Exhibit 13

Selected Consolidated
Financial Data The following selected consolidated
financial and other data are derived from the Companys Financial Statements and
should be read with the Consolidated Financial Statements and Notes thereto, and
Managements Discussion and Analysis of Results of Operations and Financial
Condition. The Consolidated Balance Sheets as of December 31, 2004 and 2003, and the
Consolidated Statements of Income for the years ended December 31, 2004, 2003, and 2002,
are included elsewhere in this Annual Report.

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

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Quarterly Financial Data
(unaudited) A summary of selected quarterly results
of operations for the years ended December 31, 2004 and 2003 follows:

|Three Months Ended              
|--------------------------------
|                                
|                                
|                                
|2004                            
|Interest income                 
|Net Interest income             
|Provision for loan losses       
|Income before income tax expense
|Net income                      
|                                
|Net income per share            
|Basic                           
|Diluted                         
|                                
|2003                            
|Interest income                 
|Net Interest income             
|Provision for loan losses       
|Income before income tax expense
|Net income                      
|                                
|Net income per share            
|Basic                           
|Diluted                         

---



# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

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

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# 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, 2004. 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,
2004, 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.

|
|
|

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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004, 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, 2004, 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, 2004, 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, 2004 and 2003
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, 2004 and our
report dated February 21, 2005 expressed an unqualified opinion on those consolidated
financial statements.

| | Crowe Chizek
and Company LLC
| | ----------------------------

Grand Rapids, Michigan February 21, 2005

|
|
|

---



# 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, 2004 and 2003,
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, 2004. 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, 2004 and 2003, and the
results of its operations and its cash flows for each of the three years in the period
ended December 31, 2004, 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, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 21, 2005 expressed an unqualified opinion
thereon.

| | Crowe Chizek
and Company LLC
| | ----------------------------

Grand Rapids, Michigan February 21, 2005

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MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Dollars in thousands)

---

|                                                       | 2004 | 2003
|------------------------------------------------------ | ---- | ----
|                                                       |      |     
|ASSETS                                                 |      |     
|Cash and due from banks                                |      |     
|Federal funds sold                                     |      |     
|                                                       |      |     
|Total cash and cash equivalents                        |      |     
|                                                       |      |     
|Securities available for sale, at fair value           |      |     
|Securities held to maturity (fair value 2004 - $2,662, |      |     
|2003 - $2,701)                                         |      |     
|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                                |      |     
|FHLB advances                                          |      |     
|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, 20,000,000 shares          |      |     
|authorized; 8,823,902 and 8,370,073 shares             |      |     
|issued and outstanding at  December 31, 2004           |      |     
|and 2003, respectively                                 |      |     
|Retained earnings                                      |      |     
|Accumulated other comprehensive income                 |      |     
|                                                       |      |     
|Total shareholders' equity                             |      |     
|                                                       |      |     
|Total liabilities and shareholders' equity             |      |     
|                                                       |      |     

|
|
|

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MACATAWA BANK
CORPORATIONCONSOLIDATED STATEMENTS OF INCOME 
Years
ended December 31, 2004, 2003 and 2002 (Dollars in thousands)

---

|                                                    | 2004 | 2003 | 2002
|--------------------------------------------------- | ---- | ---- | ----
|                                                    |      |      |     
|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                                            |      |      |     
|FHLB advances                                       |      |      |     
|Long-term debt                                      |      |      |     
|Federal funds purchased and other borrowings        |      |      |     
|                                                    |      |      |     
|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                             |      |      |     
|Supplies                                            |      |      |     
|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                            |      |      | $   
|                                                    |      |      |     

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MACATAWA BANK
CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Years ended
December 31, 2004, 2003 and 2002 (Dollars in thousands)

---

|                                           | CommonStock | RetainedEarnings | AccumulatedOtherComprehensiveIncome | TotalShareholders'Equity
|------------------------------------------ | ----------- | ---------------- | ----------------------------------- | ------------------------
|                                           |             |                  |                                     |                         
|Balance, January 1, 2002                   |             |                  | $                                   | 62,334                  
|                                           |             |                 
|Net income                                 |             |                  |                                     |                         
|                                           |             |                 
|Other comprehensive income (loss):         |             |                 
|Net change in unrealized gain (loss)       |             |                 
|on derivative instruments, net             |             |                 
|of tax of $338                             |             |                  |                                     |                         
|                                           |             |                 
|Net change in unrealized gain (loss)       |             |                 
|on securities available for sale, net      |             |                 
|of tax of $617                             |             |                  |                                     |                         
|                                           |             |                  |                                     |                         
|Comprehensive income                       |             |                  |                                     |                         
|                                           |             |                 
|Issued 2,472,015 shares for acquisition of |             |                 
|GBFC, adjusted for stock dividend          |             |                  |                                     | 39,817                  
|                                           |             |                 
|Conversion of GBFC stock options           |             |                  |                                     | 987                     
|                                           |             |                 
|Repurchase of 115,000 shares               |             |                  |                                     | (2,300                  
|                                           |             |                 
|Issued 212,355 shares in payment of        |             |                 
|4% stock dividend                          |             |                  |                                     | 4,270                   
|                                           |             |                 
|Issued 14,931 shares for stock             |             |                 
|option exercises                           |             |                  |                                     | 93                      
|                                           |             |                 
|Cash dividends at $.31 per share           |             |                  |                                     |                         
|                                           |             |                  |                                     |                         
|                                           |             |                 
|Balance, December 31, 2002                 |             |                  |                                     | 105,201                 
|                                           |             |                 
|Net income                                 |             |                  |                                     |                         
|                                           |             |                 
|Other comprehensive income (loss):         |             |                 
|Net change in unrealized gain (loss)       |             |                 
|on derivative instruments, net             |             |                 
|of tax of ($13)                            |             |                  |                                     |                         
|                                           |             |                 
|Net change in unrealized gain (loss)       |             |                 
|on securities available for sale, net      |             |                 
|of tax of ($423)                           |             |                  |                                     |                         
|                                           |             |                  |                                     |                         
|Comprehensive income                       |             |                  |                                     |                         
|                                           |             |                 
|Issued 397,664 shares in payment of        |             |                 
|5% stock dividend                          |             |                  |                                     | 8,926                   
|                                           |             |                 
|Issued 80,907 shares for stock             |             |                 
|option exercises                           |             |                  |                                     | 441                     
|                                           |             |                 
|Cash dividends at $.40 per share           |             |                  |                                     |                         
|                                           |             |                  |                                     |                         
|                                           |             |                 
|Balance, December 31, 2003                 |             |                  |                                     | 114,568                 

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|
|

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MACATAWA BANK
CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (continued)
Years ended December 31, 2004, 2003 and 2002 (Dollars in thousands)

---

|                                                | Common
 Stock | Retained
Earnings | Accumulated
    Other    
Comprehensive
   Income | Total
Shareholders'
   Equity
|----------------------------------------------- | ------------- | ----------------- | ------------------------------------------------- | -----------------------------
|                                                |               |                   |                                                   |                              
|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 $97 of       |               |                  
|tax benefit)                                    |               |                   |                                                   | 491                          
|                                                |               |                  
|Cash dividends at $.50 per share                |               |                   |                                                   |                              
|                                                |               |                   |                                                   |                              
|                                                |               |                  
|Balance, December 31, 2004                      |               |                   | $                                                 | 124,389                      
|                                                |               |                   |                                                   |                              

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MACATAWA BANK
CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2004, 2003 and
2002 (Dollars in thousands)

---

|                                                      | 2004 | 2003 | 2002
|----------------------------------------------------- | ---- | ---- | ----
|                                                      |      |      |     
|Cash flows from operating activities                  |      |      |     
|Net income                                            |      |      | $   
|Adjustments to reconcile net income                   |      |     
|to net cash from operating activities                 |      |     
|Depreciation and amortization                         |      |      |     
|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                                |      |      |     
|Purchases of securities available for sale            |      |      |     
|Maturities and calls of securities available for sale |      |      |     
|Principal paydowns on securities                      |      |      |     
|Cash received from acquisition of GBFC                |      |      |     
|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 and other borrowings     |      |      |     
|Repayments on other borrowings                        |      |      |     
|Proceeds from FHLB advances                           |      |      |     
|Repayments on FHLB advances                           |      |      |     
|Fractional shares purchased                           |      |      |     
|Cash dividends paid                                   |      |      |     
|Shares repurchased                                    |      |      |     
|Proceeds from exercises of stock options              |      |      |     
|                                                      |      |      |     
|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                                     |      |      |     

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MACATAWA BANK
CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years ended December 31,
2004, 2003 and 2002 (Dollars in thousands)

---

|                                                         | 2004 | 2003 | 2002
|-------------------------------------------------------- | ---- | ---- | ----
|                                                         |      |      |     
|Supplemental noncash disclosures:                        |      |      |     
|Transfers from loans to other real estate                |      |      |     
|                                                         |      |     
|GBFC acquisition:                                        |      |     
|Securities acquired (including FHLB stock)               |      |      |     
|Loans acquired                                           |      |      |     
|Premises and equipment acquired                          |      |      |     
|Acquisition intangibles recorded                         |      |      |     
|Other assets acquired                                    |      |      |     
|Deposits assumed                                         |      |      |     
|Borrowings assumed                                       |      |      |     
|Other liabilities assumed                                |      |      |     
|Value of common stock issued and converted stock options |      |      |     

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MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

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. Upon the completion of the
acquisition of Grand Bank Financial Corporation (GBFC), Grand Bank became a wholly owned
subsidiary effective April 1, 2002, and its results are included in the consolidated
statements of income since this effective date. Effective January 1, 2003 Grand Bank was
merged into Macatawa Bank with the combined bank named Macatawa Bank. 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, as discussed in a separate
note, were previously consolidated with the Company and now reported separately.

Nature of Operations: Macatawa
Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit
Insurance Corporation. The bank operates 22 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 was formed in October 2001 and gained approval in June 2002
from the NASD to commence operations as a broker/dealer. Macatawa Investment Services
provides various brokerage services including discount brokerage, personal financial
planning and consultation regarding individual stocks and mutual funds. Macatawa Statutory
Trust I and Macatawa Statutory Trust II are grantor trusts that were established on July
15, 2003 and March 18, 2004 through which trust preferred securities were issued.

The Company elected to become a
financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act, effective
January 9, 2002. At the present time, the Company has no plans to engage in any of the
expanded activities permitted under the new regulations.

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

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

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

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MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

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. Federal Home Loan Bank stock is carried at cost.

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

Loans: Loans are reported at
the principal balance outstanding, net of the allowance for loan losses, and charge-offs.
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 reported on the
interest method 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,
less recoveries. Management estimates the allowance balance required based on known and
inherent risks in the portfolio, economic conditions and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available for any
loan that, in managements judgment, should be charged-off. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is
confirmed.

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

Foreclosed Assets: Assets
acquired through or instead of loan foreclosure are initially recorded at fair value when
acquired, establishing a new cost basis. If fair value declines, a valuation allowance is
recorded through expense. Costs after acquisition are expensed. The Company held
$1,850,000 in foreclosed assets at December 31, 2004 and $464,000 in foreclosed assets at
December 31, 2003.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 5 years. Maintenance, repairs and minor alterations are charged to current operations
as expenditures occur and major improvements are capitalized. These assets are reviewed
for impairment when events indicate the carrying amount may not be recoverable.

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

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

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

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

Stock Compensation: Employee
compensation expense under stock option plans is reported using the intrinsic value
method. No compensation cost related to stock options was recognized during 2004, 2003 or
2002, as all options granted had an exercise price equal to or greater than the market
price of the underlying common stock at date of grant. Had compensation cost for stock
options been measured using the fair value method, net income and basic and diluted
earnings per share would have been the pro forma amounts indicated below (dollars in
thousands except per share data). The pro forma effect may increase in the future if more
options are granted.

|                                         | 2004 | 2003 | 2002
|---------------------------------------- | ---- | ---- | ----
|                                         |      |      |     
|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     |      |      |     
|Weighted-average fair value of options   |      |     
|granted during the period                |      |      |     

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

|                                | 2004 | 2003 | 2002
|------------------------------- | ---- | ---- | ----
|                                |      |      |     
|Risk-free interest rate         |      |      |     
|Expected option life            |      |      |     
|Expected stock price volatility |      |      |     
|Dividend yield                  |      |      |     

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

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

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

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

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

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

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

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently-Issued Standards
Not Yet Adopted:

FAS 123, Revised, requires all public
companies to record compensation cost for stock options provided to employees in return
for employee service. The cost is measured at the fair value of the options when granted,
and this cost is expensed over the employee service period, which is normally the vesting
period of the options. This will apply to awards granted or modified after the first
quarter or year beginning after June 15, 2005. Compensation cost will also be recorded for
prior option grants that vest after the date of adoption. The effect on results of
operations will depend on the level of future option grants and the calculation of the
fair value of the options granted at such future date, as well as the vesting periods
provided, and so cannot currently be predicted. Existing options that will vest after
adoption date are expected to result in additional compensation expense of approximately
$86,000 during the balance of 2005. There will be no significant effect on financial
position as total equity will not change.

SOP 03-3 requires that a valuation
allowance for loans acquired in a transfer, including in a business combination, reflect
only losses incurred after acquisition and should not be recorded at acquisition. It
applies to any loan acquired in a transfer that showed evidence of credit quality
deterioration since it was made. The effect of this standard on the Companys
financial position and results of operations is not expected to be material upon and after
adoption.

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.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 2  CASH AND
DUE FROM BANKS

The Company was required to have
$2,670,000 and $1,469,000 of cash on hand or on deposit with the Federal Reserve Bank to
meet regulatory reserve and clearing requirements at year-end 2004 and 2003. These
balances do not earn interest.

# NOTE 3  SECURITIES

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

|                          | Amortized
  Cost | Gross  
Unrealized
   Gains | Gross
Unrealized
  Losses | Fair
Values
|------------------------- | ---------------- | --------------------------- | ------------------------- | -----------
|                          |                  |                             |                           |            
|Available for Sale 2004   |                  |                             |                           |            
|U.S. Treasury and federal |                  |                            
|agency securities         |                  |                             | $                         | 91,394     
|State and municipal bonds |                  |                             |                           | 45,152     
|                          |                  |                             |                           |            
|                          |                  |                             | $                         | 136,546    
|                          |                  |                             |                           |            
|Held to Maturity 2004     |                  |                            
|State and municipal bonds |                  |                             | $                         | 2,552      
|                          |                  |                             |                           |            
|                          |                  |                             | $                         | 2,552      
|                          |                  |                             |                           |            
|                          |                  |                            
|Available for Sale 2003   |                  |                            
|U.S. Treasury and federal |                  |                            
|agency securities         |                  |                             | $                         | 74,804     
|State and municipal bonds |                  |                             |                           | 30,088     
|                          |                  |                             |                           |            
|                          |                  |                             | $                         | 104,892    
|                          |                  |                             |                           |            
|Held to Maturity 2003     |                  |                            
|State and municipal bonds |                  |                             | $                         | 2,624      
|                          |                  |                             |                           |            
|                          |                  |                             | $                         | 2,624      
|                          |                  |                             |                           |            

Securities with unrealized losses at
year-end 2004 and 2003, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, are as follows:

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

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

NOTE 3  SECURITIES
(Continued)

|                           | Less than 12 Months | 12 Months or More | Total
|-------------------------- | ------------------- | ----------------- | -----
|                           |                     |                   |      
|                           |                     |                   |      
|                           |                     |                   |      
|December 31, 2003          |                     |                   |      
|                           |                     |                  
|U.S. Treasury and federal  |                     |                  
|agency securities          |                     |                   | $    
|State and municipal bonds  |                     |                   |      
|                           |                     |                   |      
|Total temporarily impaired |                     |                   | $    
|                           |                     |                   |      

For unrealized losses on available
for sale securities, no loss has been recognized into income 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, 2004 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, 2004, 2003 and 2002.

At December 31, 2004 and 2003,
securities with a carrying value of approximately $1,000,000 were pledged as security for
public deposits and for other purposes required or permitted by law. In addition,
securities totaling $90,392,000 and $75,192,000 at December 31, 2004 and 2003 were used as
collateral for advances from the Federal Home Loan Bank.

# NOTE 4  LOANS

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

|                     | 2004 | 2003
|-------------------- | ---- | ----
|                     |      |     
|Commercial           |      |     
|Commercial mortgage  |      |     
|Residential mortgage |      |     
|Consumer             |      |     
|                     |      |     
|                     |      |     
|                     |      |     

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

NOTE 4  LOANS
(Continued)

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

|                               | 2004 | 2003 | 2002
|------------------------------ | ---- | ---- | ----
|                               |      |      |     
|Beginning balance              |      |      | $   
|Balances from GBFC acquisition |      |      |     
|Provision for loan losses      |      |      |     
|Loans charged-off              |      |      |     
|Recoveries                     |      |      |     
|                               |      |      |     
|Ending balance                 |      |      | $   
|                               |      |      |     

In 2004, loans charged-off included
$2,800,000 related to one borrower whose loans with the Bank totaled approximately
$5,900,000. These loans 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 the charge-off, proceeds from the liquidation of certain collateral and
payments on outstanding receivables have brought the balance to approximately $2,300,000
at December 31, 2004. This remaining loan balance is included in impaired loans at
December 31, 2004.

Impaired loans were as follows
(dollars in thousands):

|                                                  | 2004 | 2003
|------------------------------------------------- | ---- | ----
|                                                  |      |     
|Loans with no allocated allowance for loan losses |      |     
|Loans with allocated allowance for loan losses    |      |     
|                                                  |      |     
|                                                  |      |     
|                                                  |      |     
|Amount of the allowance for loan losses allocated |      |     
|                                                  |      |     

|                                             | 2004 | 2003 | 2002
|-------------------------------------------- | ---- | ---- | ----
|                                             |      |      |     
|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:

|                                             | 2004 | 2003
|-------------------------------------------- | ---- | ----
|                                             |      |     
|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.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 5  PREMISES
AND EQUIPMENT  NET

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

|                              | 2004 | 2003
|----------------------------- | ---- | ----
|                              |      |     
|Land                          |      |     
|Building                      |      |     
|Leasehold improvements        |      |     
|Furniture and equipment       |      |     
|Construction in progress      |      |     
|                              |      |     
|                              |      |     
|                              |      |     
|Less accumulated depreciation |      |     
|                              |      |     
|                              |      |     
|                              |      |     

Depreciation expense was $2,546,000, $2,301,000
and $1,872,000 for each of the years ending December 31, 2004, 2003 and 2002.

The Bank leases certain office and
branch premises and equipment under operating lease agreements. Total rental expense for
all operating leases aggregated $452,000, $586,000 and $648,000 for each of the years
ending December 31, 2004, 2003 and 2002. Future minimum rental expense under noncancelable
operating leases as of December 31, 2004 is as follows (dollars in thousands):

|     | 
|---- | 
|2005 | 
|2006 | 
|2007 | 
|2008 | 
|2009 | 
|     | 
|     | 
|     | 

# NOTE 6 
ACQUISITION INTANGIBLES

Intangible assets recorded for the
April 1, 2002 acquisition of Grand Bank Financial Corporation that are subject to
amortization were as follows in thousands of dollars as of December 31, 2004:

|                    | Gross Amount | Accumulated Amortization
|------------------- | ------------ | ------------------------
|                    |              |                         
|Core deposits       |              |                         
|Trust relationships |              |                         

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, 2004, 2003 and 2002 was
$440,000, $484,000 and $392,000. Estimated amortization expense for the next five years is
as follows (dollars in thousands):

|     | 
|---- | 
|2005 | 
|2006 | 
|2007 | 
|2008 | 
|2009 | 

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 7  DEPOSITS

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

|                           | 2004 | 2003
|-------------------------- | ---- | ----
|                           |      |     
|Noninterest-bearing demand |      |     
|Money market               |      |     
|NOW and Super NOW          |      |     
|Savings                    |      |     
|Certificates of deposit    |      |     
|                           |      |     
|                           |      |     
|                           |      |     

The following table depicts the
maturity distribution of certificates of deposits at December 31, 2004 (dollars in
thousands):

|           | 
|---------- | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

Approximately $331,677,000 and
$272,492,000 in time certificates of deposit were in denominations of $100,000 or more at
December 31, 2004 and 2003.

Brokered deposits totaled
approximately $151,789,000 and $112,624,000 at December 31, 2004 and 2003. At December 31,
2004 and 2003, brokered deposits had interest rates ranging from 1.50% to 5.25% and 1.35%
to 5.25%, respectively, and maturities ranging from one month to forty-six months.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 8  FEDERAL
HOME LOAN BANK ADVANCES

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

|Principal Terms                     | Advance Amount | Range of Maturities | Weighted Average Interest Rate
|----------------------------------- | -------------- | ------------------- | ------------------------------
|                                    |                |                     |                               
|December 31, 2004                   |                |                     |                               
|                                    |                |                    
|Single maturity fixed rate advances |                |                     | $                             
|Putable advances                    |                |                     |                               
|Amortizable mortgage advances       |                |                     |                               
|                                    |                |                    
|                                    |                |                     | $                             
|                                    |                |                    
|                                    |                |                    
|December 31, 2003                   |                |                    
|                                    |                |                    
|Single maturity fixed rate advances |                |                     | $                             
|Putable advances                    |                |                     |                               
|Short-term variable                 |                |                     |                               
|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 $90,392,000 and $75,192,000 at December 31, 2004 and 2003, and
residential and commercial real estate loans totaling $757,502,000 and $598,214,000 under
a blanket lien arrangement at December 31, 2004 and 2003.

Maturities as of December 31, 2004
were as follows (in thousands):

|           | 
|---------- | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

---

# NOTE 9  OTHER
BORROWINGS

The Company has a $10,000,000 credit
facility to provide liquidity for the parent company and additional capital for the bank
as necessary. There were no advances outstanding on this credit facility as of December
31, 2004 and 2003.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 10  LONG-TERM
DEBT

The Company has issued $40.0 million
of pooled trust preferred securities (Preferred Securities) through its
wholly-owned subsidiary grantor trusts. Macatawa Statutory Trust I issued $619,000 of
common securities to the Company and $20.0 million of Preferred Securities on July 15,
2003 at a floating interest rate of the three-month LIBOR plus 3.05%, with an initial
interest rate of 4.16%. 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%, with an initial interest rate of 3.86%.

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

At December 31, 2003, the Debentures
were eliminated in consolidation, and the Preferred Securities were reported in
liabilities with a carrying value of $19,655,000, net of unamortized debt issuance costs.
Beginning in 2004, under FASB Interpretation No. 46, the trusts are no longer
consolidated. At December 31, 2004, the Debentures totaling $41,238,000 are now reported
in liabilities as Long-term debt, and the common securities of $1,238,000 and unamortized
debt issuance costs are included in other assets.

At December 31, 2003, the entire $20
million of Preferred Securities issued qualified as Tier 1 capital for regulatory capital
purposes. At December 31, 2004, approximately $32.0 million of the $40.0 million of
Preferred Securities issued qualified as Tier 1 capital for regulatory capital purposes.

# NOTE 11  RELATED
PARTY TRANSACTIONS

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

|                                     | 2004 | 2003
|------------------------------------ | ---- | ----
|                                     |      |     
|Beginning balance                    |      |     
|New loans and renewals               |      |     
|Repayments and renewals              |      |     
|Effect of changes in related parties |      |     
|                                     |      |     
|Ending balance                       |      |     
|                                     |      |     

The primary cause for the change in
related parties during 2003 was the merger of Grand Bank into Macatawa Bank on January 1,
2003 and the corresponding elimination of its board of directors. Deposits from principal
officers, directors, and their affiliates at December 31, 2004 and 2003 were $9,487,203
and $5,451,239.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 12  STOCK
OPTIONS

Options to buy stock are granted to
officers and employees under the Employee Stock Option Plan (the Employees Plan),
which provides for issue of up to 573,300 options. Options are also granted to directors
under the Directors Stock Option Plan (the Directors Plan), which provides for
issuance of up to 161,900 options. In conjunction with the acquisition of Grand Bank
Financial Corporation during the first quarter 2002, an additional 94,835 in options were
authorized to exchange existing GBFC options outstanding. The exercise price is the market
price at the date of grant for all plans. The maximum option term is ten years with
options vesting over a one-year period for both the Employees Plan and the
Directors Plan. The amount of options available for future grants is 172,403. A
summary of the activity in the plans is as follows.

|                             | OptionsOutstanding | Weighted AverageExercise Price
|---------------------------- | ------------------ | ------------------------------
|                             |                    |                               
|Balance at January 1, 2002   |                    |                               
|Granted                      |                    |                               
|GBFC Options exchanged       |                    |                               
|Exercised                    |                    |                               
|Forfeited                    |                    |                               
|                             |                    |                               
|Balance at December 31, 2002 |                    |                               
|Granted                      |                    |                               
|Exercised                    |                    |                               
|Forfeited                    |                    |                               
|                             |                    |                               
|Balance at December 31, 2003 |                    |                               
|Granted                      |                    |                               
|Exercised                    |                    |                               
|Forfeited                    |                    |                               
|                             |                    |                               
|Balance at December 31, 2004 |                    |                               
|                             |                    |                               

Options outstanding at year-end 2004
were as follows.

|                        | Outstanding | Exerciseable
|----------------------- | ----------- | ------------
|                        |             |             
|                        |             |             
|                        |             |             
|$2.50-$5.00             |             |             
|$5.01-$10.00            |             |             
|$10.01-$15.00           |             |             
|$15.01-$20.00           |             |             
|$20.01-$25.00           |             |             
|$25.01-$30.00           |             |             
|                        |             |             
|Outstanding at year end |             |             
|                        |             |             

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 13  EMPLOYEE
BENEFITS

The Company sponsors a 401(k) plan
which covers substantially all employees. Employees may elect to contribute to the plan
from 1% to 15% of their salary subject to statutory limitations. The Company makes
matching contributions equal to 100% of the first 3% of employee contributions. Effective
July 1, 2002, the plan was amended to establish additional Company matching contributions
equal to 50% of employee contributions in excess of 3% and up to 6%. The Companys
contribution for the years ended December 31, 2004, 2003 and 2002 were approximately
$560,000, $450,000 and $294,000.

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

Grand Bank had a defined benefit
pension plan covering substantially all of its employees. This plan was curtailed in
conjunction with the acquisition of Grand Bank effective April 1, 2002. Financial
information regarding the plan was as follows, as of December 31, 2004 and 2003.

|                                      | 2004 | 2003
|------------------------------------- | ---- | ----
|                                      |      |     
|Benefit obligation at year-end        |      |     
|Fair value of plan assets at year-end |      |     
|                                      |      |     
|Funded status                         |      |     
|                                      |      |     
|Net benefit cost                      |      |     
|Employer contributions                |      |     
|Benefits paid                         |      |     

The weighted average discount rate
used in determining the actuarial present value of the benefit obligation was 6.0% for
2004 and 2003, and the weighted average expected return on plan assets was 6.0% for 2004
and 2003.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 14 EARNINGS
PER SHARE

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

|                                  | 2004 | 2003 | 2002
|--------------------------------- | ---- | ---- | ----
|                                  |      |      |     
|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 97,050, 96,600, and
42,998 shares of common stock were not considered in computing diluted earnings per share
for December 31, 2004, 2003 and 2002 because they were antidilutive.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 15  FEDERAL
INCOME TAXES

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

|                           | 2004 | 2003 | 2002
|-------------------------- | ---- | ---- | ----
|                           |      |      |     
|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):

|                                              | 2004 | 2003 | 2002
|--------------------------------------------- | ---- | ---- | ----
|                                              |      |      |     
|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):

|                                                 | 2004 | 2003
|------------------------------------------------ | ---- | ----
|                                                 |      |     
|Deferred tax asset                               |      |     
|Allowance for loan losses                        |      |     
|Accrued expenses                                 |      |     
|Nonaccrual loan interest                         |      |     
|Unrealized loss on derivative instruments        |      |     
|Other                                            |      |     
|                                                 |      |     
|                                                 |      |     
|Deferred tax liabilities                         |      |     
|Depreciation                                     |      |     
|Purchase accounting adjustments                  |      |     
|Unrealized gain on securities available for sale |      |     
|Unrealized gain on derivative instruments        |      |     
|FHLB dividends                                   |      |     
|Accretion                                        |      |     
|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, 2004 or 2003.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

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

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

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

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

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

Approximately 42% of the Banks
commitments to make loans were at fixed rates, offered at current market rates. The
majority of the variable rate commitments noted above were tied to prime and expire within
30 days. The majority of the unused lines of credit were at variable rates tied to prime.

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

# NOTE 17 
CONTINGENCIES

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

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

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 17 
CONTINGENCIES (Continued)

Trade Partners is now in
receivership. The supervising court authorized the receiver to borrow money from Macatawa
Bank to pay premiums, if needed. Macatawa Bank extended a $4 million line of credit to the
receiver, conditioned upon obtaining a security interest in the viaticals. No draws were
made against the line, and the line expired during the fourth quarter of 2004.

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

The legal actions involving Trade
Partners have not progressed to trial and the outcome of such actions is uncertain. While
we are therefore unable to determine at this time whether or to what extent these actions
may impact the Company, the Company believes it has strong defenses and fully intends to
defend any and all such actions vigorously.

# NOTE 18  HEDGING
ACTIVITIES

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

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

The Company has entered into interest
rate swap arrangements, 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 2004 and 2003. It is anticipated that approximately $5,633 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 gain (loss) related to interest rate swaps |            

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 19 
REGULATORY MATTERS

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

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

At December 31, 2004 and 2003, 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, 2004                        |        |                                                       |                                                                    
|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, 2003                        |        |                                                      
|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, 2004 and 2003. There are no conditions or events since
that notification that management believes have changed either institutions
category.

Banking regulations limit capital
distributions. Generally, capital distributions are limited to undistributed net income
for the current and prior two years. At December 31, 2004 and 2003, approximately
$35,516,000 and $23,536,000 was available to pay dividends to the holding company.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 20  FAIR
VALUES OF FINANCIAL INSTRUMENTS

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

|                                       | 2004 | 2003
|-------------------------------------- | ---- | ----
|                                       |      |     
|                                       |      |     
|                                       |      |     
|Financial assets                       |      |     
|Cash and cash equivalents              |      |     
|Securities available for sale          |      |     
|Securities held to maturity            |      |     
|Federal Home Loan Bank stock           |      |     
|Loans held for sale                    |      |     
|Loans, net                             |      |     
|Interest rate swaps                    |      |     
|Accrued interest receivable            |      |     
|Bank-owned life insurance              |      |     
|                                       |      |     
|Financial liabilities                  |      |     
|Deposits                               |      |     
|Other borrowings                       |      |     
|Federal funds purchased                |      |     
|Federal Home Loan Bank advances        |      |     
|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.

