Exhibit 13

March 9, 2006

To Our Shareholders:

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

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

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

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

BUILDING ON OUR RELATIONSHIPS:
Growing Geographically

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

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

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

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

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

BUILDING ON OUR RELATIONSHIPS:
Growing our Products and Services

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

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

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

BUILDING ON OUR RELATIONSHIPS:
Encouraging Personal Growth

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

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

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

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

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

      Thank you again for your continued confidence and support.

Selected Consolidated Financial Data

The following selected consolidated financial and other data are derived from the Company’s Financial Statements and should be read with the Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Results of Operations and Financial Condition. The Consolidated Balance Sheets as of December 31, 2005 and 2004, and the Consolidated Statements of Income for the years ended December 31, 2005, 2004, and 2003, are included elsewhere in this Annual Report.

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

Quarterly Financial Data (unaudited)

A summary of selected quarterly results of operations for the years ended December 31, 2005 and 2004 follows:

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

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

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Management’s Discussion and Analysis of Results of Operations and Financial Condition

Management’s discussion and analysis of results of operations and financial condition contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in such forward-looking statements.

The following section presents additional information to assess the results of operations and financial condition of the Company. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this Annual Report.

Overview

Macatawa Bank Corporation is a Michigan corporation and is the holding company for two wholly owned subsidiaries, Macatawa Bank and Macatawa Investment Services, Inc. and for two trusts, Macatawa Statutory Trust I and Macatawa Statutory Trust II. Macatawa Bank Corporation is a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The bank operates twenty-three branch offices and a lending and operational service facility, providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan. Macatawa Investment Services is a broker/dealer providing various services including discount brokerage, personal financial planning, and consultation regarding mutual funds and annuities. Macatawa Statutory Trusts I and II are grantor trusts and issued $20.0 million each of pooled trust preferred securities. These trusts are not consolidated in the Corporation’s financial statements. For further information regarding consolidation, see the Notes to the Consolidated Financial Statements included herein. Macatawa Bank Mortgage Company, a subsidiary of Macatawa Bank, originates and sells residential mortgage loans into the secondary market on a servicing released basis.

While maintaining asset quality and improving profitability, we have experienced rapid and substantial growth since opening Macatawa Bank in November of 1997. We first became profitable in 1999 and have increased earnings each year since then with 2005 net income reaching $20.9 million. Since our inception in 1997, we have raised approximately $100.6 million in capital through private and public common stock offerings and trust preferred offerings to facilitate our growth and progress over these years.

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

The West Michigan markets within which we operate continue to provide significant expansion opportunities for us. We opened our tenth branch in the Kent County market on the north side of the greater Grand Rapids area during the second quarter of 2005. Because of the significance of the greater Grand Rapids market and as it represents the greatest opportunity for market share growth, we anticipate additional branch openings in this market within the next few years. We also continue to enjoy success in building new and existing relationships in the Holland/Zeeland area, and our entrance into the Grand Haven market during the third quarter of 2003 has produced excellent growth results. We anticipate that we will continue to experience growth in our balance sheet and in our earnings due to these expansion opportunities.

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RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FINANCIAL CONDITION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Specific allowances are established in cases where senior credit management has identified significant conditions or circumstances related to an individually impaired credit that we believe indicates the probability that a loss has been incurred. This amount is determined by methods prescribed by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”. The specific allowance for impaired loans was $333,000 at December 31, 2005 and $923,000 at December 31, 2004. The specific allowance at the end of 2004 was primarily related to the one commercial loan borrower previously described under Portfolio Loans and Asset Quality.

The formula allowance is calculated by applying loss factors to outstanding loans based on the internal risk grade of such loans. We use a loan rating method based upon an eight point system. Loans are assigned a loss allocation factor for each loan classification category. The lower the grading assigned to a loan category, the greater the allocation percentage that is applied. Changes in risk grade of both performing and nonperforming loans affect the amount of the formula allowance. Because of the relatively unseasoned nature of our loan portfolio and the rapid loan growth we have experienced since inception, our actual historical loan loss experience remains limited. Accordingly, our loss factors are primarily based upon our analysis of the banking industry’s historical loan loss experience, including the historical loan loss experience within the current markets we operate. These factors are monitored against our loss experience as our portfolios’ age, and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the analysis date. The formula allowance was approximately $18.6 million at December 31, 2005 and $16.4 million at December 31, 2004. The increase of $1.7 million in the allowance for loan losses during 2005 was primarily related to this $2.2 million increase in the formula allowance. The increase in the formula allowance is primarily associated with the continuing growth in the commercial loan portfolio.

Groups of homogeneous loans, such as residential real estate, open- and closed-end consumer loans, etc., receive general allowance allocations based on loss trends. In lieu of an established loan loss trend for Macatawa Bank, we use historical loss trends based on industry experience and peers in determining an adequate allowance for probable losses associated with these pools of loans. General economic and business conditions, credit quality trends, collateral values, seasoning of the portfolios and recent loss experience are conditions considered in connection with allocation factors for these similar pools of loans. The general allowance was $2.1 million at December 31, 2005 and $1.7 million at December 31, 2004.

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

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

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

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

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

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

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

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

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

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CAPITAL RESOURCES AND LIQUIDITY

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

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

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

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

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

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

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

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

SENSITIVITY TO MARKET RISK

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

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

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Static Gap Analysis (dollars in thousands)			0 to 3 months			4 to 12 months			1 to 5 years			Over 5 Years			Total
Assets:
Loans-fixed			$	33,534		$	82,875		$	390,552		$	61,342		$	568,303
Loans-variable				918,204			8,461			51,916			995			979,576
Taxable securities				2,060			---			106,502			1,000			109,562
Tax exempt securities				---			713			2,123			48,205			51,041
Other securities				13,910			---			---			---			13,910
Other assets, net				---			---			---			---			147,598
Total assets			$	967,708		$	92,049		$	551,093		$	111,542		$	1,869,990
Liabilities:
Time deposits			$	141,035		$	273,456		$	275,744		$	---		$	690,235
Savings				40,612			---			---			---			40,612
Other interest bearing deposits				588,163			---			---			---			588,163
Other borrowings				72,247			42,000			89,295			8,666			212,208
Noninterest bearing deposits				---			---			---			---			188,762
Other liabilities & equity				---			---			---			---			150,010
Total liabilities & equity			$	842,057		$	315,456		$	365,039		$	8,666		$	1,869,990
Period gap			$	125,651		$	(223,407	)	$	186,054		$	102,876
Cumulative gap			$	125,651		$	(97,756	)	$	88,298		$	191,174
Cumulative gap/total assets				6.72	%		(5.23)	%		4.72	%		10.22	%

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

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

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

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

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

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

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

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

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

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

CRITICAL ACCOUNTING AND POLICIES ESTIMATES:

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

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

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

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

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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, 2005 and 2004 are set forth in the table below. This information has been restated for the 15% stock dividend paid in May 2005 and the 5% stock dividend paid in May 2004.

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

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS