EXHIBIT 13

# To Our Shareholders:

We
thought 2006 was going to be a record year for Macatawa Bank.

The
results were in, and our numbers looked great. Even though we were in a market
experiencing economic challenges, with a difficult interest rate environment causing
shrinking margins, we had once again delivered across-the-board improvements in all key
areas.

But
shortly before the end of the first quarter of 2007, we realized a fraud had been
perpetrated against the bank by one of our commercial loan customers. With disbelief, we
began to investigate.

What
we found was not pretty: About $5.2 million in loans had become impaired. That means it is
unlikely that the borrower will be able to repay us and that the collateral used to secure
the loans wont be enough to cover them.

As
soon as we became aware of this situation, we determined that most of the loan balance was
a loss and took a corresponding charge to earnings of $4.7 million in the fourth quarter
of 2006. This reduced what would have been record net income to $19.8 million for the
year, down approximately 5 percent over 2005.

This
is distressing to us and to you, our shareholders. It is also unacceptable. As part of our
internal investigation, we began to review our loan policies and procedures. As a
management team, we pledge that these procedures will be scrutinized and tightened to
prevent a recurrence.

This
certainly is not easy news to deliver or to hear. But it is important to note that
Macatawa Bank is financially strong and well-capitalized. We have a solid foundation and,
with the support of shareholders and employees, will continue to grow.

Despite
this unwelcome fourth-quarter development, much happened according to our strategic plan
in 2006:

| |  | Macatawa
Banks total assets exceeded $2.0 billion in 2006.                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our
core deposits grew $171 million or 14 percent, well in excess of the growth rates of the
markets within which we operate.                                                                                                                      
| |  | We
continue to attract new customers, adding nearly 10,000 net new deposit accounts in 2006.                                                                                                                                                       
| |  | We
remain number one in market share in Ottawa County, while steadily growing our Kent
County market share. In addition, a consumer survey conducted by The Holland Sentinel
ranked us as Best Bank on the Lakeshore for the sixth year in a row.

# Real Performers, Real
Growth

Looking forward, our focus remains on
building the strongest franchise in West Michigan. While we continued to make great
strides in expanding our reach during 2006, we see significant opportunity ahead of us,
especially in the greater Grand Rapids market. We have aggressive plans to increase our
physical presence in the Grand Rapids metropolitan market. In January 2007, we opened a
Breton Village branch, which will serve parts of both East Grand Rapids and Kentwood. In
February, we relocated our Byron Center storefront to a new, free standing, full-service
branch designed to better position us in this growing market. This summer, we will open a
Cascade branch on 28th Street east of I-96, which will complement and strengthen our
position in Kent County.

---



While our branch network is critical
to our success, we are exploring alternative delivery systems and enhanced technology that
allows us to engage customers in new and more convenient ways. Todays technology
enables our customers to become much more sophisticated product users. For example, last
year the number of customers using Macatawa Connect for bill payment increased 50 percent.
This activity is an indication of how future generations will do their banking. We are
committed to being a leader in this area by providing expanded capabilities, comprehensive
security, and a high level of user friendliness.

Treasury Management is another area
where we have achieved significant growth. Were able to offer our larger customers
state-of-the-art technology, such as remote deposit capture, which saves time, money and
improves their cash flow. We deliver these products with a high level of personal service,
creating a very compelling product. The latest technology is only effective when backed by
first-rate personnel support. We believe customers still want a real person to answer the
phone, address a question or solve a problem quickly. Macatawa provides high-touch
technology, a unique blend of personal service and state-of-the-art technology.

We have taken significant steps this
past year to enhance our Financial Services Group with the addition of Asset Management
services. This strengthens our portfolio management capabilities and provides our Trust
and Financial Service customers with increased investment options and more in-depth
counseling. We believe we have a great opportunity to increase our business in this area.
Last year the Trust group delivered a 23 percent increase in revenue over the prior year,
and we feel we can do even better in the future.

At the core of our success remains
our people, our Real Performers and the values and principles they live by.
Day in and day out, they provide a level of service that engages customers and builds the
long-term relationships that deliver continued growth. Its not just the people who
work face to face with our customers, but also those who provide the underlying foundation
in products and technology that continue to drive our business forward. It is also about
the countless hours our employees donate in support of their local communities. We invite
you to learn more about a few of our Real Performers in the following pages,
knowing that they represent the 480 other employees that we have employed throughout the
Macatawa Bank market area.

/s/ Benjamin A. SmithBenjamin A. Smith IIICHAIRMAN &
CEO / MACATAWA BANK CORPORATION

/s/ Philip J. KoningPhilip J. KoningPRESIDENT / MACATAWA BANK
CORPORATIONPRESIDENT & CEO / MACATAWA BANK

---



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, 2006 and 2005, and the
Consolidated Statements of Income for the years ended December 31, 2006, 2005, and 2004,
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, 2006 and 2005 follows:

|Three Months Ended              
|--------------------------------
|                                
|                                
|                                
|2006                            
|Interest income                 
|Net Interest income             
|Provision for loan losses       
|Income before income tax expense
|Net income                      
|                                
|Net income per share*           
|Basic                           
|Diluted                         
|                                
|2005                            
|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 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 as described in Note 1 - Recent Developments and Note 4 of the financial
statements.

---



# 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-four 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.

While maintaining asset quality and
improving profitability, we have experienced rapid and substantial growth since opening
Macatawa Bank in November of 1997. We first became profitable in 1999 and have increased
earnings each year since then with 2006 net income reaching $22.9 million. Since our
inception in 1997, we have raised approximately $100.6 million in capital through private
and public common stock offerings and trust preferred offerings to facilitate our growth
and progress over these years.

We believe that growth in core
deposits is key to our long-term success and is our primary funding source for asset
growth. Establishing a branching network in our markets has been of high importance in
order to facilitate this core deposit growth. We have gained community awareness and
acceptance in our markets through this expanding branch network and our high quality
service standards.

The West Michigan markets within
which we operate continue to provide significant expansion opportunities for us. We opened
our twenty-fourth branch during the second quarter of 2006 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 $19.8 million,  or $1.20 per diluted share for 2006 as compared to $20.9 million,
 or $1.27 per diluted share for 2005,  and $12.8 million,  or $.79 per diluted share for
2004.  The results for 2006 include a charge against  earnings of $4.7 million ($3.1
million after tax, or $0.18) per share.  The results for 2004 include a charge  against
 earnings of $2.3 million ($1.5  million  after  tax, or $0.09) per share.  These
 losses  are  associated  with two  separate  impaired  commercial loan relationships
described under Loan Portfolio and Asset Quality and Allowance for Loan Losses.

The trends in net income
 principally  reflect  strong growth in our net interest  income due to our  continuing
 growth in interest earning  assets and growth in  noninterest  income,  partially
 offset by increases in  noninterest  expense and provisions for loan losses.

Net Interest Income:Net
interest income totaled $67.4 million during 2006 compared to $62.8 million during 2005
and $52.0 million during 2004. The growth in net interest income during 2006 compared to
2005 was driven by strong growth in average interest earning assets and 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 14
basis points to 3.67% for 2006 as the increase in the cost of funds exceeded the increase
in the yield on earning assets.

The yield on earning assets increased
89 basis points to 7.26% for 2006 from 6.37% for 2005. The primary reason for this
increase was the rise in the yield on our variable rate loan portfolio during the first
half of 2006. The increases in short-term interest rates that began in mid-2004 continued
through June of 2006 causing the increase in variable rate loan yields. The addition of
new loans at generally higher rates during this period also contributed to the increase in
asset yield. The increase in the yield on earning assets was offset by a 114 basis point
increase in our overall cost of funds to 4.01% for 2006. The primary reasons for the
increase can be attributed to increasing the rates paid on our deposit accounts consistent
with market increases, the rollover of time deposits to higher rates within the rising
rate environment during 2006, and a shift to higher costing sources of funds. The rates
paid on higher yielding checking accounts, money market accounts and retail time deposits
reached levels in 2006 that had not been seen in the past few years, causing deposit
customers to shift funds from low or no yield checking accounts into these higher rate
accounts.

The 21% growth in net interest income
during 2005 compared to 2004 was also largely driven by significant growth in average
interest earning assets which increased by $219.0 million, or 15%, to $1.65 billion for
2005. The net interest margin increased by 17 basis points to 3.81% for 2005, also
contributing to the growth in net interest income.

The increases in short-term interest
rates described above caused an increase in the yield on assets and the overall cost of
funds in 2005 compared to 2004. The yield on earning assets increased 90 basis points and
was largely offset by an 80 basis point increase in the overall cost of funds during 2005
when compared to 2004.

Anticipated growth in earning assets
is expected to continue to increase levels of net interest income. We expect, however,
that compression in the net interest margin that began when the Federal Open Market
Committee stopped raising short-term interest rates during the third quarter of 2006, will
continue as long as short-term and long-term rates remain within a narrow range. We
continue to maintain derivative instruments, as discussed in the Notes to the Consolidated
Financial Statements, to help balance our interest rate risk sensitivity considering our
significant variable rate loan portfolio. This is discussed in further detail under the
section Sensitivity to Market Risk.

---



The following table shows an analysis
of net interest margin for the years ended December 31, 2006, 2005 and 2004.

|                                         | For the years ended December 31,
|---------------------------------------- | --------------------------------
|                                         |                                 
|                                         |                                 
|                                         |                                 
|(Dollars in Thousands)                  
|                                         |                                 
|                                         |                                 
|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 included in interest income are not material. 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 2006 was $7.7 million as compared to $3.7 million for 2005
and $7.9 million for 2004. For 2006 and 2004, the provision for loan losses included $4.7
million and $2.3 million, respectively, of additional provisions related to two separate
commercial borrowers described below under Loan Portfolio and Asset Quality and Allowance
for Loan losses. 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 $14.2 million during 2006, as compared to $13.0million during 2005 and$10.0 million in 2004. The $1.2 million increase over
2005 was a result of improvements in all individual components except gains on sold loans
which decreased from $2.3 million to $1.7 million due to a decline in mortgage loan
origination volume. The $3.0 million or 30% improvement over 2004 included increases in
all individual components with the exception of trust fees which were unchanged.

Revenues from trust services
increased $668,000 or 23% to $3.6 million for 2006. Trust fees are primarily based on the
underlying values of trust assets managed. An increase in both the market valuation of
assets held in trust accounts and a continued increase in new trust customers contributed
to the strong increase in 2006. Despite also gaining new trust customers in 2005, trust
fees remained relatively flat at $2.9 million for 2005 compared to 2004 due to a decline
in the market valuation of assets held in the trust accounts.

Deposit service charge income
increased $551,000 or 13% to $4.9 million for 2006 compared to $4.3 million for 2005 and
$3.0 million for 2004. The increase in 2006 and 2005 reflects the continued expansion of
our deposit customer account base as we have grown. An overdraft privilege service
implemented at the beginning of the second quarter of 2005 was well received and was also
a large contributor to the increase in deposit service charge income in 2005.

---



Other income increased $569,000 in
2006 and $1.5 million in 2005. The increase in other income for both years included
increases in miscellaneous fee categories associated with volume increases as we have
grown. These fee categories include debit card and ATM processing income and revenues from
mutual fund and annuity sales. The increase in 2006 and 2005 also included an additional
$373,000 and $499,000, respectively, of income earned on bank-owned life insurance
purchased during the fourth quarter of 2004. Also included in other income for 2005 was
$348,000 in gains on the sale of two commercial properties, one previously held as other
real estate.

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

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

Gain on sales of loans decreased
$615,000 in 2006 compared to 2005, while 2005 increased $129,000 compared to 2004.
Mortgage interest rate levels have steadily increased since 2004, resulting in a continued
decline in the level of residential refinancing and loan originations. An improvement in
the loan sales margin received on residential loans sold during 2005 offset the decline in
volume from 2004. The general improvement in our loan sales margin since 2004 reflects an
improvement in our competitive position with our secondary market investors and greater
discipline in our pricing practices. Considering the higher level of mortgage interest
rates, we expect the volume of originations going forward to be more consistent with 2006
levels.

Noninterest Expense:Noninterest expense totaled $44.9 million for 2006 as compared to $41.4 million for
2005 and $35.4 million for 2004. Salaries and benefits increased $2.4 million in 2006 over
2005 and $3.2 million in 2005 over 2004, comprising the majority of the increase in both
years.

The increase in salaries and benefits
for 2006 and 2005 is primarily related to additional staffing in each line of business and
in support departments consistent with growth of the Bank. Effective January 1, 2006, we
adopted FAS 123, Revised, and accordingly, we recorded stock option compensation expense
of $657,000 in 2006. Increased incentives associated with strong performance also
contributed to the increase in salaries and benefits during 2005. The consistent increase
in salaries and benefits reflects our attention to properly managing and supporting our
growth and our interest in creating a platform for strong future growth.

The increase in occupancy expense of
$319,000 in 2006 and $586,000 in 2005 and the increase in furniture and equipment expense
of $246,000 in 2006 and $207,000 in 2005 are consistent with our branch and facilities
expansion during these periods. We would expect the level of increase in these expense
categories to be commensurate with our plans for future branch expansion.

---



Data processing fees were up $172,000
in 2006 and $510,000 in 2005. In September of 2004, we outsourced our item processing
function which was the primary reason for the increase in 2005. We expect future increases
to be consistent with the Companys growth.

Other expense increased $279,000 in
2006 and $1.3 million in 2005. The increase in both periods includes increases in various
expense categories consistent with the growth of our company. These categories include
expenses associated with debit card and ATM processing, customer and internal courier, and
various outside service contracts. The level of the increase in most expense categories
moderated in 2006 as a result of our expense control and the continued improvement in the
efficiency of our banks operations as we have grown.

The level of the increase in most expense categories
moderated in 2006 as a result of our expense control and the continued improvement in the
efficiency of our banks operations as we have grown.

Federal Income Tax Expense:Our federal income tax expense has increased generally commensurate with our increase
in pre-tax earnings. Our federal income tax expense is lower than the amount computed by
applying our statutory federal income tax rate to our pre-tax earnings primarily due to
tax-exempt interest income. Our effective tax rate was 31.5%, 32.1% and 31.9% in 2006,
2005 and 2004, respectively.

# FINANCIAL CONDITION

Summary:Our total assets were
$2.07 billion at December 31, 2006, an increase of $204.8 million from $1.87 billion in
total assets at December 31, 2005. We believe the continued strong asset growth reflects
the acceptance of our full-service community banking philosophy in the growing communities
we serve. Our asset growth consists primarily of growth in our loan portfolio as we
continue to attract new loan customers and deepen relationships with existing customers
despite the strong competition from other locally based community banks and larger
regional banks. Total portfolio loans increased $163.6 million or 11% during 2006. The
growth in total assets also included growth in our investment securities portfolio and
premises and equipment.

The increase in total assets was
principally funded by deposit growth. Deposits grew by $159.8 million during 2006, an 11%
growth rate. We attribute the deposit growth to our quality customer service, the desire
of our customers to bank with a locally run bank, and convenient accessibility through the
expansion of our branch network and other delivery channels.

Cash and Cash Equivalents: Our
cash and cash equivalents, which include federal funds sold and short-term investments,
were $39.9 million at December 31, 2006, as compared to $49.1 million at December 31,
2005. The balance at the end of 2005 was elevated due to a large inflow of customer
deposits that occurred right at the end of the year.

Securities:Securities
increased $40.7 million or 25% to $201.3 million at December 31, 2006 from $160.6 million
at December 31, 2005. We maintain our security portfolio at a level to provide diversity
in the risk nature of our assets, to support our liquidity needs and to balance our
interest rate risk. Our portfolio consists primarily of high quality U.S government agency
and state and local municipal bonds classified as available for sale. These securities are
generally purchased at fixed rates to help offset the interest sensitivity of our variable
rate loan portfolio. We expect continued growth of our securities portfolio generally
consistent with the growth of our company to maintain the diversity of our assets and
support our liquidity and interest rate risk management.

---



Loan Portfolio and Asset Quality:Our total loan portfolio increased to $1.71 billion at December 31, 2006 from $1.55
billion at December 31, 2005. The $163.6 million increase in portfolio loans continues our
consistent pattern of growth. Each of our loan portfolios, including commercial and
commercial real estate, residential real estate and consumer loans grew during 2006. The
strongest growth was in the commercial and commercial real estate portfolios, which grew
by 12%. We believe the continued growth we have experienced in each of our loan portfolios
is a result of our focus on providing high quality customer service and reflects the
acceptance of our full-service community banking philosophy in the growing communities we
serve.

The majority of loans that we retain
in our portfolio are to small and mid-sized businesses in the form of commercial and
commercial real estate loans. Our combined commercial loan portfolios accounted for
approximately 76% and 74% of our total portfolio loans at December 31, 2006 and 2005,
respectively. The $1.29 billion in commercial and commercial real estate loans at December
31, 2006 represents an increase of $138.9 million over the $1.15 billion at December 31,
2005. A further breakdown in the composition of the commercial real estate loan portfolio
is shown in the table below (in thousands):

|                                   | December 31, 2006 | December 31, 2005
|---------------------------------- | ----------------- | -----------------
|                                   |                   |                  
|Construction/Land Development      |                   |                  
|Farmland and Agriculture           |                   |                  
|Nonfarm, Nonresidential            |                   |                  
|Multi-family                       |                   |                  
|                                   |                   |                  
|Total Commercial Real Estate Loans |                   |                  
|                                   |                   |                  

Approximately two-thirds of the
balance in the construction and land development category and the entire balance in the
multi-family category are comprised of non-owner occupied loans as of both December 31,
2006 and December 31, 2005.

We feel the consistent growth in
commercial loans that we have been able to achieve reflects the acceptance of our lending
approach by our customers and the ability of our lending team to respond to their needs
effectively. Our commercial loan department is built around a well-seasoned officer team
and our lending approach involves an efficient loan approval process focused around local
decision-making.

The residential real estate portfolio
increased from $223.4 million at December 31, 2005 to $224.8 million at December 31, 2006.
Our residential real estate loan portfolio, which also includes residential construction
loans made to individual homeowners, comprised approximately 13% of portfolio loans at the
end of 2006. Our residential real estate portfolio represents only a small portion of our
residential origination loan volume, as we sell the majority of our fixed-rate obligations
on the secondary market with servicing released to reduce our exposure to interest rate
risk. We originated for sale $103.7 million in residential mortgages in 2006, $137.0
million in 2005, and $141.7 million in 2004. Loans held for sale were $1.5 million at
December 31, 2006 as compared to $2.3 million at December 31, 2005. The gradual decline in
residential refinancing and loan originations is a result of the generally rising level of
longer-term interest rates that has occurred since 2004.

Our consumer loan portfolio includes
both loans secured by personal property, as well as home equity fixed term and line of
credit loans. Our consumer loan portfolio increased to $194.8 million at December 31, 2006
from $171.5 million at December 31, 2005. Consumer loans comprised approximately 11% of
our portfolio loans at the end of both 2006 and 2005.

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

---



Nonperforming assets are comprised of
nonperforming loans, foreclosed assets and repossessed assets. Our nonperforming loans
include loans on non-accrual status, restructured loans and loans delinquent more than 90
days but still accruing. Nonperforming loans as of December 31, 2006 totaled $22.3 million
or 1.30% of total portfolio loans compared to $4.2 million or 0.27% of total portfolio
loans at December 31, 2005.

The balance of nonperforming loans at
the end of 2006 includes one large commercial relationship totaling approximately $15.2
million. The loans for this relationship came due in September 2006 but were not renewed
as of December 31, 2006 due to their size and complexity. The loans continued to accrue
interest as we expected to collect all amounts owed. The Bank and the borrower, a land
development partnership, have entered into an agreement and the new loans closed on
January 31, 2007. The remaining balance of nonperforming loans at the end of 2006 and the
balance of nonperforming loans at the end of 2005 consist of a number of smaller
commercial loans most of which are on nonaccrual for which we consider to be well
collateralized or adequately reserved. The majority of nonperforming loans at the end of
2004 related to one commercial borrower. The loans associated with this borrower became
impaired due to fraud perpetrated by the borrower. The borrower has since ceased
operations. Proceeds from the liquidation of collateral, payments on outstanding
receivables and additional charge-offs reduced our balances from this relationship to zero
at the end of 2006 and approximately $229,000 at the end of 2005, from $2.3 million at
year-end 2004.

Our loan portfolio is reviewed
regularly by an external loan review team, our own loan officers, and our senior
management. When reasonable doubt exists concerning collectibility of interest or
principal of one of our loans, that loan is placed in non-accrual status. Any interest
previously accrued but not collected is reversed and charged against current earnings.

Foreclosed assets include assets
acquired in settlement of loans. As of December 31, 2006 foreclosed assets totaled $3.2
million compared to $527,000 as of December 31, 2005. The balance at the end of 2006 is
comprised of several real estate properties for which no loss is expected upon
disposition.

Total nonperforming assets amounted
to $25.6 million or 1.23% of total assets as of December 31, 2006 compared to $4.9 million
or 0.26% of total assets as of December 31, 2005. 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 as of December 31, 2006 was $23.3 million, representing
approximately 1.36% of total portfolio loans outstanding, compared to $21.0 million or
1.36% of total loans at December 31, 2005.

Our allowance for loan losses is
maintained at a level considered appropriate based upon our regular, quarterly assessments
of the probable estimated losses inherent in the loan portfolio. Our methodology for
measuring the appropriate level of allowance relies on several key elements, which include
specific allowances for loans considered impaired, formula allowance for graded loans,
general allocations based on historical trends for pools of similar loan types and under
certain circumstances, an unallocated reserve 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 $400,000 at December 31, 2006 and $333,000 at
December 31, 2005.

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. Our loan portfolio has grown rapidly since our
inception. As a result, a significant portion of our loan portfolio remains relatively
unseasoned and our actual historical loan loss experience is limited. Accordingly, the
determination of our loss factors includes consideration of the banking industrys
historical loan loss experience by loan type and the historical loan loss experience
within our geographic markets, as well as our own loan loss experience and trends. These
factors are regularly monitored and adjusted for significant factors that, in
managements judgment, affect the collectibility of the portfolio as of the analysis
date. The commercial loan allowance was $21.0 million at December 31, 2006 compared to
$18.6 million at December 31, 2005 and increased primarily in response to the continuing
growth in the commercial loan portfolio. The increase of $2.3 million in the total
allowance for loan losses during 2006 was primarily related to this $2.4 million increase
in the commercial loan allowance.

Groups of homogeneous loans, such as
residential real estate, open- and closed-end consumer loans, etc., receive general
allowance allocations based on loss trends. In lieu of an established loan loss trend for
Macatawa Bank, we use historical loss trends based on industry experience and peers in
determining an adequate allowance for probable losses associated with these pools of
loans. General economic and business conditions, credit quality trends, collateral values,
seasoning of the portfolios and recent loss experience are conditions considered in
connection with allocation factors for these similar pools of loans. The general allowance
was $1.8 million at December 31, 2006 and $2.1 million at December 31, 2005.

The continued increase in the
allowance was deemed necessary given the significant growth in loans. However, the
allowance for loan losses as a percent of total loans remained unchanged at 1.36%. 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.

---



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

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

The above allocations are not
intended to imply limitations on usage of the allowance. The entire allowance is available
for any loan losses without regard to loan type. The allowance amounted to $23.3 million
at December 31, 2006. Of this total, 2% related to specific allocations on impaired loans,
90% related to commercial loan portfolio allocations and 8% related to general
allocations.

Net charge-offs totaled $5.4
million, or 0.33% of average loans for 2006 compared to $1.9 million, or 0.13% of average
loans for 2005 and $4.7 million, or 0.37% of average loans for 2004.  Net charge-offs in
2006 include a $4.7 million charge-off related to $5.2 million in outstanding loans to
one commercial borrower.  The impairment of the loans to this borrower was discovered in
March 2007 through internal investigations relating to the collateral.  The collateral
was not of sufficient value to cover the outstanding principal on these loans and it is
likely that the borrower will be unable to meet the repayment terms of the loans. The
internal investigation suggests that the borrower may have made misrepresentations to the
Bank regarding the loan collateral and its financial condition.  Because of these
misrepresentations and the timing of our discovery of them, the allowance for loan losses
did not contain sufficient allocations related to this borrower.  As such, an additional
provision for loan losses amounting to $4.7 million was recorded as of December 31, 2006
in order to maintain the allowance for loan losses at a level considered adequate in our
judgment.  The remaining balance of the loans to this borrower, amounting to $495,000,
was included in non-accrual loans as of December 31, 2006.  Net charge-offs in 2006,
excluding this large single charge-off were low compared to the prior two years.  Strong
collateral positions on nonperforming loans that were resolved during 2006 allowed for
this low level of net charge-offs.  As previously noted under the section Loan Portfolio
and Asset Quality, the level of net charge-offs for 2004 relates primarily to a $2.8
million charge-off associated with the impaired loans to one commercial borrower.  The
following is a summary of our loan balances, changes in the allowance for loan losses and
related ratios.

---



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

Premises and Equipment:Premises and equipment totaled $60.7 million at December 31, 2006, an increase of $7.7
million from December 31, 2005. The increase included costs associated with the
construction of a new regional facility in downtown Holland and a new branch site in Grand
Rapids. Both are expected to open in the first quarter of 2007.

Deposits:Total deposits
increased $159.8 million to $1.67 billion at December 31, 2006, as compared to $1.51
billion at December 31, 2005. The majority of growth during the year was in interest
bearing deposits, including interest bearing checking, money market and time deposit
accounts, as deposit customers preferred such accounts within the generally high rate
environment. Interest bearing checking accounts increased $57.7 million to $265.7 million,
money market accounts grew $79.0 million to $459.0 million and time deposits within our
markets increased $43.5 million to $449.6 million at the end of 2006. Because of the
strong growth from deposits within our markets, we were able to rely less on brokered
deposits during 2006. Brokered deposits declined $11.3 million to $272.9 million at the
end of 2006. 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 from deposits within our markets.

---



Noninterest bearing demand accounts
comprised approximately 11% of total deposits at December 31, 2006, as compared to
approximately 12% of total deposits at the end of 2005. Interest bearing demand, including
money market, and savings accounts comprised approximately 46% of total deposits at
December 31, 2006, as compared to 42% at the end of last year. Time accounts as a
percentage of total deposits were approximately 43% at December 31, 2006, as compared to
46% at December 31, 2005.

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. Additionally, we have a $10.0 million credit facility available for general
corporate needs including contributing capital to our subsidiary bank to enable it to
maintain regulatory capital at well-capitalized levels. This credit facility was unused
during all of 2006 and 2005.

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. Borrowed funds totaled
$212.2 million at December 31, 2005 including $145.2 million of Federal Home Loan Bank
advances, $41.2 million in long-term debt associated with trust preferred securities and
$25.8 million in federal funds purchased. The increase in borrowed funds in 2006 was used
to support growth in assets.

---



# CAPITAL RESOURCES AND
LIQUIDITY

Capital Resources: Total
shareholders equity was $156.8 million at December 31, 2006 compared to $141.7
million at December 31, 2005.  The increase of $15.1 million was primarily the result of
retained net income (net of cash dividends paid).  Net income generated during 2006 of
$19.8 million was partially offset by cash dividends of $7.9 million, or $.48 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 2006, resulting in a transfer of $15.1 million from
retained earnings to common stock.  In addition, a 3-for-2 stock split was paid in June
2006.

The change in accumulated other
comprehensive income was due to an increase in both the market value of securities
available for sale and the derivative instruments associated with the Companys
interest rate swap arrangements due principally to the changes in interest rates during
2006. For more information regarding our interest rate swap arrangements, see the Notes to
the Consolidated Financial Statements.

The Corporation was categorized as
well capitalized for regulatory capital purposes at December 31, 2006 and
2005. The following table shows the Companys various capital ratios for 2006 and
2005.

|2006                             | 2005
|-------------------------------- | ----
|                                 |     
|                                 |     
|Average equity to average assets |     
|Total risk-based capital         |     
|Tier 1 risk-based capital        |     
|Tier 1 capital to average assets |     

Growth in capital from strong
earnings in 2006 was consistent with the growth in assets resulting in the stable capital
ratios from 2005 to 2006. Of the $40.0 million of trust preferred securities outstanding
at December 31, 2006, approximately $38.0 million qualified as Tier 1 capital with the
remaining qualifying as Tier 2 capital. For more information regarding the trust preferred
securities, please refer to the Notes to the Consolidated Financial Statements.

We believe the additional regulatory
capital provided by the trust preferred security issuances, as supplemented by our
improvement in earnings, will support our growth plans in the near future. Additional
capital may be necessary within the next three to four years if our growth continues at
its current pace. Capital sources include, 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 as December 31, 2006.

|1 year or less          | 1-3 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, 2006, we had a total of $470.9 million in unused lines of credit, $25.9 million in
unfunded loan commitments, and $27.3 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. Our asset/liability management process aids us in providing
liquidity while maintaining a balance between interest earning assets and interest bearing
liabilities.

We use two interest rate risk
measurement techniques in our interest rate risk management. We first use a static gap
analysis to identify overall changes in the repricing periods of assets and liabilities.
This measures the difference between the dollar amounts of interest sensitive assets and
liabilities that may be refinanced or repriced during a given time period. A significant
repricing gap could result in a negative impact to our net interest margin during periods
of changing market interest rates. The following table illustrates our interest rate
repricing gaps for selected maturity periods at December 31, 2006.

---



|0 to 3 months                   | 4 to 12 months | 1 to 5 years | Over 5 Years | Total    
|------------------------------- | -------------- | ------------ | ------------ | ---------
|                                |                |              |              |          
|Assets:                         |                |             
|Taxable securities              |                |              | $            | ---      
|Tax exempt securities           |                |              |              | ---      
|FHLB stock                      |                |              |              | 12,275   
|Loans-fixed (a)                 |                |              |              | 49,874   
|Loans-variable (a)              |                |              |              | 779,876  
|Other assets, net               |                |              |              | ---      
|                                |                |              |              |          
|Total assets                    |                |              | $            | 842,025  
|                                |                |             
|Liabilities:                    |                |             
|Noninterest bearing deposits    |                |              | $            | ---      
|Other interest bearing deposits |                |              |              | 724,909  
|Savings                         |                |              |              | 40,160   
|Time deposits                   |                |              |              | 205,720  
|Other borrowings                |                |              |              | 73,228   
|Other liabilities & equity      |                |              |              | ---      
|                                |                |              |              |          
|Total liabilities & equity      |                |              | $            | 1,044,017
|                                |                |             
|Period gap                      |                |              | $            | (201,497 
|Cumulative gap                  |                |              | $            | (201,497 
|Cumulative gap/total assets     |                |              |              | (9.71    

(a)    
          Does not include loans on non-accrual.

The above table shows that total
liabilities maturing or repricing within three months exceeded assets maturing within the
same time period. The analysis, however, does not consider the different rate
sensitivities of certain assets or liabilities to changes in market rates or reflect the
magnitude of interest rate changes on net interest income. In addition, cash flows and
repricing characteristics for various categories of assets and liabilities are subject to
competitive pressures, consumer sentiments and other influences that are beyond our
control and are not reflected in this static analysis. As a result, various assets and
liabilities indicated as maturing or repricing within a stated period may reprice at
different levels and mature or reprice in other periods or at different volumes.

Accordingly, we also utilize a
simulation model to assess the direction and magnitude of variations in net interest
income and the economic value of equity (EVE) resulting from potential changes
in market interest rates. Key assumptions in the model include 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
$80.0 million in variable rate loans repricing immediately into fixed rate loans repricing
in one to five 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, 2006 (dollars in thousands).

|Economic Valueof Equity  | PercentChange | Net InterestIncome | PercentChange
|------------------------ | ------------- | ------------------ | -------------
|                         |               |                    |              
|Change in Interest Rates |               |                   
|200 basis point rise     |               |                    | $            
|100 basis point rise     |               |                    |              
|Base-rate scenario       |               |                    |              
|100 basis point decline  |               |                    |              
|200 basis point decline  |               |                    |              

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, 2006 and 2005 are set forth in the table
below. This information has been restated to reflect the impact of all previously paid
stock dividends and splits.

|               | 2006 | 2005
|-------------- | ---- | ----
|               |      |     
|               |      |     
|               |      |     
|Quarter        |      |     
|First Quarter  |      |     
|Second Quarter |      |     
|Third Quarter  |      |     
|Fourth Quarter |      |     

Quarterly cash dividends totaling
$.28 were paid during 2004, and a 5% stock dividend was declared during the second quarter
of 2004. Quarterly cash dividends totaling $.39 were paid during 2005, and a 15% stock
dividend was declared during the second quarter of 2005. Quarterly cash dividends totaling
$.48 were paid during 2006, a 5% stock dividend and a 3-for-2 stock split were declared
during the second quarter of 2006.

# 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 and the Russell 2000 Index of Regional-Midwest Banks. The
comparison assumes a $100 investment on December 31, 2001 at the initial price of $9.69
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.



|                     | 2001 | 2002 | 2003 | 2004   | 2005 | 2006
|-------------------- | ---- | ---- | ---- | ------ | ---- | ----
|                     |      |      |      |        |      |     
|                     |      |      |      |        |      |     
|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 | 
|                                                                 | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON       | 
|INTERNAL CONTROL OVER FINANCIAL REPORTING                        | 
|                                                                 | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON       | 
|FINANCIAL STATEMENTS                                             | 
|                                                                 | 
|CONSOLIDATED FINANCIAL STATEMENTS                                | 
|                                                                 | 
|CONSOLIDATED BALANCE SHEETS                                      | 
|                                                                 | 
|CONSOLIDATED STATEMENTS OF INCOME                                | 
|                                                                 | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY       | 
|                                                                 | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                            | 
|                                                                 | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       | 

---



# MANAGEMENTS
REPORT ON INTERNALCONTROL OVER FINANCIAL
REPORTING

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

Company management assessed the
effectiveness of the Companys internal control over financial reporting as of
December 31, 2006. 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,
2006, the Companys internal control over financial reporting is effective based on
those criteria.

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

| |  | /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 managements
assessment, included in the accompanying Managements Report on Internal Control Over
Financial Reporting, that Macatawa Bank Corporation maintained effective internal control
overfinancial reporting as of December 31, 2006, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Macatawa Bank Corporations
management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on managements assessment and
an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.

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

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

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

In our opinion, managements
assessment that Macatawa Bank Corporation maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects,
based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, Macatawa Bank Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, 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, 2006 and 2005
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, 2006 and our
report dated March 16, 2007 expressed an unqualified opinion on those consolidated
financial statements.

|Grand Rapids, Michigan
March 16, 2007 | Crowe Chizek and Company LLC
|------------------------------------- | ----------------------------

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, 2006 and 2005,
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, 2006. 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, 2006 and 2005, and the
results of its operations and its cash flows for each of the three years in the period
ended December 31, 2006, 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, 2006, based on criteria established in Internal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 16, 2007 expressed an unqualified
opinion thereon.

|Grand Rapids, Michigan
March 16, 2007 | Crowe Chizek and Company LLC
|------------------------------------- | ----------------------------

F-4

---



MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
(Dollars in thousands)

---

|                                                       | 2006 | 2005
|------------------------------------------------------ | ---- | ----
|                                                       |      |     
|ASSETS                                                 |      |     
|Cash and due from banks                                |      |     
|                                                       |      |     
|Total cash and cash equivalents                        |      |     
|                                                       |      |     
|Securities available for sale, at fair value           |      |     
|Securities held to maturity (fair value 2006 - $2,762, |      |     
|2005 - $3,974)                                         |      |     
|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; 16,254,619 and 10,227,992 shares           |      |     
|issued and outstanding at December 31, 2006            |      |     
|and 2005, respectively                                 |      |     
|Retained earnings                                      |      |     
|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, 2006, 2005 and 2004 (Dollars in thousands,
except per share data)

---

|                                                    | 2006 | 2005 | 2004
|--------------------------------------------------- | ---- | ---- | ----
|                                                    |      |      |     
|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 EQUITYYears ended December
31, 2006, 2005 and 2004 (Dollars in thousands,
except per share data)

---

|                                                  | CommonStock | RetainedEarnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity
|------------------------------------------------- | ----------- | ---------------- | --------------------------------------------- | --------------------------
|                                                  |             |                  |                                               |                           
|Balance, January 1, 2004                          |             |                  | $                                             | 114,568                   
|                                                  |             |                 
|Net income                                        |             |                  |                                               |                           
|                                                  |             |                 
|Other comprehensive income (loss):                |             |                 
|Net change in unrealized gain (loss)              |             |                 
|on derivative instruments, net                    |             |                 
|of tax of ($366)                                  |             |                  |                                               |                           
|                                                  |             |                 
|Net change in unrealized gain (loss)              |             |                 
|on securities available for sale, net             |             |                 
|of tax of ($509)                                  |             |                  |                                               |                           
|                                                  |             |                  |                                               |                           
|Comprehensive income                              |             |                  |                                               |                           
|                                                  |             |                 
|Issued 418,263 shares in payment of               |             |                 
|5% stock dividend                                 |             |                  |                                               | 9,330                     
|                                                  |             |                 
|Issued 35,566 shares for stock                    |             |                 
|option exercises (net of 5,249 shares             |             |                 
|exchanged and including $97 of tax benefit)       |             |                  |                                               | 491                       
|                                                  |             |                 
|Cash dividends at $.28 per share                  |             |                  |                                               |                           
|                                                  |             |                  |                                               |                           
|                                                  |             |                 
|Balance, December 31, 2004                        |             |                  |                                               | 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 |             |                  |                                               | 176                       
|earned under Stock Compensation Plan)             |             |                 
|                                                  |             |                 
|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 $.39 per share                  |             |                  |                                               |                           
|                                                  |             |                  |                                               |                           
|                                                  |             |                 
|Balance, December 31, 2005                        |             |                  |                                               | 136,583                   

---

See accompanying notes
to consolidated financial statements.

F-7

---



MACATAWA BANK
CORPORATION CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (continued) Years ended December 31,
2006, 2005 and 2004 (Dollars in thousands, except per share data)

---

|                                                          | CommonStock | RetainedEarnings | 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 $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 $.48 per share                          |             |                  |                                               |                           
|                                                          |             |                  |                                               |                           
|                                                          |             |                 
|Balance, December 31, 2006                                |             |                  | $                                             | 153,728                   
|                                                          |             |                  |                                               |                           

---

See accompanying notes
to consolidated financial statements.

F-8

---



MACATAWA BANK
CORPORATION CONSOLIDATED STATEMENTS
OF CASH FLOWS Years ended December
31, 2006, 2005 and 2004 (Dollars in thousands)

---

|                                                                | 2006 | 2005 | 2004
|--------------------------------------------------------------- | ---- | ---- | ----
|                                                                |      |      |     
|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                                |      |      |     
|Purchase of bank-owned life insurance                           |      |      |     
|Additions to premises and equipment                             |      |      |     
|                                                                |      |      |     
|Net cash from investing activities                              |      |      |     
|                                                                |      |     
|Cash flows from financing activities                            |      |     
|Net increase in deposits                                        |      |      |     
|Net increase (decrease) in short-term borrowings                |      |      |     
|Proceeds from long-term debt                                    |      |      |     
|Proceeds from other borrowed funds                              |      |      |     
|Repayments of other borrowed funds                              |      |      |     
|Fractional shares purchased                                     |      |      |     
|Cash dividends paid                                             |      |      |     
|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                                |      |      | $   
|                                                                |      |      |     
|                                                                |      |     
|Supplemental cash flow information:                             |      |     
|Interest paid                                                   |      |      | $   
|Income taxes paid                                               |      |      |     
|Supplemental noncash disclosures:                               |      |     
|Transfers from loans to other real estate                       |      |      |     

---

See accompanying notes
to consolidated financial statements.

F-9

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2006 and 2005

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Macatawa Bank, and its wholly-owned subsidiary, Macatawa
Bank Mortgage Company; and Macatawa Investment Services, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.

The Company also owns all of the
common stock of Macatawa Statutory Trust I and Macatawa Statutory Trust II. These are
grantor trusts that issued trust preferred securities and are discussed in a separate
note.

Nature of Operations: Macatawa
Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit
Insurance Corporation. The Bank operates 24 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.

Recent Developments: In
March 2007 management decided to record an additional loan charge-off and corresponding
loan loss provision of $4.7 million within the 2006 financial results of the Company.
The charge-off and additional provision was based on information that became available
after December 31, 2006, and was related to outstanding commercial loans of $5.2 million
to one borrower.

Management has reason to
believe that the borrower will be unable to meet the repayment terms of the loans. The
loans have been secured by collateral, but the collateral likely will not be of
sufficient value to cover the outstanding principal on these loans.  The remaining
balance of loans to this borrower, amounting to $495,000, is secured by identified
collateral and is included in impaired loans at December 31, 2006.

The loan impairment was
discovered in early March 2007 through internal investigations relating to the collateral
and the borrower relationship.  Our internal investigation suggests that the borrower may
have made misrepresentations to the Bank regarding the loan collateral and its financial
condition.

The after-tax impact on
net income of the additional loan loss provision was approximately $3.1 million, or $0.18
per share.  We will aggressively seek to recover funds associated with this borrower.

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

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

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

---

(Continued)

F-10

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

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.

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

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

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

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-11

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2006 and 2005

---

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 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 $3.2 million in foreclosed assets at December 31, 2006 and $527,000 in
foreclosed assets at December 31, 2005.

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.

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.

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

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

---

(Continued)

F-12

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

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.

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. For 2006, adopting this standard resulted in
the Company recording compensation cost for stock options of $657,000 or $522,000 after
tax, representing $0.03 per share for 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 and
2004, as all options granted had an exercise price equal to or greater than the market
price of the underlying common stock at date of grant.

Had compensation cost for stock
options been measured using the fair value method, net income and basic and diluted
earnings per share would have been the pro forma amounts indicated below (dollars in
thousands, except per share data).

|                                         | 2005 | 2004
|---------------------------------------- | ---- | ----
|                                         |      |     
|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     |      |     

The Companys stock compensation
plan allows for the issuance of restricted stock awards. Compensation expense is based
upon the market price of the Companys stock at the date of grant and is recognized
over the vesting period of the awards. In December 2006, 21,440 shares of common stock
were awarded under the plan with a vesting period of three years. During 2005, 7,875
shares of common stock were awarded under the plan and vested immediately upon grant.
There were no stock awards in 2004. The compensation expense for stock awarded in 2006 was
nominal. Compensation expense for stock awarded in 2005 amounted to $176,000 and was
recognized immediately upon grant.

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.

---

(Continued)

F-13

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

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.

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

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.

Derivatives: Derivative
financial instruments are recognized as assets or liabilities at fair value. 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.

At the start of a derivative
contract, the Company designates the derivative as one of three types based on the
Companys intentions and belief as to likely effectiveness as a hedge. These three
types are (1) a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), (2) a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge), or (3) an instrument with no
hedging designation (stand-alone derivative). For a fair value hedge, the gain
or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are
recognized in current earnings as fair values change. For a cash flow hedge, the gain or
loss on the derivative is reported in other comprehensive income and is reclassified into
earnings in the same periods during which the hedged transaction affects earnings. For
both types of hedges, derivative gains and losses that are not effective in hedging the
changes in fair value or expected cash flows of the hedged item are recognized immediately
in current earnings. Changes in the fair value of derivatives that do not qualify for
hedge accounting are reported currently in earnings, as noninterest income.

Net cash settlements on derivatives
that qualify for hedge accounting are recorded in interest income or interest expense,
based on the item being hedged. Net cash settlements on derivatives that do not qualify
for hedge accounting are reported in noninterest income. Cash flows on hedges are
classified in the cash flow statement the same as the cash flows of the items being
hedged.

The Company formally documents the
relationship between derivatives and hedged items, as well as the risk-management
objective and the strategy for undertaking hedge transactions. This documentation includes
linking fair value or cash flow hedges to specific assets and liabilities on the balance
sheet or to specific firm commitments or forecasted transactions. 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 fair
values or cash flows of the hedged items. The Company discontinues hedge accounting when
it determines that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted
transaction is no longer probable, a hedged firm commitment is no longer firm, or
treatment of the derivative as a hedge is no longer appropriate or intended.

---

(Continued)

F-14

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

When hedge accounting is
discontinued, later changes in fair value of the derivative are recorded as noninterest
income. When a fair value hedge is discontinued, the hedged asset or liability is no
longer adjusted for changes in fair value and the existing basis adjustment is amortized
or accreted over the remaining life of the asset or liability. When a cash flow hedge is
discontinued but the hedged cash flows or forecasted transaction is still expected to
occur, gains or losses that were accumulated in other comprehensive income are amortized
into earnings over the same periods which the hedged transactions will affect earnings.

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

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

Stock Splits and Dividends:
The fair value of shares issued in stock dividends for 20% or less is transferred from
retained earnings to common stock, to the extent of available retained earnings. Any
excess of fair value over available retained earnings is considered a return of capital.
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.

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

Adoption of New
Accounting Standards:

Effective January 1, 2006, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-based Payment.See Stock Compensation above for further
discussion of the effect of adopting this standard.

In September 2006, the Securities and
Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108),which is effective for fiscal years ending on or after
November 15, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected
financial statement misstatements should be considered in quantifying a current year
misstatement. SAB 108 requires public companies to quantify misstatements using both an
income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether
either approach results in a misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. If prior year errors that had been
previously considered immaterial now are considered material based on either approach, no
restatement is required so long as management properly applied its previous approach and
all relevant facts and circumstances were considered. Adjustments considered immaterial in
prior years under the method previously used, but now considered material under the dual
approach required by SAB 108, are to be recorded upon initial adoption of SAB 108. The
adoption of SAB 108 did not have any effect on the financial statements.

---

(Continued)

F-15

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

Effect of Newly Issued But Not Yet
Effective Accounting Standards:

In July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition
threshold and measurement attribute for a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company has determined that the
adoption of FIN 48 will not have a material effect on the financial statements.

---

(Continued)

F-16

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# NOTE 2  ACQUISITION

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.

Smith & Associates is an
investment  advisory  firm based in Holland,  Michigan.  Mr. Smith is the owner of Smith & Associates.
 Mr.  Smith is also the  founder  and  Chairman  of  Macatawa  Bank  Corporation.  The
 transaction  is structured  as a merger  of Smith &  Associates  into  Macatawa,  which
in turn will  contribute  the  business  to Macatawa Bank.

The purchase price was $3,150,000,
less any liabilities of Smith & Associates as of the closing date. In addition, one
$300,000 contingent payment will 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. The purchase
price and the contingent payments will be paid in common stock of Macatawa valued at the
average closing price during the month of September, 2006 ($23.0035 per share).

The transaction will be accounted for
using purchase accounting. The final allocation of the purchase price to goodwill and
intangible assets is being determined. Any subsequent impairment is required to be
reflected in the income statement at such time.

Mr. Smith will provide assistance with transitioning clients as reasonably requested
          from time to time. Under the Noncompetition Agreement, Mr. Smith agrees to a six
          year covenant not to compete with the acquired business.

All closing conditions were satisfied
and the transaction closed effective as of January 1, 2007.

---

(Continued)

F-17

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# 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 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    
|                          |               |                      |                       |          
|Available for Sale 2005   |               |                     
|U.S. Treasury and federal |               |                     
|agency securities         |               |                      | $                     | 111,102  
|State and municipal bonds |               |                      |                       | 46,878   
|Other equity securities   |               |                      |                       | 1,000    
|                          |               |                      |                       |          
|                          |               |                     
|                          |               |                      | $                     | 158,980  
|                          |               |                      |                       |          
|Held to Maturity 2005     |               |                     
|State and municipal bonds |               |                      | $                     | 3,907    
|                          |               |                      |                       |          
|                          |               |                     
|                          |               |                      | $                     | 3,907    
|                          |               |                      |                       |          

Securities with unrealized losses at year-end
2006 and 2005, 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, 2006          |                     |                   |      
|                           |                     |                  
|U.S. Treasury and federal  |                     |                  
|agency securities          |                     |                   | $    
|State and municipal bonds  |                     |                   |      
|Other equity securities    |                     |                   |      
|                           |                     |                   |      
|                           |                     |                  
|Total temporarily impaired |                     |                   | $    
|                           |                     |                   |      

---

(Continued)

F-18

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# NOTE 3  SECURITIES
(Continued)

|                           | Less than 12 Months | 12 Months or More | Total
|-------------------------- | ------------------- | ----------------- | -----
|                           |                     |                   |      
|                           |                     |                   |      
|                           |                     |                   |      
|December 31, 2005          |                     |                   |      
|                           |                     |                  
|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 2006 or 2005 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, 2006 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, 2006, 2005 and 2004.

At December 31, 2006 and 2005,
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, 2006,
securities with a carrying value of approximately $21,399,000 were pledged as collateral
for securities sold under agreements to repurchase. In addition, securities totaling
$107,581,000 at December 31, 2005 were used as collateral for advances from the Federal
Home Loan Bank.

---

(Continued)

F-19

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2006 and 2005

---

# NOTE 4  LOANS

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

|                     | 2006 | 2005
|-------------------- | ---- | ----
|                     |      |     
|Commercial           |      |     
|Commercial mortgage  |      |     
|Residential mortgage |      |     
|Consumer             |      |     
|                     |      |     
|                     |      |     
|                     |      |     
|                     |      |     

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

|                          | 2006 | 2005 | 2004
|------------------------- | ---- | ---- | ----
|                          |      |      |     
|Beginning balance         |      |      | $   
|Provision for loan losses |      |      |     
|Loans charged-off         |      |      |     
|Recoveries                |      |      |     
|                          |      |      |     
|                          |      |     
|Ending balance            |      |      | $   
|                          |      |      |     

Loans charged-off in 2006
included a $4.7 million charge-off related to $5.2 million in outstanding loans to one
commercial borrower.  The impairment of the loans to this borrower was discovered in
March 2007 through internal investigations relating to the collateral.  The collateral
was not of sufficient value to cover the outstanding principal on these loans and it is
likely that the borrower will be unable to meet the repayment terms of the loans.  The
internal investigation suggests that the borrower may have made misrepresentations to the
Bank regarding the loan collateral and its financial condition.  Because of these
misrepresentations and the timing of our discovery of them, the allowance for loan losses
did not contain sufficient allocations related to this borrower.  As such, an additional
provision for loan losses amounting to $4.7 million was recorded as of December 31, 2006
in order to maintain the allowance for loan losses at a level considered adequate in our
judgment.  The remaining balance of the loans to this borrower is secured by identified
collateral, amounting to $495,000, and was included in impaired loans as of December 31,
2006.

Loans charged-off for 2004 included a
third quarter charge of $2,800,000 related to one borrower whose loans, totaling
$5,900,000, became impaired due to fraud perpetrated by the borrower. After this
charge-off, approximately $3,100,000 of the loan balances remained outstanding. Subsequent
to this initial charge-off, proceeds from the liquidation of certain collateral, payments
on outstanding receivables, and additional charge-offs of $125,000 in 2004 and $789,000 in
2005, reduced the balance to approximately $2,300,000 at December 31, 2004 and $229,000 at
December 31, 2005. At December 31, 2006, all balances were paid with no additional losses.

Impaired loans were as follows
(dollars in thousands):

|                                   | 2006 | 2005
|---------------------------------- | ---- | ----
|                                   |      |     
|Loans with no allocated allowance  |      |     
|for loan losses                    |      |     
|Loans with allocated allowance for |      |     
|loan losses                        |      |     
|                                   |      |     
|                                   |      |     
|                                   |      |     
|                                   |      |     
|                                   |      |     
|Amount of the allowance for loan   |      |     
|losses allocated                   |      |     
|                                   |      |     

---

(Continued)

F-20

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2006 and 2005

---

# NOTE 4  LOANS
(Continued)

|                                             | 2006 | 2005 | 2004
|-------------------------------------------- | ---- | ---- | ----
|                                             |      |      |     
|Average of impaired loans during the period  |      |      | $   
|Interest income recognized during impairment |      |      |     
|Cash-basis interest income recognized        |      |      |     

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

|                                             | 2006 | 2005
|-------------------------------------------- | ---- | ----
|                                             |      |     
|Loans past due over 90 days still on accrual |      |     
|Nonaccrual loans                             |      |     
|                                             |      |     
|                                             |      |     
|                                             |      |     

Nonperforming loans include both
smaller balance homogeneous loans that are collectively evaluated for impairment and
individually classified impaired loans. The balance of nonperforming loans at the end of
2006 includes one large commercial relationship totaling approximately $15.2 million. The
loans came due in September 2006 but were not renewed as of December 31, 2006 due to their
size and complexity. At no time were the loans placed in nonaccrual as we expected to
collect all amounts owed. An agreement has occurred between the Bank and the borrower, a
land development partnership, and the loans were renewed and closed as of January 31,
2007.

# NOTE 5  PREMISES
AND EQUIPMENT  NET

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

|                              | 2006 | 2005
|----------------------------- | ---- | ----
|                              |      |     
|                              |      |     
|Land                          |      |     
|Building                      |      |     
|Leasehold improvements        |      |     
|Furniture and equipment       |      |     
|Construction in progress      |      |     
|                              |      |     
|                              |      |     
|Less accumulated depreciation |      |     
|                              |      |     
|                              |      |     
|                              |      |     
|                              |      |     

The balance of construction in
progress at December 31, 2006 primarily relates to two facilities expected to open in the
first quarter of 2007. Depreciation expense was $2,949,000, $2,713,000 and $2,546,000 for
each of the years ending December 31, 2006, 2005 and 2004.

The Bank leases certain office and
branch premises and equipment under operating lease agreements. Total rental expense for
all operating leases aggregated to $382,000, $380,000 and $452,000 for each of the years
ending December 31, 2006, 2005 and 2004. Future minimum rental expense under noncancelable
operating leases as of December 31, 2006 is as follows (dollars in thousands):

|2007 |  |  | $ | 307 |  |  |  | 
|---- |  |  | - | --- |  |  |  | 
|2008 |  |  |   | 260 |  |  |  | 
|2009 |  |  |   | 38  |  |  |  | 
|2010 |  |  |   | 8   |  |  |  | 
|2011 |  |  |   | 6   |  |  |  | 
|     |  | 
|     |  |  | $ | 619 |  |  |  | 
|     |  | 

---

(Continued)

F-21

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2006 and 2005

---

# NOTE 6 
ACQUISITION INTANGIBLES

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

|                              | 2006 | 2005
|----------------------------- | ---- | ----
|                              |      |     
|                              |      |     
|Core deposits                 |      |     
|Trust relationships           |      |     
|                              |      |     
|                              |      |     
|Less accumulated amortization |      |     
|                              |      |     
|                              |      |     
|                              |      |     

Both the core deposits and trust
relationships intangibles are being amortized on an accelerated basis over a period of ten
years. Amortization expense for the years ended December 31, 2006, 2005 and 2004 was
$378,000, $406,000 and $440,000. Estimated amortization expense for the next five years is
as follows (dollars in thousands):

|2007 |  |  | $ | 340 |  |  |  | 
|---- |  |  | - | --- |  |  |  | 
|2008 |  |  |   | 315 |  |  |  | 
|2009 |  |  |   | 297 |  |  |  | 
|2010 |  |  |   | 281 |  |  |  | 
|2011 |  |  |   | 266 |  |  |  | 

# NOTE 7  DEPOSITS

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

|                           | 2006 | 2005
|-------------------------- | ---- | ----
|                           |      |     
|                           |      |     
|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, 2006 (dollars in
thousands):

| | 2007       |  | $ | 480,991 |  |  |  | 
| | ---------- |  | - | ------- |  |  |  | 
| | 2008       |  |   | 123,569 |  |  |  | 
| | 2009       |  |   | 71,319  |  |  |  | 
| | 2010       |  |   | 44,438  |  |  |  | 
| | 2011       |  |   | 2,019   |  |  |  | 
| | Thereafter |  |   | 120     |  |  |  | 
| |            | 
| |            |  | $ | 722,456 |  |  |  | 
| |            | 

Approximately $504,274,000 and
$515,772,000 in time certificates of deposit were in denominations of $100,000 or more at
December 31, 2006 and 2005.

Brokered deposits totaled
approximately $272,896,000 and $284,201,000 at December 31, 2006 and 2005. At December 31,
2006 and 2005, brokered deposits had interest rates ranging from 3.30% to 5.49% and 2.70%
to 4.55%, respectively, and at year-end 2006, maturities ranging from two months to
forty-three months.

---

(Continued)

F-22

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2006 and 2005

---

# 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
Advances

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

|Principal Terms                     | Advance Amount | Range of Maturities | Weighted AverageInterest Rate
|----------------------------------- | -------------- | ------------------- | -----------------------------
|                                    |                |                     |                              
|December 31, 2006                   |                |                     |                              
|                                    |                |                    
|Single maturity fixed rate advances |                |                     | $                            
|Putable advances                    |                |                     |                              
|Amortizable mortgage advances       |                |                     |                              
|                                    |                |                    
|                                    |                |                     | $                            
|                                    |                |                    
|                                    |                |                    
|December 31, 2005                   |                |                    
|                                    |                |                    
|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 securities totaling $107,581,000 at December 31, 2005, and residential and commercial
real estate loans totaling $596,829,000 and $526,066,000 under a blanket lien arrangement
at December 31, 2006 and 2005.

Maturities as of December 31, 2006
were as follows (in thousands):

| | 2007       |  | $ | 47,000  |  |  |  | 
| | ---------- |  | - | ------- |  |  |  | 
| | 2008       |  |   | 70,674  |  |  |  | 
| | 2009       |  |   | 5,344   |  |  |  | 
| | 2010       |  |   | 41,000  |  |  |  | 
| | 2011       |  |   | --      |  |  |  | 
| | Thereafter |  |   | 8,000   |  |  |  | 
| |            | 
| |            |  | $ | 172,018 |  |  |  | 
| |            | 

# Securities Sold Under
Agreements to Repurchase

Securities sold under agreements to
repurchase (repo borrowings) are financing arrangements secured by U.S.
federal agency securities. On August 16, 2006, the Company secured two $10 million repo
borrowings at a floating rate of three-month LIBOR plus a margin. These borrowings were
secured by securities that had a carrying amount of approximately $21,399,000 at December
31, 2006. At maturity, the securities underlying the arrangements are returned to the
company. These borrowings at December 31, 2006 were as follows (in thousands):

|Principal Terms              | Amount | Maturity | Interest Rate
|---------------------------- | ------ | -------- | -------------
|                             |        |          |              
|Floating rate repo borrowing |        |          | $            
|Floating rate repo borrowing |        |          | $            
|                             |        |         
|                             |        |          | $            

---

(Continued)

F-23

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# NOTE 8  OTHER
BORROWED FUNDS (Continued)

The Company has a $10,000,000 credit
facility to provide liquidity for the parent company and additional capital for the Bank
as necessary. There were no advances outstanding on this credit facility as of December
31, 2006 and 2005.

# 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 the three-month LIBOR plus 3.05%. Macatawa Statutory
Trust II issued $619,000 of common securities and $20.0 million of Preferred Securities on
March 18, 2004 at a floating interest rate of the three-month LIBOR plus 2.75%.

The Company issued subordinated
debentures (Debentures) to each trust in exchange for the proceeds of the
offerings, which Debentures represent the sole asset of each trust. The Preferred
Securities represent an interest in 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, 2006 and 2005, 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 both December 31, 2006 and
December 31, 2005, approximately $38 million of the $40 million of Preferred Securities
issued qualified as Tier 1 capital for regulatory capital purposes.

# NOTE 10  RELATED
PARTY TRANSACTIONS

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

|                        | 2006 | 2005
|----------------------- | ---- | ----
|                        |      |     
|                        |      |     
|Beginning balance       |      |     
|New loans and renewals  |      |     
|Repayments and renewals |      |     
|                        |      |     
|                        |      |     
|Ending balance          |      |     
|                        |      |     

Deposits from principal officers,
directors, and their affiliates at December 31, 2006 and 2005 were $4,324,000 and
$6,199,000.

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.

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

---

(Continued)

F-24

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# 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 1,825,890 shares of common stock. The
Directors Plans permit the grant of stock options or the issuance of restricted
stock for up to 450,741 shares of common stock. Included in these totals, are additional
shares approved for issuance from Employees and Directors Plans by the
shareholders at their annual meeting in April, 2006. There were 739,530 shares under the
Employees Plans and 167,342 shares under the Directors Plans available for
future issuance as of December 31, 2006. 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 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.

The fair value of options granted was
determined using the following weighted-average assumptions as of grant date.

|                                               | 2006 | 2005 | 2004
|---------------------------------------------- | ---- | ---- | ----
|                                               |      |      |     
|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, 2006   |                       |                                 |                                                            | 1,019,559                  
|Granted                          |                       |                                 |                                                            | 97,987                     
|Exercised                        |                       |                                 |                                                            | (134,811                   
|Forfeited                        |                       |                                 |                                                            | (5,583                     
|                                 |                       |                                 |                                                            |                            
|Outstanding at December 31, 2006 |                       |                                 |                                                            | 977,152                    
|                                 |                       |                                 |                                                            |                            
|                                 |                       |                                
|Exercisable at December 31, 2006 |                       |                                 |                                                            | 733,362                    
|                                 |                       |                                 |                                                            |                            

---

(Continued)

F-25

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

NOTE 11  STOCK-BASED
COMPENSATION(Continued)

Information related to stock options
during each year follows:

|                                           | 2006 | 2005 | 2004
|------------------------------------------ | ---- | ---- | ----
|                                           |      |      |     
|                                           |      |      |     
|Intrinsic value of options exercised       |      |      | $   
|Cash received from option exercises        |      |      |     
|Tax benefit realized from option exercises |      |      |     

As of December 31, 2006, there was
approximately $1,107,000 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 2.4 years.

# Restricted Stock Awards

A summary of changes in the
Companys nonvested stock awards for the year follows:

|Nonvested Stock Awards         | Shares | Weighted-AverageGrant-DateFair Value
|------------------------------ | ------ | ------------------------------------
|                               |        |                                     
|Nonvested at January 1, 2006   |        |                                     
|Granted                        |        |                                     
|Vested                         |        |                                     
|Forfeited                      |        |                                     
|                               |        |                                     
|                               |        |                                     
|Nonvested at December 31, 2006 |        |                                     
|                               |        |                                     

As of December 31, 2006, there was
$439,000 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 3.0 years. There were no shares vested during the years
ended December 31, 2006 and 2004. The total fair value of shares vested during the year
ended December 31, 2005, was $176,000.

---

(Continued)

F-26

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# NOTE 12  EMPLOYEE
BENEFITS

The Company sponsors a 401(k) plan
which covers substantially all employees. Employees may elect to contribute to the plan
from 1% to 15% of their salary subject to statutory limitations. The Company makes
matching contributions equal to 100% of the first 3% of employee contributions and 50% of
employee contributions in excess of 3%, up to 6%. The Companys contributions for the
years ended December 31, 2006, 2005 and 2004 were approximately $691,000, $620,000 and
$560,000.

The Company sponsors an employee
stock purchase plan which allows employees to direct the Company to withhold payroll
dollars and purchase Company stock for the employees at market price on a quarterly basis.
The Company has reserved 51,422 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.

---

(Continued)

F-27

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# 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):

|                                  | 2006 | 2005 | 2004
|--------------------------------- | ---- | ---- | ----
|                                  |      |      |     
|                                  |      |      |     
|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 for 319,961, 226,012,
and 175,782 shares of common stock were not considered in computing diluted earnings per
share for December 31, 2006, 2005 and 2004, respectively, because they were antidilutive.

---

(Continued)

F-28

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# NOTE 14  FEDERAL
INCOME TAXES

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

|                           | 2006 | 2005 | 2004
|-------------------------- | ---- | ---- | ----
|                           |      |      |     
|                           |      |      |     
|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):

|                                              | 2006 | 2005 | 2004
|--------------------------------------------- | ---- | ---- | ----
|                                              |      |      |     
|                                              |      |      |     
|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):

|                                                 | 2006 | 2005
|------------------------------------------------ | ---- | ----
|                                                 |      |     
|                                                 |      |     
|Deferred tax asset                               |      |     
|Allowance for loan losses                        |      |     
|Unrealized loss on derivative instruments        |      |     
|Unrealized loss on securities available for sale |      |     
|Other                                            |      |     
|                                                 |      |     
|                                                 |      |     
|Deferred tax liabilities                         |      |     
|Depreciation                                     |      |     
|Purchase accounting adjustments                  |      |     
|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, 2006 or 2005.

---

(Continued)

F-29

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# 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
(dollars in thousands):

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

At year-end 2006, approximately 68%
of the Banks commitments to make loans were at fixed rates, offered at current
market rates. The majority of the variable rate commitments noted above were tied to prime
and expire within 30 days. The majority of the unused lines of credit were at variable
rates tied to prime.

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

# NOTE 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 1,200 Trade  Partners  investors.  Management  believes the Company has strong  defenses and will  vigorously  defend the
cases.

---

(Continued)

F-30

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# 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-31

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# NOTE 17  HEDGING
ACTIVITIES

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

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

The Company has entered into interest
rate swap arrangements, all of which are classified as cash flow hedges, that convert the
variable rate cash inflows on certain of its loans to fixed rates of interest. These
interest rate swaps pay interest to the Company at a fixed rate and require interest
payments from the Company at a variable rate. All of these swaps were fully effective
during 2006 and 2005. It is anticipated that approximately $567,000 net of tax, of
unrealized losses on these cash flow hedges will be reclassified to earnings over the next
twelve months.

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

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

---

(Continued)

F-32

---



MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# 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.

At December 31, 2006 and 2005, actual
capital levels (dollars in thousands) and minimum required levels were:

|                                         | Actual | Minimum Required For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Regulations
|---------------------------------------- | ------ | ---------------------------------------------- | -----------------------------------------------------------------
|                                         |        |                                                |                                                                  
|                                         |        |                                                |                                                                  
|                                         |        |                                                |                                                                  
|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                                     |        |                                                |                                                                  
|                                         |        |                                               
|                                         |        |                                               
|December 31, 2005                        |        |                                               
|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 Company and Bank were categorized as
well capitalized at December 31, 2006 and 2005. There are no conditions or events since
December 31, 2006 that management believes have changed either institutions
category.

Banking regulations limit capital
distributions. Generally, capital distributions are limited to undistributed net income
for the current and prior two years. The Bank paid dividends to the holding company
totaling $10 million in 2006. At December 31, 2006 and 2005, approximately $50,145,000 and
$50,126,000 was available to pay dividends to the holding company.

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(Continued)

F-33

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MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# 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).

|                                       | 2006 | 2005
|-------------------------------------- | ---- | ----
|                                       |      |     
|                                       |      |     
|                                       |      |     
|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            |      |     
|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-34

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MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

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

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

|CONDENSED BALANCE
SHEETS
|------------------------

|                                              | 2006 | 2005
|--------------------------------------------- | ---- | ----
|                                              |      |     
|                                              |      |     
|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                             |      |     
|                                              |      |     
|Shareholders' equity                          |      |     
|Common stock                                  |      |     
|Retained earnings                             |      |     
|Accumulated other comprehensive income (loss) |      |     
|                                              |      |     
|Total shareholders' equity                    |      |     
|                                              |      |     
|                                              |      |     
|Total liabilities and shareholders' equity    |      |     
|                                              |      |     

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(Continued)

F-35

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MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

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

|CONDENSED STATEMENTS OF INCOME
|------------------------------

|                                              | 2006 | 2005 | 2004
|--------------------------------------------- | ---- | ---- | ----
|                                              |      |      |     
|                                              |      |      |     
|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-36

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MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

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

|CONDENSED STATEMENTS OF CASH FLOWS
|----------------------------------

|                                                 | 2006 | 2005 | 2004
|------------------------------------------------ | ---- | ---- | ----
|                                                 |      |      |     
|                                                 |      |      |     
|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 issuance of long-term debt         |      |      |     
|Proceeds from exercises of stock options         |      |      |     
|Fractional shares purchased                      |      |      |     
|Cash dividends paid                              |      |      |     
|                                                 |      |      |     
|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         |      |      | $   
|                                                 |      |      |     

(Continued)

F-37

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MACATAWA BANK
CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

---

# NOTE 21  QUARTERLY
FINANCIAL DATA (Unaudited)

|                                             | Interest | Net Interest | Net | Earnings Per Share
|-------------------------------------------- | -------- | ------------ | --- | ------------------
|                                             |          |              |    
|                                             |          |              |     |                   
|(Dollars in thousands except per share data)
|2006                                         |          |              |     |                   
|First quarter                                |          |              | $   | 30,241            
|Second quarter                               |          |              |     | 32,896            
|Third quarter                                |          |              |     | 34,779            
|Fourth quarter                               |          |              |     | 35,589            
|                                             |          |             
|2005                                         |          |             
|First quarter                                |          |              | $   | 23,198            
|Second quarter                               |          |              |     | 25,357            
|Third quarter                                |          |              |     | 27,752            
|Fourth quarter                               |          |              |     | 29,087            

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 as described in Note 1- Recent Developments and Note 4 of the financial
statements.

F-38

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