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

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

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

CONDENSED
BALANCE SHEETS

|                                           | 2004 | 2003
|------------------------------------------ | ---- | ----
|                                           |      |     
|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     |      |     
|                                           |      |     
|Total shareholders' equity                 |      |     
|                                           |      |     
|Total liabilities and shareholders' equity |      |     
|                                           |      |     

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

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

CONDENSED STATEMENTS OF
INCOME

|                                              | 2004 | 2003 | 2002
|--------------------------------------------- | ---- | ---- | ----
|                                              |      |      |     
|Income                                        |      |      |     
|Interest income                               |      |      | $   
|Dividends from subsidiaries                   |      |      |     
|                                              |      |      |     
|Total income                                  |      |      |     
|                                              |      |      |     
|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                      |      |      |     
|                                              |      |     
|Federal income tax expense (benefit)          |      |      |     
|                                              |      |      |     
|Net income                                    |      |      | $   
|                                              |      |      |     

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

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

CONDENSED STATEMENTS OF
CASH FLOWS

|                                                 | 2004 | 2003 | 2002
|------------------------------------------------ | ---- | ---- | ----
|                                                 |      |      |     
|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 |      |      |     
|(Increase) decrease in other assets              |      |      |     
|Increase (decrease) in other liabilities         |      |      |     
|                                                 |      |      |     
|Net cash from operating activities               |      |      |     
|                                                 |      |     
|Cash flows from investing activities             |      |     
|Loan originations and payments                   |      |      |     
|Investment in subsidiaries                       |      |      |     
|                                                 |      |      |     
|Net cash from investing activities               |      |      |     
|                                                 |      |     
|Cash flows from financing activities             |      |     
|Other borrowings                                 |      |      |     
|Proceeds from issuance of long-term debt         |      |      |     
|Proceeds from exercises of stock options         |      |      |     
|Fractional shares purchased                      |      |      |     
|Shares repurchased                               |      |      |     
|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         |      |      | $   
|                                                 |      |      |     

|
|
|

---



MACATAWA BANK
CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

---

# NOTE 22  QUARTERLY
FINANCIAL DATA (Unaudited)

|               | Interest                                     | Net Interest | Net | Earnings Per Share
|-------------- | -------------------------------------------- | ------------ | --- | ------------------
|               |                                              |              |    
|               |                                              |              |     |                   
|               | (Dollars in thousands except per share data)
|2004           |                                              |              |     |                   
|First quarter  |                                              |              | $   | 17,305            
|Second quarter |                                              |              |     | 18,636            
|Third quarter  |                                              |              |     | 20,345            
|Fourth quarter |                                              |              |     | 22,043            
|               |                                              |             
|               |                                              |             
|2003           |                                              |             
|First quarter  |                                              |              | $   | 15,408            
|Second quarter |                                              |              |     | 15,885            
|Third quarter  |                                              |              |     | 16,373            
|Fourth quarter |                                              |              |     | 16,768            

Net income for the third quarter of
2004 includes the impact of a $2.3 million ($1.5 million after-tax, or $0.17 per share)
charge against earnings related to the one borrower that became impaired as previously
described in Note 4.

|
|
|

---



# 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 financial condition and results of operations of the
Company. This section should be read in conjunction with the consolidated financial
statements and the supplemental financial data contained elsewhere in this Annual Report.

# Overview

Macatawa Bank Corporation is a
Michigan corporation and is the holding company for two wholly owned subsidiaries,
Macatawa Bank and Macatawa Investment Services, Inc. and for two trusts, Macatawa
Statutory Trust I and Macatawa Statutory Trust II. Effective January 9, 2002, Macatawa
Bank Corporation elected to become a financial holding company pursuant to Title I of the
Gramm-Leach-Bliley Act. Macatawa Bank commenced operations on November 25, 1997. On April
1, 2002, Macatawa Bank Corporation acquired Grand Bank Financial Corporation
(GBFC) and its wholly owned banking subsidiary, Grand Bank. Its results are
included in the consolidated statements of income since this effective date. Grand Bank
was merged into Macatawa Bank effective January 1, 2003 with the combined bank named
Macatawa Bank. Macatawa Bank is a Michigan chartered bank with depository accounts insured
by the Federal Deposit Insurance Corporation. The bank operates twenty-two branch offices
and a lending and operational service facility, providing a full range of commercial and
consumer banking and trust services in Kent County, Ottawa County, and northern Allegan
County, Michigan. Macatawa Investment Services was formed in October 2001 and gained
approval in June 2002 from NASD to commence operations as a broker/dealer. Macatawa
Investment Services provides various services including discount brokerage, personal
financial planning, and consultation regarding mutual funds and annuities. Macatawa
Statutory Trusts I and II are grantor trusts and issued $20.0 million each of pooled trust
preferred securities. These trusts are not consolidated in the Corporations
financial statements. For further information regarding consolidation, see 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 2004 net income reaching $12.8 million. Since our
inception in 1997, we have raised approximately $100.6 million in capital through private
and public common stock offerings and trust preferred offerings to facilitate our growth
and progress over these years. When we acquired GBFC we issued 2,472,000 shares of common
stock in exchange for all of the outstanding stock of GBFC.

We believe that growth in core
deposits is key to our long-term success and is our primary funding source for asset
growth. Establishing a branching network in our markets has been of high importance in
order to facilitate this core deposit growth. We have gained community awareness and
acceptance in our markets through this expanding branch network and our high service
quality standards. Since our inception in 1997, core deposits have increased at an annual
rate exceeding 20% each year.

1

---



The West Michigan markets within
which we operate continue to provide significant expansion opportunities for us. We opened
our ninth branch in the Kent County market on the south side of the greater Grand Rapids
area during the third quarter of 2004. 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 year. We also
continue to enjoy success in building new and existing relationships in the
Holland/Zeeland area, and our entrance into the Grand Haven market during the third
quarter of 2003 has produced excellent growth results.We anticipate that we will
continue to experience growth in our balance sheet and in our earnings due to these
expansion opportunities.

# RESULTS OF OPERATIONS

Summary:Net income totaled
$12.8 million, or $1.42 per diluted share for 2004 as compared to $11.8 million, or $1.32
per diluted share for 2003, and $9.5 million, or $1.16 per diluted share for 2002. The
results for 2004 include a charge against earnings of $2.3 million ($1.5 million after
tax), or approximately $0.17 per share, for a loss associated with the impaired commercial
loan relationship described under Loan Portfolio and Asset Quality.

The increase in net income
principally reflects strong growth in our net interest income due to our continuing growth
in interest earning assets, offset by increases in the provision for loan losses and
noninterest expense.

The effective date of the GBFC
acquisition was April 1, 2002 and therefore the results of operations for the first
quarter of 2002 did not include the effect of GBFC and Grand Bank.

Net Interest Income:Net
interest income totaled $52.0 million during 2004 compared to $42.1 million during 2003
and $34.5 million during 2002. The 24% growth in net interest income during 2004 compared
to 2003 was driven by significant growth in average interest earning assets which
increased by $273.0 million, or 24%, to $1.43 billion for 2004. The net interest margin
remained relatively flat, increasing one basis point to 3.64% for 2004. The ratio of
interest earning assets to interest-bearing funds declined slightly from 113.37% to
113.36%.

The yield on earning assets declined
eight basis points to 5.47% for 2004 from 5.55% for 2003. Declining rates occurred through
the first half of 2003 and remained at historically low rates through the first half of
2004. The amortization and prepayment of higher yielding loans and the addition of new
loans and securities at generally lower rates during this period was the primary reason
for the decline in asset yield. The increases in short-term interest rates that occurred
in the last half of 2004 caused an increase in the yield on our variable rate loan
portfolio which helped to offset some of the general decline in our loan yields from the
prior year. The decline in the yield on earning assets was more than offset by a 12 basis
point decline in our overall cost of funds. This decline was primarily attributable to a
17 basis point decline in our cost of deposits as we continued to experience a shift to
lower costing transaction accounts, primarily money market accounts, discussed under the
section on Deposits.

The 23% growth in net interest income
during 2003 compared to 2002 was also largely driven by significant growth in average
interest earning assets which increased by $224.4 million, or 24%, to $1.15 billion for
2003. Despite an increase of two basis points in the net interest spread to 3.36% for
2003, a decline in net interest margin of six basis points to 3.63% for 2003 slightly
offset the increase in net interest income. This was the result of a slightly greater
reliance on interest-bearing funds. Accordingly, the ratio of interest earning assets to
interest bearing liabilities declined to 113.37% for 2003 from 114.45% for 2002.

2

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During a continued period of
declining interest rates from 2002 to 2003, the decline in the yield on earning assets was
offset by a corresponding decline in the overall cost of funds. The decline in net
interest margin during 2003 was mitigated by 34% growth in noninterest bearing deposits, a
slight shift in the mix of the interest bearing deposit portfolio to lower costing demand
and money market accounts, and continued downward repricing of the time deposit portfolio.

During the period when short-term
interest rates remained at historic lows throughout 2003 and into 2004, we continued our
use of derivative instruments, as discussed in the Notes to the Consolidated Financial
Statements, to help mitigate some of the decline in net interest margin associated with
our significant variable rate loan portfolio.

Anticipated growth in earning assets
is expected to continue to increase levels of net interest income. In addition, we would
expect a continued rise in short-term interest rates to have a favorable impact on our net
interest margin considering our asset sensitivity as discussed under Sensitivity to Market
Risk.

The following table shows an analysis
of net interest margin for the years ended December 31, 2004, 2003 and 2002.

3

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

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

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

4

---



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

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

Provision for Loan Losses: The
provision for loan losses for 2004 was $7.9 million as compared to $4.1 million for 2003
and $3.3 million for 2002. The increase in 2004 is largely related to the $2.3 million
additional provision for the one commercial borrower described under Portfolio Loans and
Asset Quality. 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 $10.0 million during 2004, as compared to $10.2 during 2003
and $7.9 million in 2002. Increases in deposit service charges, trust fees and other
income were offset by a decline in gain on sales of loans during 2004. All noninterest
income components contributed to the increase in 2003 over 2002.

The increase in deposit service
charges of $398,000 or 16% during 2004 and $317,000 or 14% during 2003 reflects the
continued expansion of our deposit customer account base as we have grown.

Revenues from trust services grew to
$2.9 million for 2004 compared to $2.5 million for 2003 and $2.1 million for 2002. Trust
fees are, to a great extent, based on the underlying values of trust assets managed. The
upward trend in the market valuation of securities in both the latter half of 2004 and
2003 contributed to the increase in trust fees in each year, in addition to increased fees
due to gaining new trust customers during each year.

5

---



Other income increased $564,000 in
2004 and $234,000 in 2003. The increase in other income for both years included increases
in miscellaneous fee categories associated with volume increases as we have grown. These
fee categories include debit card and ATM processing income, revenues from mutual fund and
annuity sales, and income from title insurance sales. The increase in 2004 also included
$157,000 of income earned on bank-owned life insurance purchased during the fourth quarter
of 2004. The impact of the income on bank-owned life insurance to non-interest income will
increase as it is expected to remain fully outstanding in future periods.

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:

|(Dollars in thousands)                                                | 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 declined $1.5
million in 2004 compared to 2003, while 2003 increased $1.4 million compared to 2002. The
generally higher levels of longer-term interest rates in 2004 resulted in significantly
lower levels of residential refinancing and loan originations than at the end of 2002 and
into 2003 when longer-term interest rates reached historic lows and related refinancing
activity was at record highs. An improvement in the loan sales margin received on
residential loans sold during 2004 slightly offset the significant decline in volume. The
general improvement in our loan sales margin since 2002 reflects an improvement in our
competitive position with our secondary market investors and greater discipline in our
pricing practices. Since mortgage interest rate levels have generally increased from their
historic lows, we expect the volume of originations from refinancing activity to continue
to slow. We do, however, believe the decline in refinancing volume will be somewhat offset
by an increase in new home purchase originations as additional opportunities arise from
our continued market expansion.

Noninterest Expense:Noninterest expense totaled $35.4 million for 2004 as compared to $30.6 million for
2003 and $24.7 million for 2002. Salaries and benefits increased $2.8 million in 2004 over
2003 and $3.5 million in 2003 over 2002, comprising the majority of the increase in both
years.

The increase in salaries and benefits
for 2004 primarily reflects an increase in staffing for the five new full-service branches
that were opened since the fourth quarter of 2003, and for the lending, trust and
investment service departments that has occurred in the past twelve months to enhance our
service in these areas. For 2003, approximately 30% of this increase related to the
addition of the Grand Bank workforce effective with the GBFC acquisition on April 1, 2002.
In addition, our growth in 2003 also required additional staff in various areas including
new branches, lending departments, and operations which were all necessary to support
increased customer activity. 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.

6

---



The increase in occupancy expense of
$311,000 in 2004 and $481,000 in 2003 and the increase in furniture and equipment expense
of $180,000 in 2004 and $427,000 in 2003 are consistent with our branch and facilities
expansion during these periods. The increases in 2003 were also partially due to the GBFC
acquisition. Consistent with the recent trend, we would expect the level of increase in
these expense categories to decline as we focus on growing into our current branch
capacity.

The increase in marketing and
promotion expense of $264,000 in 2004 and $224,000 in 2003 is consistent with the growth
in our company, and our interest in creating a more significant presence in the markets we
serve.

Data processing fees were up $275,000
in 2004 consistent with the growth in our company. The slight decline in data processing
fees in 2003 compared to 2002 reflects operational efficiencies achieved with the
integration of the systems and operations of Grand Bank into ours during the second
quarter of 2002 and the merger of Grand Bank into ours effective January 1, 2003.

Other expense increased $1.1 million
in 2004 and $944,000 in 2003. 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,
community donations, loan related fees and state taxes. The increase for 2004 also
includes expenses associated with the implementation of Section 404 of the Sarbanes-Oxley
Act and additional holding costs associated with other real estate owned.

Federal Income Tax Expense:Our federal income tax expense has increased generally commensurate with our increase
in pre-tax earnings. Our actual 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 31.9%, 32.9% and
32.8% in 2004, 2003 and 2002, respectively. The decrease in 2004 from prior years is
principally attributed to an increase in tax-exempt interest income and income from bank
owned life insurance.

# FINANCIAL CONDITION

Summary:Our total assets were
$1.67 billion at December 31, 2004, an increase of $271.5 million from $1.40 billion in
total assets at December 31, 2003. 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 $239.3 million or 21% during 2004. The
growth in total assets also included growth in our investment securities portfolio,
premises and equipment and other assets.

The increase in total assets was
principally funded by strong deposit growth. Deposits grew by $242.1 million during 2004,
a 22% growth rate. We attribute the strong 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.

7

---



Cash and Cash Equivalents: Our
cash and cash equivalents, which include federal funds sold and short-term investments,
were $31.7 million at December 31, 2004, as compared to $60.0 million at December 31,
2003. The high balance at the end of 2003 included federal funds sold reflecting a large
inflow of customer deposits that occurred right at the end of the year.

Securities:Securities
increased $30.1 million or 27% to $139.8 million at December 31, 2004 from $109.7 million
at December 31, 2003. We maintain our security portfolio at a level to provide diversity
in the nature of our assets, to support our liquidity needs and to balance our interest
rate risk. Our portfolio consists primarily of high quality U.S government agency and
state and local municipal bonds classified as available for sale. These securities are
generally purchased at fixed rates to help offset the interest sensitivity of our variable
rate loan portfolio. We expect continued growth of our securities portfolio generally
consistent with the growth of our company to maintain the diversity of our assets and
support our liquidity and interest rate risk management.

Loan Portfolio and Asset Quality:Our total loan portfolio increased to $1.40 billion at December 31, 2004 from $1.16
billion at December 31, 2003. The $239.3 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 by 20% or more
during 2004. We believe the continued strong loan growth we have experienced in each of
our loan portfolios is a result 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 73% of our total portfolio loans at both December 31, 2004 and 2003. The
$1.02 million in commercial and commercial real estate loans at December 31, 2004
represents an increase of 20% over the $849.0 million at December 31, 2003. 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 27% to $219.0 million at December 31, 2004. Our residential real estate loan
portfolio, which also includes residential construction loans made to individual
homeowners, comprised approximately 16% of portfolio loans at the end of 2004. Our
residential real estate portfolio only represents 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 $141.7 million in residential mortgages in 2004, $305.6 million in
2003, and $240.8 million in 2002. Loans held for sale were $3.2 million at December 31,
2004 as compared to $4.1 million at December 31, 2003. The generally higher levels of
longer-term interest rates in 2004 resulted in significantly lower levels of residential
refinancing and loan originations as compared to the end of 2002 and into 2003 when
longer-term interest rates were at historic lows and related refinancing activity was at
record highs.

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 20% to $162.4 million at December 31,
2004. Consumer loans comprised approximately 12% of our portfolio loans at the end of
2004.

8

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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, 2004 totaled $4.0 million
or 0.29% of total portfolio loans compared to $4.0 million or 0.35% of total portfolio
loans at December 31, 2003.

The majority of nonperforming loans
at the end of 2004 relates 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. The loans are secured by liens on commercial real estate, equipment,
accounts receivable, and inventory and were written down to a balance deemed collectible
based upon a valuation of the collateral. Of the original $5.9 million in loans to this
borrower, $2.8 million was charged-off, resulting in a balance of $3.1 million. Subsequent
to the charge-off, proceeds from the liquidation of certain collateral and payments on
outstanding receivables have brought the balance to approximately $2.3 million at December
31, 2004. For the remaining portion of our nonperforming loans we are well-collateralized
or we have written the loan down to a level commensurate with the estimated value of the
underlying collateral.

Our loan 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, 2004 foreclosed assets totaled $1.9
million compared to $464,000 as of December 31, 2003. The balance at the end of 2004
relates to one piece of commercial real estate for which no loss is expected upon
disposition.

Total nonperforming assets amounted
to $5.9 million or 0.35% of total assets as of December 31, 2004 compared to $4.5 million
or 0.32% of total assets as of December 31, 2003. The following table shows the
composition and amount of our nonperforming assets.

|(Dollars in thousands)                              | 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                |                  

9

---



Allowance for Loan Losses: Our
allowance for loan losses as of December 31, 2004 was $19.3 million, representing
approximately 1.38% of total portfolio loans outstanding, compared to $16.1 million or
1.39% of total loans at December 31, 2003.

Our allowance for loan losses is
maintained at a level considered appropriate based upon our regular, quarterly assessments
of the probable estimated losses inherent in the loan portfolio. Our methodology for
measuring the appropriate level of allowance relies on several key elements, which include
specific allowances for loans considered impaired, formula allowance for graded loans, and
general allocations based on historical trends for pools of similar loan types.

Specific allowances are established
in cases where senior credit management has identified significant conditions or
circumstances related to an individually impaired credit that we believe indicates the
probability that a loss has been incurred. This amount is determined by methods prescribed
by SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The
specific allowance for impaired loans was $923,000 at December 31, 2004 and $792,000 at
December 31, 2003. The relative levels of specific allowance on impaired loans to the
balance of impaired loans at December 31, 2004 and 2003 remained relatively stable.

The formula allowance is calculated
by applying loss factors to outstanding loans based on the internal risk grade of such
loans. We use a loan rating method based upon an eight point system. Loans are assigned a
loss allocation factor for each loan classification category. The lower the grading
assigned to a loan category, the greater the allocation percentage that is applied.
Changes in risk grade of both performing and nonperforming loans affect the amount of the
formula allowance. Because of the relatively unseasoned nature of our loan portfolio and
the rapid loan growth we have experienced since inception, our actual historical loan loss
experience remains limited. Accordingly, our loss factors are primarily based upon our
analysis of the banking industrys historical loan loss experience, including the
historical loan loss experience within the current markets we operate. These factors are
monitored against our loss experience as our portfolios age, and may be adjusted for
significant factors that, in managements judgment, affect the collectibility of the
portfolio as of the analysis date. The formula allowance was $16.4 million at December 31,
2004 and $13.4 million at December 31, 2003. The increase of $3.2 million in the allowance
for loan losses during 2004 was primarily related to this $3.0 million increase in the
formula allowance. The increase in the formula allowance is primarily associated with the
continuing growth in the commercial loan portfolio.

Groups of homogeneous loans, such as
residential real estate, open- and closed-end consumer loans, etc., receive general
allowance allocations based on loss trends. In lieu of an established loan loss trend for
Macatawa Bank, we use historical loss trends based on industry experience and peers in
determining an adequate allowance for probable losses associated with these pools of
loans. General economic and business conditions, credit quality trends, collateral values,
seasoning of the portfolios and recent loss experience are conditions considered in
connection with allocation factors for these similar pools of loans. The general allowance
was $1.7 million at December 31, 2004 and $1.6 million at December 31, 2003.

The continued increase in the
allowance was deemed necessary given the significant growth in loans, the unseasoned
nature of our portfolio and the still soft, although improving, economic conditions both
on a national basis and locally. 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.

10

---



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
|------------------------- | -----------------
|                          |                  
|                          |                  
|                          |                  
|                          |                  
|Commercial and commercial |                  
|real estate               |                  
|Residential real estate   |                  
|Consumer                  |                  
|Unallocated               |                  
|                          |                  
|Total                     |                  
|                          |                  

The above allocations are not
intended to imply limitations on usage of the allowance. The entire allowance is available
for any loan losses without regard to loan type. The allocated portion of the allowance
amounted to $19.0 million at December 31, 2004. Of this total, 5% related to specific
allocations on impaired loans, 86% related to formula allocations and 9% related to
general allocations.

Net charge-offs totaled $4.7 million,
or 0.37% of average loans for 2004 compared to $1.5 million, or 0.14% of average loans for
2003. As previously noted under the section Loan Portfolio and Asset Quality, the increase
for 2004 relates primarily to the $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.

|(Dollars in thousands)                         | 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                   |            
|Balance from GBFC acquisition                  |            
|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                                    |            

11

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Premises and Equipment:Premises and equipment totaled $45.8 million at December 31, 2004, an increase of $7.1
million from December 31, 2003. The increase included costs incurred to complete our new
regional banking facility in Grand Haven and two new full-service branch locations that
opened during 2004. The new Grand Haven facility allowed us to replace a leased branch
site with a full service facility in a more favorable location. The remaining branch sites
allowed us to establish a presence both on the northwest side of Grand Rapids in Walker
and on south side of Grand Rapids in Gaines Township. We also purchased property in
downtown Grand Rapids which we expect to develop in the future to further strengthen our
presence in the heart of Kent County.

Deposits:Total deposits
increased $242.1 million to $1.35 billion at December 31, 2004, as compared to $1.11
billion at December 31, 2003. The majority of growth during the year was in lower costing
transaction accounts, primarily money markets, although each category of deposits
experienced growth during the year. Money market accounts increased $159.1 million
primarily related to growth in business accounts and success in attracting large
depositors. Although the balances for these large depositors may vary from period to
period, we expect these relationships to be a long-term source of funding. 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 this
trend of growth in transaction account deposits to continue.

The mix of our deposit portfolio
remained relatively consistent. Noninterest bearing demand accounts comprised
approximately 11% of total deposits at December 31, 2004, as compared to approximately 13%
of total deposits at the end of 2003. Interest bearing demand, including money markets,
and savings accounts comprised approximately 53% of total deposits at December 31, 2004,
as compared to 49% at the end of last year. Time accounts as a percentage of total
deposits were approximately 36% at December 31, 2004, and were approximately 38% at
December 31, 2003.

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

Borrowed funds totaled $187.4 million
at December 31, 2004, including $124.0 million of Federal Home Loan Bank advances, $41.2
million in long-term debt associated with trust preferred securities and $22.1 million in
federal funds purchased. Borrowed funds totaled $165.3 million at December 31, 2003
including $145.7 million of Federal Home Loan Bank advances and $19.6 million in long-term
debt comprised of a trust preferred security offering issued in July 2003.

The repayment of Federal Home Loan
Bank advances during 2004 was offset by a corresponding increase in federal funds
purchased due to the relatively lower cost of these funds compared to alternative
borrowings. In addition, our holdings of long-term debt increased as a result of our
second trust preferred security issuance. These borrowings qualify as capital for
regulatory purposes and are discussed further below.

12

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# CAPITAL RESOURCES AND
LIQUIDITY

Capital Resources: Total
shareholders equity was $129.1 million at December 31, 2004 compared to $121.9
million at December 31, 2003. The increase of $7.9 million was primarily the result of
retained net income (net of cash dividends paid) that was slightly offset by a reduction
in accumulated other comprehensive income. Net income generated during 2004 of $12.8
million was partially offset by cash dividends of $4.4 million, or $.50 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 2004, resulting in a transfer of $9.4 million from
retained earnings to common stock.

The change in accumulated other
comprehensive income was due to a decrease in both the market value of securities
available for sale and the derivative instruments associated with the Companys
interest rate swap arrangements due principally to the general rise in longer-term
interest rates during 2004. 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, 2004 and
2003. The following table shows the Companys various capital ratios for 2004 and
2003.

|As of and for the year ended December 31, | 2004 | 2003
|----------------------------------------- | ---- | ----
|                                          |      |     
|Average equity to average assets          |      |     
|Total risk-based capital                  |      |     
|Tier 1 risk-based capital                 |      |     
|Tier 1 capital to average assets          |      |     

At December 31, 2004, our total
capital to risk-weighted assets was 11.0% compared to 10.9% at December 31, 2003. Our Tier
1 Capital as a percent of average assets was 8.3% at December 31, 2004 and 8.8% at
December 31, 2003. An increase in both our Tier 1 and total risk-based capital associated
with our issuance of trust preferred securities in the first quarter of 2004 has been
largely offset by significant growth in our assets. On March 18, 2004, we raised
additional regulatory capital by participating in a pooled trust preferred security
issuance in the amount of $20.0 million. Of the $40.0 million of trust preferred
securities outstanding at December 31, 2004, approximately $32.0 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 provide by the trust preferred security issuances in the past two years, as
supplemented by our improvement in earnings, will support our growth plans in the near
future. Additional capital may be necessary within the next two years if our growth
continues at its current pace. Capital sources include additional common stock offerings,
trust preferred securities offerings and subordinated debt.

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

# SENSITIVITY TO MARKET
RISK

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

We use two interest rate risk
measurement techniques in our interest rate risk management. We first use a static gap
analysis. This measures the difference between the dollar amounts of interest sensitive
assets and liabilities that may be refinanced or repriced during a given time period. A
significant repricing gap could result in a negative impact to our net interest margin
during periods of changing market interest rates. The following table illustrates our
interest rate repricing gaps for selected maturity periods at December 31, 2004.

|Static Gap Analysis
(dollars in thousands) | 0 to 3 months | 4 to 12 months | 1 to 5 years | Over 5 Years | Total
|------------------------------------------ | ------------- | -------------- | ------------ | ------------ | -----
|Assets:                                    |               |                |              |              |      
|Loans-fixed                                |               |                | $            | 36,210       |      
|Loans-variable                             |               |                |              | 906,626      |      
|Taxable securities                         |               |                |              | 2,004        |      
|Tax exempt securities                      |               |                |              | --           |      
|Other securities                           |               |                |              | 12,239       |      
|Other assets, net                          |               |                |              | --           |      
|                                           |               |                |              |              |      
|Total assets                               |               |                | $            | 957,079      |      
|                                           |               |               
|Liabilities:                               |               |               
|Time deposits                              |               |                | $            | 108,308      |      
|Savings                                    |               |                |              | 38,494       |      
|Other interest bearing deposits            |               |                |              | 683,594      |      
|Other borrowings                           |               |                |              | 79,569       |      
|Noninterest bearing deposits               |               |                |              | --           |      
|Other liabilities & equity                 |               |                |              | --           |      
|                                           |               |                |              |              |      
|Total liabilities & equity                 |               |                | $            | 909,965      |      
|                                           |               |               
|Period gap                                 |               |                | $            | 47,114       |      
|Cumulative gap                             |               |                | $            | 47,114       |      
|Cumulative gap/total assets                |               |                |              | 2.82         | %    

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The above table shows that total
assets maturing or repricing within three months exceeded liabilities maturing within the
same time period by $47.1 million indicating that we are asset sensitive in this time
horizon. The above gap analysis is limited, however, in that cash flows and repricing
characteristics for various categories of assets and liabilities are subject to
competitive pressures, consumer sentiments and other influences that are beyond our
control and are not reflected in this static analysis. As a result, various assets and
liabilities indicated as maturing or repricing within a stated period may reprice at
different levels and mature or reprice in other periods or at different volumes.

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

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

The simulation analysis also
considers the interest rate swaps we have entered into which have the effect of converting
$100.0 million in variable rate loans repricing immediately into fixed rate loans
repricing in one to five years. The interest rate swaps are not reflected in the table
above and are more fully discussed in the Notes to the Consolidated Financial Statements.

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, 2004 (dollars in thousands).

|Interest Rate Scenario   | Economic Value of Equity | Percent Change | Net Interest Income | Percent Change
|------------------------ | ------------------------ | -------------- | ------------------- | --------------
|Change in Interest Rates |                          |                |                     |               
|200 basis point rise     |                          |                | $                   | 146,833       
|100 basis point rise     |                          |                |                     | 155,136       
|Base-rate scenario       |                          |                |                     | 160,669       
|100 basis point decline  |                          |                |                     | 166,536       
|200 basis point decline  |                          |                |                     | 175,190       

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

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

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

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

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 judgements 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.

16

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Quarterly Stock Price Information:The Companys common stock is quoted on the Nasdaq National Market under the
symbol MCBC. High and low sales prices (as reported on the Nasdaq National Market) for
each quarter for the years ended December 31, 2004 and 2003 are set forth in the table
below. This information has been restated for the 5% stock dividends paid in May 2004 and
May 2003.

|               | 2004 | 2003
|-------------- | ---- | ----
|               |      |     
|               |      |     
|               |      |     
|Quarter        |      |     
|First Quarter  |      |     
|Second Quarter |      |     
|Third Quarter  |      |     
|Fourth Quarter |      |     

Quarterly cash dividends totaling
$.31 were paid during 2002, and a 4% stock dividend was declared during the second quarter
of 2002. Quarterly cash dividends totaling $.40 were paid during 2003, and a 5% stock
dividend was declared during the second quarter of 2003. Quarterly cash dividends totaling
$.50 were paid during 2004, and a 5% stock dividend was declared during the second quarter
of 2004.

17