##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-KSB [X]
    
    ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the fiscal year ended DECEMBER 31, 2003 OR [  ]
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 Commission file number: 333-17317 MICHIGAN HERITAGE BANCORP, INC. (Exact name of registrant as specified in its charter)
 Michigan(State or other jurisdiction
of incorporation or organization)
    
    38-3318018(I.R.S. employer identification no.)
 28300 Orchard Lake Road, Suite 200, Farmington Hills, MI 48334(Address of principal executive offices with zip code) 248-538-2525(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:    None Securities registered pursuant to Section 12(g) of the Act:   Common Stock Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: [X]   No: [   ] Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.   [X] State issuers revenues for its most recently completed fiscal year: $ 11,351,000 The aggregate market value of the voting and no-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of
February 23, 2004 was $16,027,863. As of February 23, 2004, there were 1,490,964shares of Common Stock of the
Issuer issued and outstanding. Transitional Small Business Disclosure Format (check one):   Yes: [   ]   No: [X] Portions of the registrants Proxy Statement for its 2004 Annual Meeting of
Shareholders to be held April 22, 2004, to the extent expressly so stated
herein are incorporated by reference into Part III of this Report.




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TABLE OF CONTENTS  DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTSPART IItem 1. Description of BusinessItem 2. Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity and Related Stockholder MattersItem 6. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7. Financial StatementsItem 8. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresPART IIIItem 9. Directors and Executive Officers of the RegistrantItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. Exhibits, List and Reports on Form 8-KSIGNATURESEXHIBIT INDEXComputation of Earnings Per ShareRule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationSection 1350 CertificationSection 1350 Certification    Table of Contents  TABLE OF CONTENTS PagePART IDisclosure Regarding Forward-Looking Statements
    
    
    1Item 1
    
    Description of Business
    
    
    3Item 2
    
    Description of Property
    
    
    10Item 3
    
    Legal Proceedings
    
    
    10Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    10PART IIItem 5
    
    Market for Common Stock and Related Stockholder Matters
    
    
    11Item 6
    
    Managements Discussion and Analysis
    
    
    12Item 7
    
    Financial Statements
    
    
    20Item 8
    
    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    20Item 8A
    
    Controls and Procedures
    
    
    20PART IIIItem 9
    
    Directors and Executive Officers of the Registrant
    
    
    21Item 10
    
    Executive Compensation
    
    
    21Item 11
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    21Item 12
    
    Certain Relationships and Related Transactions
    
    
    21Item 13
    
    Exhibits, List and Reports on Form 8-K
    
    
    21Signatures
    
    
    
    
    52Exhibit Index
    
    
    
    
    53




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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS PRELIMINARY NOTE: The Company wishes to caution readers not to place undue
reliance on any forward-looking statements contained in the following
discussion, and advises readers that various factors, including regional and
national economic conditions, substantial changes in levels of market interest
rates, credit and other risks of lending and investment activities and
competitive and regulatory factors, could affect the Companys financial
performance and could cause the Companys actual results for future periods to
differ materially from those anticipated or projected. This Annual Report on Form 10-KSB, including information included or
incorporated by reference, contains, and future filings by the Company on Form
10-QSB and Form 8-K and future oral and written statements by the Corporation
and our management may contain, forward-looking statements about the Company
and its subsidiaries which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, statements with respect to anticipated future
operating and financial performance, growth opportunities, interest rates, cost
savings and funding advantages expected or anticipated to be realized by

management. Words such as may, could, should, would, believe,
anticipate, estimate, expect, intend, plan and similar expressions
are intended to identify these forward-looking statements. Forward-looking
statements by the Company and its management are based on beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions of
management and are not guarantees of future performance. The Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events of
circumstances after the date of such statements. The factors discussed below and elsewhere in this document, as well as other
factors discussed under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations in this Annual Report could
cause actual results to differ materially from those indicated by the
forward-looking statements made in this Annual Report. The following factors, many of which are subject to change based on various
other factors beyond our control, could cause our financial performance to
differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements:  
    
    The strength of the United States economy in general
and the strength of the local economies in which we conduct our
operations;
    
    The effects of, and changes in, trade, monetary and
fiscal policies and laws, including interest rate policies of
the Federal Reserve Board;
    
    Financial market, monetary and interest rate
fluctuations, particularly the relative relationship of
short-term interest rates to long-term interest rates;
    
    The timely development of and acceptance of new
products and services of the Company and the perceived overall
value of these products and services by users, including the
features, pricing and quality compared to competitors products
and services;
    
    The willingness of users to substitute competitors
products and services for our products and services; 1




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##### Table of Contents




    
    The impact of changes in financial services laws and
regulations (including laws concerning taxes, accounting
standards, banking, securities and insurance);
    
    The impact of technological changes;
    
    Changes in consumer spending and saving habits; and
    
    Our success at managing the risks involve in the foregoing. 2




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PART I 
 Item 1. Description of Business. General Michigan Heritage Bancorp, Inc. (the Company) was incorporated in 1989 as a
Michigan corporation and was inactive from the time of its formation until
November 1996. The Bank, the Companys wholly-owned subsidiary (the Bank),
is a Michigan banking corporation with depository accounts insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation. The Bank provides
a range of commercial and consumer banking services primarily in Oakland and
western Wayne counties including Novi, Farmington, Farmington Hills, Livonia,
Northville, Northville Township, and Troy. The Banks present lending activities are primarily focused on commercial real
estate, commercial term loans, and to a lessor extent, commercial equipment
financing to businesses secured by the assets of the borrower. The Bank
originates loans and leases both directly and through third party referral
sources such as leasing companies and mortgage brokers, many of whom are known
to management. The Banks retail strategy focuses on single-family mortgage
loans, home equity loans, and, to a lesser extent, other forms of consumer
lending. The Bank offers both ATM and debit cards, competitive rates on
various deposit products and other attractive products and services. The Bank
also offers telephone and internet banking. These services reflect the Banks
intended strategy of serving small- to medium-sized businesses and individual
customers in its market area. In 1997, the Bank opened its original main office in the rapidly developing
Haggerty Road corridor in the southeast corner of Novi, Michigan. The Bank
continues to operate a branch out of that leased facility. The communities
that comprise the Banks primary service area are Novi, Farmington, Farmington
Hills, Livonia, Northville, Northville Township, and Troy. Management believes
these communities have an expanding and diverse economic base, which includes a
wide range of small- to medium-sized businesses engaged in manufacturing, high
technology research and development, computer services and retail. The Banks
secondary service area is the remaining portions of Oakland County and Wayne
County not included within the primary service area. In January 1999, the Company opened its second branch location in Troy,
Michigan. The headquarters for both the Company and the Bank was relocated to the
northeast area of Farmington Hills, Michigan in December 1999. The Bank
entered into a 15 year lease for this facility at approximately $220,000 annual
rent, net of rental income. In January 2000, the Company opened its third branch on the first floor of the
Banks new headquarters in Farmington Hills, Michigan. The branch office
located in the new building is leased with minimal leasehold improvements.
This branch was subsequently designated as the Banks main office in October
2001. During 2001, the Bank formed a mortgage division and hired a team of mortgage
professionals to generate single family residential loans and related products.
Also during 2001, the Bank formed a wholly-owned leasing subsidiary, MHB
Leasing, Inc., which has enabled the Bank to strategically affiliate with
business partners to generate lease transactions and fee income. In 2002, the Bank formed MHB Financial, LLC, a joint venture with the Agents
Assistance Corporation, the for profit arm of the Michigan Association of
Insurance Agents (MAIA). The joint venture will offer consumers throughout
Michigan a complete array of mortgage products including conventional,
adjustable rate and home equity loans. The Bank, as the majority shareholder,
will provide warehouse lending, compliance oversight, comprehensive training
and the processing and closing of mortgage loans using its state of the art
internet based computer system. The MAIA, which represents Michigan insurance
agents, will provide an exclusive network of mortgage loan originators located
in insurance agencies. 3




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Company Selected Financial Information The following table contains selected financial information for the Company: ($ in 000s except per share data)For the years ended December 31,
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Net interest income before provision for credit losses
    
    $
    6,010
    
    
    $
    6,304
    
    
    $
    4,614
    
    
    $
    4,083
    
    
    $
    3,403Net income
    
    $
    1,261
    
    
    $
    1,252
    
    
    $
    110
    
    
    $
    504
    
    
    $
    475Net income per diluted
share of common stock
    
    $
    0.82
    
    
    $
    0.83
    
    
    $
    0.07
    
    
    $
    0.34
    
    
    $
    0.36Cash dividends declared per
common share of stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividend payout ratio
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aTotal assets at year-end
    
    $
    145,383
    
    
    $
    152,328
    
    
    $
    143,529
    
    
    $
    120,568
    
    
    $
    108,887Total stockholders equity at year-end
    
    $
    15,176
    
    
    $
    14,057
    
    
    $
    12,514
    
    
    $
    12,323
    
    
    $
    11,718Total average assets
    
    $
    143,042
    
    
    $
    141,487
    
    
    $
    126,101
    
    
    $
    110,036
    
    
    $
    102,935Total average stockholders equity
    
    $
    14,686
    
    
    $
    13,193
    
    
    $
    12,659
    
    
    $
    12,010
    
    
    $
    10,566Return on average total assets
    
    
    0.88
    %
    
    
    0.88
    %
    
    
    0.09
    %
    
    
    0.46
    %
    
    
    0.46
    %Return on average stockholders equity
    
    
    8.59
    %
    
    
    9.49
    %
    
    
    0.87
    %
    
    
    4.20
    %
    
    
    4.50
    %Average equity to average assets
    
    
    10.27
    %
    
    
    9.32
    %
    
    
    10.04
    %
    
    
    10.91
    %
    
    
    10.26
    %
 4




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Lending The Banks lending activities include commercial loans, commercial real estate
loans, commercial equipment leases, direct financing leases, residential
mortgage loans, home equity loans, and consumer installment loans. The Bank
considers a loan or lease impaired when it is probable that all interest and
principal will not be collected. For the year ended December 31, 2003,
impaired loans and leases were $1,475,000. Specific allowances for impaired
credits were $249,000 at year-end 2003. Management believes the total specific
allowances for impaired credits will adequately provide for expected
charge-offs. Due to improvement in the quality of the loan and lease portfolio and lack of
growth, only $18,000 was added to the allowance for credit losses during 2003. Management is not aware of any potential problem loans or leases which could
have a material effect on the Banks operating results, liquidity, or capital
resources. Furthermore, management is not aware of any other factors that it
believes would cause future net loan or lease charge-offs, in total and by
credit category, to significantly differ from those experienced by institutions
of similar size. The following table sets forth outstanding loan and lease balances at December
31, 2003 and 2002, by category of credit. ($ in 000s)December 31,2003
    
    2002% of
    
    
    
    
    
    % ofType of Loan or Lease
    
    Outstanding
    
    Total
    
    Outstanding
    
    TotalCommercial loans discounted
    
    $
    31,123
    
    
    
    26.5
    %
    
    $
    32,461
    
    
    
    27.5
    %Commercial loans direct
    
    
    4,013
    
    
    
    3.4
    %
    
    
    3,258
    
    
    
    2.7
    %Commercial lines of credit
    
    
    15,919
    
    
    
    13.6
    %
    
    
    14,467
    
    
    
    12.2
    %Commercialconstruction
    
    
    7,032
    
    
    
    6.0
    %
    
    
    6,738
    
    
    
    5.7
    %Commercial real estate
    
    
    30,692
    
    
    
    26.2
    %
    
    
    25,520
    
    
    
    21.5
    %Real estateconstruction
    
    
    103
    
    
    
    0.1
    %
    
    
    4,036
    
    
    
    3.4
    %Real estatemortgage
    
    
    8,468
    
    
    
    7.2
    %
    
    
    13,823
    
    
    
    11.7
    %Home equity
    
    
    2,036
    
    
    
    1.7
    %
    
    
    3,257
    
    
    
    2.7
    %Installment loans and other
    
    
    217
    
    
    
    0.2
    %
    
    
    275
    
    
    
    0.2
    %Lease financing
    
    
    17,745
    
    
    
    15.1
    %
    
    
    14,696
    
    
    
    12.4
    %Total loans and leases
    
    $
    117,348
    
    
    
    100.0
    %
    
    $
    118,531
    
    
    
    100.0
    %
 5




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Allowance
for Credit Losses - Summary
The following table summarizes changes in the allowance for credit losses
arising from additions to the allowance which have been charged to expense,
selected ratios, and the allocation of the allowance for credit losses. ($ inAmount as of2003
    
    2002
    
    2001Average loans and leases
    
    $
    112,21
    
    
    $
    117,96
    
    
    $
    106,09Total loans and leases at
    
    $
    117,34
    
    
    $
    118,53
    
    
    $
    119,36Allowance for credit losses at beginning
    
    $
    2,01
    
    
    $
    1,80
    
    
    $
    1,88Provision charged to
    
    
    18
    
    
    
    701
    
    
    
    877Loan and lease charge-offs during the
    
    
    (314
    
    
    
    (560
    
    
    
    (964Loan and lease recoveries during the
    
    
    58
    
    
    

    70
    
    
    
    2Allowance for credit losses at end
    
    $
    1,77
    
    
    $
    2,01
    
    
    $
    1,80Ratio of net charge-offs during the
average loans and leases
    
    
    0.33
    %
    
    
    0.53
    %
    
    
    0.91
    %Allowance for credit losses as a
of loans and leases at
    
    
    1.51
    
    
    
    1.70
    
    
    
    1.51Specific allowance for impaired loans
    
    $
    249
    
    
    $
    98
    
    
    $
    170Unallocated
    
    
    1,52
    
    
    
    1,91
    
    
    
    1,63Total allowance for credit
    
    $
    1,77
    
    
    $
    2,01
    
    
    $
    1,80
 Nonaccrual, Past Due and Restricted Loans and Leases
The following table summarizes the Banks non-performing loans and leases for
the respective years ending December 31. ($ in 000s)Amount as of December 31,2003
    
    2002
    
    2001Loans accounted for on a nonaccrual basis
    
    $
    1,924
    
    
    $
    903
    
    
    $
    1,077Accruing loans that are contractully past due 90 days
or more as to interest or principle payments
    
    
    28
    
    
    
    591
    
    
    
    419Total
    
    $
    1,952
    
    
    $
    1,494
    
    
    $
    1,496
 6




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Allowance for Credit Losses  Detail
The following table summarized the allowance for credit losses in the Banks
portfolio for the respective years ending December 31. ($ in 000s)Amount as of December 31,2003
    
    2002
    
    2001Total loans and leases at year end
    
    $
    117,348
    
    
    $
    118,531
    
    
    $
    119,365Allowance for credit losses at beginning of period
    
    $
    2,013
    
    
    $
    1,802
    
    
    $
    1,887Loan and lease charge-offs during the periodCommercial & Financial
    
    
    (291
    )
    
    
    (476
    )
    
    
    (765
    )Real Estate - Mortgages
    
    
    (23
    )
    
    
    (84
    )
    
    
    (193
    )Installment Loans to Individuals
    
    
    
    
    
    
    
    
    
    
    (6
    )Total charge-offs
    
    
    (314
    )
    
    
    (560
    )
    
    
    (964
    )Loan and lease recoveries during the periodCommercial & Financial
    
    
    48
    
    
    
    69
    
    
    
    2Real Estate - Mortgages
    
    
    10
    
    
    
    1
    
    
    
    Installment Loans to Individuals
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    58
    
    
    
    70
    
    
    
    2Net charge-offs
    
    
    (256
    )
    
    
    (490
    )
    
    
    (962
    )Provision charged to expense
    
    
    18
    
    
    
    701
    
    
    
    877Allowance for credit losses at end of period
    
    $
    1,775
    
    
    $
    2,013
    
    
    $
    1,802Ratio of net charge-offs during the period to
loans and leases outstanding at year end
    
    
    0.22
    %
    
    
    0.41
    %
    
    
    0.81
    %
 In each accounting period, the allowance for credit losses is adjusted by
management to the amount necessary to maintain the allowance at adequate
levels. Through its credit department, management attempts to allocate
specific portions of the allowance for credit losses based on specifically
identifiable problem credits. Managements evaluation of the allowance is
further based on consideration of actual loss experience, the present and
prospective financial condition of borrowers, industry concentrations within
the portfolio and general economic conditions. The primary risk element considered by management with respect to each
installment and residential real estate loan is lack of timely payment.
Management has a reporting system that monitors past due loans and has adopted
policies to pursue its creditors rights in order to preserve the Banks
position. The primary risk elements with respect to commercial loans and
leases are the financial condition of the borrower, the sufficiency of
collateral, and lack of timely payment. Management has a policy of requesting
and reviewing periodic financial statements from its commercial loan and lease
customers. There can be no assurance that the Bank will not sustain losses in
any given period which could be substantial in relation to the size of the
allowance for credit losses. 7




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##### Table of Contents



Deposits The following summarizes certain information regarding deposits with the Bank. ($ in 000s)For the Year Ended December 31,2003
    
    2002Average
    
    Rate
    
    Average
    
    RateType of Deposit
    
    Amount
    
    Paid (%)
    
    Amount
    
    Paid (%)Noninterest bearing demand deposits
    
    $
    4,888
    
    
    
    0.00
    
    
    $
    3,470
    
    
    
    0.00Interest bearing checking and
and money market deposits
    
    
    41,416
    
    
    
    1.90
    
    
    
    29,227
    
    
    
    2.53Savings deposits
    
    
    215
    
    
    
    1.35
    
    
    
    158
    
    
    
    1.50Time deposits
    
    
    71,171
    
    
    
    3.82
    
    
    
    81,499
    
    
    
    4.53Total deposits
    
    $
    117,690
    
    
    
    2.98
    
    
    $
    114,354
    
    
    
    3.88
 The Bank has no foreign banking offices. 8




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Supervision and Regulation The Company is a registered bank holding company and, as such, is subject to
the supervision of and regulation by the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (BHCA). Under the BHCA, the Company
is subject to periodic examination by the Federal Reserve Board and is required
to file periodic reports of its operations and such additional information as
the Federal Reserve Board may require. The Company is also required to file
periodic reports with, and otherwise comply with the rules and regulations of
the Securities and Exchange Commission under the federal securities laws. In accordance with Federal Reserve Board policy, the Company acts as a source
of financial strength to the Bank and is expected to commit resources to
support the Bank in circumstances where the Company might not do so absent such
policy. In addition, in certain circumstances, a Michigan state bank having
impaired capital may be required by the Commissioner of the Michigan Office of
Financial and Insurance Services of the State of Michigan (the Commissioner)
either to restore the Banks capital by a special assessment upon its
shareholders or to initiate the liquidation of the Bank. The Bank is a Michigan banking corporation and its deposit accounts are insured
up to applicable limits by the Federal Deposit Insurance Corporation (the
FDIC) under the Bank Insurance Fund. As a FDIC-insured, Michigan-chartered
bank, and a member of the Federal Reserve System, the Bank is subject to the
examination, supervision, reporting and enforcement requirements of the
Commissioner, as the chartering authority for Michigan banks, and the Federal
Reserve Board, as the Banks primary federal regulator. These agencies and
federal and state law extensively regulate various aspects of the banking
business including, among other things, permissible types and amounts of loans
and leases, investments and other activities, capital adequacy, branching,
interest rates on loans and on deposits, the maintenance of non-interest
bearing reserves on deposit accounts and the safety and soundness of banking
practices. Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the
scope of business, investments, reserves against deposits, capital levels
relative to operations, lending activities and practices, the nature and amount
of collateral for loans and leases, the establishment of branches, mergers,
consolidations and dividends. The system of supervision and regulation
applicable to the Company and the Bank establishes a comprehensive framework
for their respective operations and is intended primarily for the protection of
the FDIC deposit insurance funds, the depositors of the Bank and the public,
rather than shareholders of the Bank or the Company. Federal law and regulations, including provisions added by the Federal Deposit
Insurance Corporation Improvement Act of 1991 and regulations promulgated
thereunder, establish supervisory standards applicable to the operation,
management and lending activities of the Bank, including internal controls,
credit documentation, credit underwriting, interest rate exposure, asset
growth, compensation and loan-to-value ratios for credits secured by real
property. Employees At December 31, 2003, the Company employed 47 people on a full-time basis at
the Bank. The Company itself does not have any employees. Over the next 12
months, management does not expect to appreciably add additional full-time
people to the Bank. Competition The Company and the Bank face strong competition for deposits, loans and leases
and other financial services from numerous Michigan and out-of-state banks,
thrifts, credit unions and other financial institutions as well as other
entities which provide financial services, including consumer finance
companies, securities brokerage firms, mortgage brokers, equipment leasing
companies, insurance companies, mutual funds, and other lending sources and
investment alternatives. Some of the financial institutions and financial
service organizations with which the Bank will compete are not subject to the
same degree of regulation as the Bank. Many of the financial institutions
aggressively compete
for business in the Banks market areas. Many of these competitors have been
in business for many years, have
established customer bases, have substantially higher lending limits than the
Bank, are larger and will be able to offer certain services that the Bank does
not expect to provide in the foreseeable future, including trust services, and 9




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##### Table of Contents



international banking services. In addition, most of these entities have
greater capital resources than the Bank which, among other things, may allow
them to price their services at levels more favorable to the customer and to
provide larger credit facilities than the Bank can provide. 
 Item 2. Description of Property. The Bank leases a 3,000 square foot building at 21211 Haggerty Road, Novi,
Michigan 48375 which served as its main office and headquarters until December
1999. In 2001 the Novi location was designated a branch office. The lease
term was renewed until August 31, 2007 at an annual rent of $63,105 for
2002-2003 increasing to a maximum of $69,115 in 2007. The building was
originally built in 1988 to be a bank branch and has one drive-up window, three
drive-up bays, teller windows, and customer service areas. This facility also
houses the Banks mortgage division. The Bank opened its first branch in January 1999, with 1,500 square feet of
office space within a strip mall at 1917 East Big Beaver Road, Troy, MI 48083.
The initial five year lease term has expired and the branch lease is currently
month to month, at an annual rent of $32,000, until the execution of the
renewal option of an additional five years is completed. The branch has teller
windows, customer service areas, and a mutual funds room. The Bank signed a 15 year lease for approximately 10,000 square feet for a new
headquarters location in Farmington Hills, Michigan which the Bank occupied
during December 1999. The lease extends until June 30, 2014. Additional costs
for furniture, equipment and leasehold improvements for the new headquarters
were approximately $400,000. The annual rent, net of rental income, is
approximately $220,000. The Bank opened its third branch in January 2000 with 1,200 square feet of
office space on the first floor of the new headquarters building. The lease
extends until June 30, 2014, at an annual rent of $28,000. The branch has
teller windows, customer service areas, and a mutual funds room. There were
minimal leasehold improvements for the branch. Additional equipment for the
branch was approximately $24,000. All of the Banks facilities are in good physical condition and, in
managements opinion, the properties are adequately covered by insurance. 
 Item 3. Legal Proceedings. None 
 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 10




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##### Table of Contents



PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters. The Companys common stock is traded in the over-the-counter market and
quotations are reported on the OTC Bulletin Board under the symbol MHBC.
There were approximately 65 holders of record as of December 31, 2003.
Included among the 65 holders of record are investment firms with an
undetermined number of clients owning the Companys common stock. The Company
paid a 10% common stock dividend on June 15, 1998. The Company has not paid
any cash dividends. As of February 23, 2004 there were 1,490,964 shares of
common stock issued and outstanding. The following sets forth the quarterly high and low bid price per share
during each of the four quarters in 2003 and 2002. These quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission, and may
not represent actual transactions. High / Low2003
    
    4th Quarter
    
    $
    11.75 / $9.753rd Quarter
    
    $
    11.95 / $10.052nd Quarter
    
    $
    10.85 / $8.501st Quarter
    
    $
    11.00 / $8.002002
    
    4th Quarter
    
    $
    8.00 / $6.753rd Quarter
    
    $
    6.65 / $6.502nd Quarter
    
    $
    6.65 / $5.701st Quarter
    
    $
    5.75 / $5.30
 EQUITY COMPENSATION PLAN INFORMATION Number of securities to
    
    Weighted-average
    
    Number of securities remainingbe issued upon exercise
    
    exercise price of
    
    available for future issuance underof outstanding options,
    
    outstanding options,
    
    equity compensation plan (excludingwarrants, and rights
    
    warrants, and rights
    
    securities reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation plans approved by
shareholders
    
    102,800 shares
    
    $5.16/share
    
    5,000 sharesEquity compensation plans not approved by
shareholders
    
    None
    
    
    N/A
    
    
    NoneTotal
    
    102,800 shares
    
    $5.16/share
    
    5,000 shares
 11




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##### Table of Contents



Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations. The following discussion addresses material factors affecting the financial
condition and results of the Company. This discussion should be read in
conjunction with the audited financial statements, footnotes and supplemental
financial data presented elsewhere in this report. The Company was in the development stage during 1996 and the first two months
and nine days of 1997. The Company completed an initial public offering of
common stock during February and March 1997. On March 10, 1997, the Bank
opened for business. As of December 31, 2003, the Bank has been operational
almost 82 months and has completed its sixth full fiscal year of operations. Results of Operations Year 2003 Compared to Year 2002
The Company earned $1,261,000 in net profits for 2003, a $9,000 improvement
over 2002. Although the Banks earnings were flat due primarily to the state
of the ecomony in the Detroit Metropolitan area the Bank was able to continue
the reduction in its cost of funds by $1,038,000, a 21.34% decrease from the
prior year. Net interest margin, although less than the prior year, remained a
strong 4.26%. Also, the non-interest income increased $91,000 over 2002 due to
gains on sale of loans and leases resulting from the syndication of leases in
the banks discount lease portfolio and to a lesser extent the refinancing of
residential mortgages. Other expenses increased by $464,000 primarily due to
staff additions in the first quarter, commissions paid to mortgage originators,
and an increase in costs associated with the sale of other real estate owned.
Occupancy expense increased $108,000 over the prior year due to adjustments for
operating expenses at the Farmington Hills facility for 2001 and 2002, not
previously billed by the landlord. Lien recording and other loan related
expenses declined by $59,000 due to a reduction in the volume of refinancing of
residential mortgages. Provisions for federal income tax applicable to
operating income increased $7,000 over 2002. Year 2002 Compared to Year 2001 The Company earned $1,252,000 in net profits for 2002, a $1,142,000 improvement
over 2001 which was primarily the result of a reduction in the Banks cost of
funds which improved the net interest margin. Also, the non-interest income
increased $596,000 over 2001 due to gains on sale of loans and leases due
primarily to the robust refinance market for residential mortgages. Other
expenses increased by $753,000 primarily due to increases in commissions, loan
and lease expenses. Professional fees also increased $192,000 over 2001 due to
increases in legal fees relating primarily to loans and leases and management
fees for MHB Leasing, Inc., the Banks wholly-owned subsidiary formed in 2001.
Provision for federal income taxes applicable to operating income increased
$567,000. Quarterly net profits for 2002 were $225,000, $305,000, for the
first and second quarters respectively, and $309,000, and $413,000 for the
third and fourth quarters, respectively. Quarterly net results for 2001 were
$130,000 and $103,000 for the first and second quarters respectively, and net
losses of $18,000 and $105,000 for the third and fourth quarters respectively. 12




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##### Table of Contents



Quarterly Summary The Companys quarterly consolidated net interest income before provision for
credit losses, operating income, net income, and net earnings (loss) per share
are summarized below for years 2003, 2002, and 2001. Total operating income is
net interest income after provision for credit losses plus other operating
income. ($ in 000s Except per Share Earnings)2003
    
    2002
    
    2001Net Interest Income Before
Provision for Credit Losses1st Quarter
    
    $
    1,606
    
    
    $
    1,495
    
    
    $
    1,0332nd Quarter
    
    
    1,390
    
    
    
    1,523
    
    
    
    1,0673rd Quarter
    
    
    1,461
    
    
    
    1,579
    
    
    
    1,1634th Quarter
    
    
    1,553
    
    
    
    1,707
    
    
    
    1,351Total Net Interest Income
    
    $
    6,010
    
    
    $
    6,304
    
    
    $
    4,614Total Operating Income1st Quarter
    
    $
    1,973
    
    
    $
    1,525
    
    
    $
    1,1902nd Quarter
    
    
    1,787
    
    
    
    1,615
    
    
    
    1,2533rd Quarter
    
    
    1,794
    
    
    
    1,778
    
    
    
    1,0724th Quarter
    
    
    1,953
    
    
    
    2,109
    
    
    
    1,050Total Operating Income
    
    $
    7,507
    
    
    $
    7,027
    
    
    $
    4,565Consolidated Net Income1st Quarter
    
    $
    359
    
    
    $
    225
    
    
    $
    1302nd Quarter
    
    
    247
    
    
    
    305
    
    
    
    1033rd Quarter
    
    
    302
    
    
    
    309
    
    
    
    (18
    )4th Quarter
    
    
    353
    
    
    
    413
    
    
    
    (105
    )Total Net Income
    
    $
    1,261
    
    
    $
    1,252
    
    
    $
    110Net Earnings (Loss) per Share1st Quarter
    
    $
    0.24
    
    
    $
    0.21
    
    
    $
    0.092nd Quarter
    
    
    0.17
    
    
    
    0.21
    
    
    
    0.063rd Quarter
    
    
    0.20
    
    
    
    0.15
    
    
    
    (0.01
    )4th Quarter
    
    
    0.24
    
    
    
    0.27
    
    
    
    (0.07
    )Total Net Earnings (Loss) per Share
    
    $
    0.85
    
    
    $
    0.84
    
    
    $
    0.07
 Return on Average Equity and Average Assets For 2003, the return on average equity was 8.59% compared to 9.49% for 2002 and
0.87% for 2001. The return on average assets for 2003 was 0.88%, compared to
0.88% for 2002 and 0.09% for 2001. While there have been no cash dividends paid
to date, the Board of Directors declared and distributed a 10% common stock
dividend during the second quarter of 1998. 13




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##### Table of Contents



Balance Sheet Comparisons at Year End2003 Compared to 2002 The Companys total assets at December 31, 2003 were $145,383,000 compared to
$152,328,000 at the end of 2002, a decrease of $6,945,000 or 4.55%. Gross
loans and leases decreased by $1,183,000 or 1.00% to $117,348,000 at the end of
2003. Deposits decreased by $6,249,000 or 5.20% to a 2003 year-end balance of
$113,993,000. Federal Home Loan Bank borrowings were $14,500,000 and there
were no federal funds purchased at year-end. Federal Home Loans Bank
borrowings were $12,500,000 and federal funds purchased were $4,000,000 at the
end of 2002. Cash and cash equivalents were $2,602,000 at the end of 2003, a
decrease of $8,384,000 or 76.31% from 2002 year-end. As of December 31, 2003, the Bank has reserves for possible credit losses of
1.51% of gross loans and leases outstanding. During 2003, management only
provided an additional $18,000 in reserves due to improvement in credit quality
and lack of growth in the loan and lease portfolio. In addition, the current
economic climates in metropolitan Detroit as well as the economy in general
have been taken into account by management while reviewing the adequacy of
credit loss reserves. Management believes that the resulting $1,775,000 credit reserve at year end
2003 is adequate relative to the overall quality of the loan and lease
portfolio. At year end 2003, specific allowances of $249,000 were allocated for impaired
loans and leases classified by management of $1,475,000. At the end of 2002,
specific allowances of $98,000 were allocated for impaired loans and leases
classified by management of $708,000. During 2003, there was $256,000 in net
charge-offs. During 2002, there were $490,000 in net charge-offs. In 2001
there were $962,000 in net charge-offs. In 2000, there were $160,000 in net
charge-offs. In 1999, there were $901,000 in net charge-offs. There were no
charge-offs during 1998 or 1997. The Banks loan and lease portfolio at the end of 2003 and 2002 by category and
as a percentage of total loans and leases outstanding is summarized below. ($ in 000s)December 31,2003
    
    2002% of
    
    
    
    
    
    % of
    
    ChangeType of Loan or Lease
    
    Outstanding
    
    Total
    
    Outstanding
    
    Total
    
    $
    
    %Commercial loans discounted
    
    $
    30,515
    
    
    
    26.0
    %
    
    $
    32,461
    
    
    
    27.5
    %
    
    
    (1,946
    )
    
    
    -6.0
    %Commercial Relationship Lending:Commercial loans direct
    
    
    4,621
    
    
    
    3.9
    %
    
    
    3,258
    
    
    
    2.7
    %
    
    
    1,363
    
    
    
    41.8
    %Commercial lines of credit
    
    
    15,919
    
    
    
    13.6
    %
    
    
    14,467
    
    
    
    12.2
    %
    
    
    1,452
    
    
    
    10.0
    %Commercialconstruction
    
    
    7,032
    
    
    
    6.0
    %
    
    
    6,738
    
    
    
    5.7
    %
    
    
    294
    
    
    
    4.4
    %Commercial real estate
    
    
    30,692
    
    
    
    26.2
    %
    
    
    25,520
    
    
    
    21.5
    %
    
    
    5,172
    
    
    
    20.3
    %Total Commercial Relationship Lending:
    
    
    58,264
    
    
    
    49.7
    %
    
    
    49,983
    
    
    
    42.1
    %
    
    
    8,281
    
    
    
    16.6
    %Real estateconstruction
    
    
    103
    
    
    
    0.1
    %
    
    
    4,036
    
    
    
    3.4
    %
    
    
    (3,933
    )
    
    
    -97.4
    %Real estatemortgage
    
    
    8,468
    
    
    
    7.2
    %
    
    
    13,823
    
    
    
    11.7
    %
    
    
    (5,355
    )
    
    
    -38.7
    %Home equity
    
    
    2,036
    
    
    
    1.7
    %
    
    
    3,257
    
    
    
    2.7
    %
    
    
    (1,221
    )
    
    
    -37.5
    %Installment loans and other
    
    
    217
    
    
    
    0.2
    %
    
    
    275
    
    
    
    0.2
    %
    
    
    (58
    )
    
    
    -21.1
    %Lease financing
    
    
    17,745
    
    
    
    15.1
    %
    
    
    14,696
    
    
    
    12.4
    %
    
    
    3,049
    
    
    
    20.7
    %Total loans and leases
    
    $
    117,348
    
    
    
    100.0
    %
    
    $
    118,531
    
    
    
    100.0
    %
    
    $
    (1,183
    )
    
    
    -1.0
    %
 Loans and leases were funded primarily by deposits consisting mostly of time
deposits. Time deposits represented 60% of total deposits at 2003 year end
compared to 63% of total deposits at 2002 year end. Additional loan and lease
information can be found elsewhere in this report in the Notes to Consolidated
Financial Statements. 14




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##### Table of Contents



Net Interest Income Analysis The largest source of the Companys revenues is net interest income. Net
interest income is the spread between interest income on loans, leases and
investments and interest expense on deposits and borrowed funds. Two
statistics used to measure net interest income are (1) net interest spread, and
(2) net interest margin. Net interest spread is the difference between the
average yield on interest-earning assets and the average rate incurred on
interest-bearing liabilities. Net interest margin is expressed as net interest
income divided by average interest-earning assets. Net interest margin is
greater than net interest spread due to the interest income earned on
interest-earning assets funded by non-interest-bearing liabilities such as
non-interest bearing demand deposits, escrow accounts and stockholders equity. The following table presents the Companys average balance sheets, net interest
spread and net interest margin for the three years ended December 31, 2003,
2002, and 2001. Net interest income for 2003 decreased $294,000 or 4.66% to
$6,010,000. Net interest income for 2002 increased $1,690,000 or 36.62% to
$6,304,000 compared to $4,614,000 for 2001. Consolidated Average Balance Sheets
and Analysis of Net Interest Income(Taxable Equivalent Basis)For the Years Ended December 31,($ in 000s) 2003
    
    2002
    
    2001Average
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateAssetsInterest bearing balances in other banks
    
    $
    2,682
    
    
    $
    25
    
    
    
    0.93
    %
    
    $
    187
    
    
    $
    3
    
    
    
    1.60
    %
    
    $
    2,189
    
    
    $
    96
    
    
    
    4.39
    %Federal funds sold
    
    
    2,221
    
    
    
    26
    
    
    
    1.17
    
    
    
    937
    
    
    
    15
    
    
    
    1.60
    
    
    
    2,194
    
    
    
    109
    
    
    
    4.97Investment securities
    
    
    22,447
    
    
    
    952
    
    
    
    4.24
    
    
    
    18,247
    
    
    
    914
    
    
    
    5.01
    
    
    
    13,113
    
    
    
    788
    
    
    
    6.01Loans and leases, net
    
    
    112,218
    
    
    
    8,757
    
    
    
    7.80
    
    
    
    117,960
    
    
    
    10,099
    
    
    
    8.56
    
    
    
    106,090
    
    
    
    9,768
    
    
    
    9.21Loans held for sale
    
    
    1,518
    
    
    
    76
    
    
    
    5.01
    
    
    
    2,108
    
    
    
    137
    
    
    
    6.50
    
    
    
    1,091
    
    
    
    92
    
    
    
    8.43Total earning assets
    
    
    141,086
    
    
    
    9,836
    
    
    
    6.97
    
    
    
    139,439
    
    
    
    11,168
    
    
    
    8.01
    
    
    
    124,677
    
    
    
    10,853
    
    
    
    8.70Cash and due from banks
    
    
    1,312
    
    
    
    
    
    
    
    
    
    
    
    1,575
    
    
    
    
    
    
    
    
    
    
    
    1,054Allowance for credit losses
    
    
    (1,916
    )
    
    
    
    
    
    
    
    
    
    
    (1,791
    )
    
    
    
    
    
    
    
    
    
    
    (1,773
    )Operating lease equipment, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other assets
    
    
    2,560
    
    
    
    
    
    
    
    
    
    
    
    2,264
    
    
    
    
    
    
    
    
    
    
    
    2,143Total assets
    
    $
    143,042
    
    
    
    
    
    
    
    
    
    
    $
    141,487
    
    
    
    
    
    
    
    
    
    
    $
    126,101Liabilities and Stockholders EquityInterest on checking and
Money market deposit accounts
    
    $
    41,416
    
    
    $
    786
    
    
    
    1.90
    %
    
    $
    29,227
    
    
    $
    738
    
    
    
    2.53
    %
    
    $
    12,274
    
    
    $
    473
    
    
    
    3.85
    %Savings deposits
    
    
    215
    
    
    
    2
    
    
    
    0.93
    
    
    
    158
    
    
    
    2
    
    
    
    1.27
    
    
    
    48
    
    
    
    1
    
    
    
    2.08Other time deposits less than $100,000
    
    
    22,789
    
    
    
    813
    
    
    
    3.57
    
    
    
    32,326
    
    
    
    1,415
    
    
    
    4.38
    
    
    
    49,694
    
    
    
    2,952
    
    
    
    5.94Time deposits $100,000 and greater
    
    
    48,382
    
    
    
    1,918
    
    
    
    3.96
    
    
    
    49,173
    
    
    
    2,285
    
    
    
    4.65
    
    
    
    42,310
    
    
    
    2,581
    
    
    
    6.10Borrowed funds
    
    
    8,808
    
    
    
    307
    
    
    
    3.49
    
    
    
    13,032
    
    
    
    424
    
    
    
    3.25
    
    
    
    5,769
    
    
    
    232
    
    
    
    4.02Total interest bearing liabilities
    
    
    121,610
    
    
    
    3,826
    
    
    
    3.15
    
    
    
    123,916
    
    
    
    4,864
    
    
    
    3.93
    
    
    
    110,095
    
    
    
    6,239
    
    
    
    5.67Other deposits, non-interest bearing
    
    
    4,888
    
    
    
    
    
    
    
    
    
    
    
    3,470
    
    
    
    
    
    
    
    
    
    
    
    2,560Other liabilities
    
    
    1,858
    
    
    
    
    
    
    
    
    
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    787Stockholders equity
    
    
    14,686
    
    
    
    
    
    
    
    
    
    
    
    13,193
    
    
    
    
    
    
    
    
    
    
    
    12,659Total liabilities and stockholders equity
    
    $
    143,042
    
    
    
    
    
    
    
    
    
    
    $
    141,487
    
    
    
    
    
    
    
    
    
    
    $
    126,101Net interest income
    
    
    
    
    
    $
    6,010
    
    
    
    
    
    
    
    
    
    
    $
    6,304
    
    
    
    
    
    
    
    
    
    
    $
    4,614Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.82
    %
    
    
    
    
    
    
    
    
    
    
    4.08
    %
    
    
    
    
    
    
    
    
    
    
    3.03
    %Cost of earning assets
    
    
    
    
    
    
    
    
    
    
    2.71
    %
    
    
    
    
    
    
    
    
    
    
    3.49
    
    
    
    
    
    
    
    
    
    
    
    5.00
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.26
    %
    
    
    
    
    
    
    
    
    
    
    4.52
    %
    
    
    
    
    
    
    
    
    
    
    3.70
    %Net interest-earning assets to
interest-bearing liabilities
    
    
    116
    %
    
    
    
    
    
    
    
    
    
    
    113
    %
    
    
    
    
    
    
    
    
    
    
    113
    %Net income after taxes
    
    $
    1,261
    
    
    
    
    
    
    
    
    
    
    $
    1,252
    
    
    
    
    
    
    
    
    
    
    $
    110
 15




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##### Table of Contents



The 4.26% net interest margin for 2003 is a decline of 26 basis points (bps)
from 2002. The yield on earning assets declined 104 bps in 2003, compared to
8.01 in 2002 and is merely a reflection of a general decline in interest rates
across the board. Because of this lower rate environment, the Banks cost of
earning assets also declined 78 bps, to 2.71% compared to 3.49% in 2002. The
78 bps reduction is primarily the result of certificate of deposits being
re-priced in 2003 at substantially lower rates, the Banks use of lower cost
federal funds purchased, and borrowings from the Federal Home Loan Bank of
Indianapolis. The 4.52% net interest margin for 2002 is an 82 bps increase from 2001. While
the yield on earning assets declined 69 bps from 2001, 8.01% compared to 8.70%,
the cost of earning assets also went down 151 bps to 3.49% from 5.00% primarily
due to a lower cost of time deposits in 2002 compared to 2001. The ratio of
net interest-bearing assets to interest-bearing liabilities was 116.00%,
113.00%, and 113.00% for 2003, 2002, and 2001, respectively. The net interest spread for 2003 of 3.82% decreased 24 bps from the 4.08%
spread for 2002. The average yield on earning assets of 6.97% decreased 104
bps from 2002 primarily due to an overall decline in interest rates in the 2003
economic environment. The 3.15% cost of interest-bearing liabilities for 2003
declined 78 bps from 3.93% in 2002 due primarily to higher costing time
deposits being re-priced at lower rates in 2003 and new time deposits being
acquired at rates lower than existing time deposits. In addition the Bank was
able to use its Federal Funds and Federal Home Loan Bank lines at a lower cost. The net interest spread for 2002 of 4.08% increased 105 bps over the 3.03%
spread for 2001. The 2002 average yield on earning assets of 8.01% decreased
69 bps from 2001 primarily due to a lower interest rate environment. The 3.93%
cost of interest-bearing liabilities for 2002 decreased 174 bps from 5.67% in
2001 due primarily to lower costing time deposits in 2002. The cost of
interest-bearing liabilities for 2002 and 2001 reflect lower market rates being
paid on all deposit accounts. 16




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##### Table of Contents



An analysis of the Companys changes in net interest income is presented in the

next table. The $294,000 decline in net interest income in 2003 was primarily
due to an overall decrease in interest rates over the last twelve months. The
$1,690,000 net interest income increase in 2002 resulted primarily from a
$1,005,000 increase in volume of average balances. Loan and lease fee income included in loan and lease interest income was
$629,000, $638,000, and $625,000 for 2003, 2002, and 2001 respectively. Average balances of nonaccrual loans and leases for 2003 were $2,009,000 which
reduced net interest income by approximately $160,000. Nonaccrual loans and
leases reduced net interest income in 2002 by $63,000 and $73,000 for 2001. Analysis of Net Interest Income Changes(Taxable Equivalent Basis)($ in 000s) 2003 Compared to 2002
    
    2002 Compared to 2001Volume &
    
    Volume &Yield/Rate
    
    Yield/RateVolume
    
    Yield/Rate
    
    Mix
    
    Total
    
    Volume
    
    Yield/Rate
    
    Mix
    
    TotalIncrease (Decrease) in Interest IncomeInterest bearing balances in other banks
    
    $
    40
    
    
    $
    (1
    )
    
    $
    (17
    )
    
    $
    22
    
    
    $
    (88
    )
    
    $
    (61
    )
    
    $
    56
    
    
    $
    (93
    )Federal funds sold
    
    
    21
    
    
    
    (4
    )
    
    
    (6
    )
    
    
    11
    
    
    
    (62
    )
    
    
    (74
    )
    
    
    42
    
    
    
    (94
    )Taxable investment securities
    
    
    210
    
    
    
    (140
    )
    
    
    (32
    )
    
    
    38
    
    
    
    309
    
    
    
    (131
    )
    
    
    (52
    )
    
    
    126Loans and leases, net
    
    
    (492
    )
    
    
    (894
    )
    
    
    44
    
    
    
    (1,342
    )
    
    
    1,093
    
    
    
    (611
    )
    
    
    (68
    )
    
    
    414Loans held for sale
    
    
    (38
    )
    
    
    (31
    )
    
    
    8
    
    
    
    (61
    )
    
    
    85
    
    
    
    (64
    )
    
    
    (59
    )
    
    
    (38
    )Total interest income change
    
    
    (259
    )
    
    
    (1,070
    )
    
    
    (3
    )
    
    
    (1,332
    )
    
    
    1,337
    
    
    
    (941
    )
    
    
    (81
    )
    
    
    315Increase (Decrease) in Interest ExpenseInterest on checking and
Money market deposit accounts
    
    
    308
    
    
    
    (183
    )
    
    
    (77
    )
    
    
    48
    
    
    
    653
    
    
    
    (163
    )
    
    
    (225
    )
    
    
    265Savings deposits
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (1
    )
    
    
    1Other time deposits less than $100,000
    
    
    (417
    )
    
    
    (262
    )
    
    
    77
    
    
    
    (602
    )
    
    
    (1,032
    )
    
    
    (777
    )
    
    
    272
    
    
    
    (1,537
    )Time deposits $100,000 and greater
    
    
    (37
    )
    
    
    (336
    )
    
    
    6
    
    
    
    (367
    )
    
    
    418
    
    
    
    (615
    )
    
    
    (99
    )
    
    
    (296
    )Borrowed funds
    
    
    (137
    )
    
    
    30
    
    
    
    (10
    )
    
    
    (117
    )
    
    
    292
    
    
    
    (44
    )
    
    
    (56
    )
    
    
    192Total interest expense change
    
    
    (282
    )
    
    
    (752
    )
    
    
    (4
    )
    
    
    (1,038
    )
    
    
    333
    
    
    
    (1,599
    )
    
    
    (109
    )
    
    
    (1,375
    )Net interest income change
    
    $
    23
    
    
    $
    (318
    )
    
    $
    1
    
    
    $
    (294
    )
    
    $
    1,004
    
    
    $
    658
    
    
    $
    28
    
    
    $
    1,690
 17




---



##### Table of Contents



The following table summarizes on a consolidated basis, investments as of
December 31, 2003 and 2002. The carrying value of securities increased by
$5,158,000 or 29.00% ($23,071,000 for year-end 2003 compared to $17,913,000 for
year-end 2002) and the overall yield at year end decreased 78 bps (4.17% for
2003 compared to 4.95% for 2002). This decrease was primarily due to
reinvesting maturing securities and adding additional volume during 2003 at
lower yields. Additionally, the Bank had $362,000 of Federal Reserve Bank
stock and $815,000 of Federal Home Loan Bank stock outstanding at year-end
2003. Maturities of SecuritiesDecember 31, 2003 and December 31, 2002At Market Value and Taxable Equivalent Basis($ in 000s) Maturity
    
    1 - 5 Year
    
    6 - 10 Year
    
    Over 10 YearUnder 1 Year
    
    Maturity
    
    Maturity
    
    Maturity
    
    TotalDecember 31, 2003
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    YieldSecurities Available for Sale (a):U.S. Treasury
    
    $
    521
    
    
    
    3.42
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    521
    
    
    
    3.42
    %U.S. Government agencies
and corporations
    
    
    2,810
    
    
    
    3.63
    
    
    
    1,580
    
    
    
    2.67
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,390
    
    
    
    3.28States and political
subdivisions
    
    
    1,014
    
    
    
    5.00
    
    
    
    5,246
    
    
    
    4.42
    
    
    
    1,923
    
    
    
    5.91
    
    
    
    
    
    
    
    
    
    
    
    8,183
    
    
    
    4.84Other bonds, notes and
debentures
    
    
    1,034
    
    
    
    5.02
    
    
    
    3,504
    
    
    
    3.87
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,538
    
    
    
    4.13Subtotal
    
    
    5,379
    
    
    
    4.13
    
    
    
    10,330
    
    
    
    3.96
    
    
    
    1,923
    
    
    
    5.91
    
    
    
    
    
    
    
    
    
    
    
    17,632
    
    
    
    4.23Mortgage backed
securities (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,439
    
    
    
    3.89
    
    
    
    5,439
    
    
    
    3.89Total
    
    $
    5,379
    
    
    
    4.13
    %
    
    $
    10,330
    
    
    
    3.96
    %
    
    $
    1,923
    
    
    
    5.91
    %
    
    $
    5,439
    
    
    
    3.89
    %
    
    $
    23,071
    
    
    
    4.17
    %
 A time deposit maturity analysis as of December 31, 2003 is presented in the
following table. Time Deposit
    
    Under $100,000
    
    $100,000 & Over
    
    Total Time DepositsMaturity AnalysisAs of December 31, 2003
    
    Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Maturing in:3 mos or less
    
    $
    3,586
    
    
    
    2.47
    %
    
    $
    1,003
    
    
    
    2.57
    %
    
    $
    4,589
    
    
    
    2.49
    %4-6 mos
    
    
    10,254
    
    
    
    2.71
    %
    
    
    11,729
    
    
    
    3.38
    %
    
    
    21,983
    
    
    
    3.07
    %7-12 mos
    
    
    6,166
    
    
    
    3.18
    %
    
    
    33,851
    
    
    
    3.56
    %
    
    
    40,017
    
    
    
    3.50
    %Greater than 12 mos
    
    
    619
    
    
    
    4.27
    %
    
    
    2,399
    
    
    
    3.61
    %
    
    
    3,018
    
    
    
    3.74
    %TOTAL
    
    $
    20,625
    
    
    
    2.86
    %
    
    $
    48,982
    
    
    
    3.50
    %
    
    $
    69,607
    
    
    
    3.31
    %
 18




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##### Table of Contents



Other Income Analysis For the year 2003, other income increased by $91,000 to $1,515,000 resulting
mostly from additional gains on loans and leases sold in 2003, of which
$872,000 was from the Banks mortgage division, $258,000 from the syndication
of discounted leases and $212,000 from the sale of other real estate owned.
Other remaining income was $128,000. Other Expense Analysis In 2003 other expenses increased by $464,000 to $5,656,000. Salaries and
employee benefits increased by $239,000 to $2,991,000 due to staff additions in
the first quarter and commission paid to mortgage originators. Occupancy
expense increased by $108,000 to $501,000 due primarily to adjustments for
operating expenses at the Farmington Hills facility for 2001 and 2002 not
previously billed by the landlord, and an adjustment to the accrual for
property tax for the branch in Novi, