in cash and cash equivalents          |      |      |     
|Cash and cash equivalents at beginning of year   |      |      |     
|                                                 |      |      |     
|Cash and cash equivalents at end of year         |      |      | $   
|                                                 |      |      |     

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(Continued)

F-35

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MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 and 2006

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NOTE 21  QUARTERLY FINANCIAL
DATA(Unaudited) (Dollars in thousands except per share data)

|               |  |  |   | Earnings Per Share
|-------------- |  |  | - | ------------------
|               |  |  |   |                   
|               |  |  |   |                   
|               |  |  |   |                   
|               |  |  |   |                   
|2007           |  |  |   |                   
|First quarter  |  |  | $ | 34,931            
|Second quarter |  |  |   | 35,683            
|Third quarter  |  |  |   | 35,391            
|Fourth quarter |  |  |   | 33,368            
|               |  | 
|2006           |  |  |   |                   
|First quarter  |  |  | $ | 30,241            
|Second quarter |  |  |   | 32,896            
|Third quarter  |  |  |   | 34,779            
|Fourth quarter |  |  |   | 35,589            

Net income for the third and fourth
quarters of 2007 includes the impact of $2.1 million ($1.4 million after tax, or $0.08 per
share) and $9.5 million ($6.2 million after tax, or $0.36 per share), respectively, of
charges against earnings for additional provisions for loan losses primarily to address
risks associated with loans to residential developers.

Net income for the fourth quarter of
2006 includes the impact of a $4.7 million ($3.1 million after tax, or $0.18 per share)
charge against earnings related to a commercial borrower whose loans became impaired.

---

F-36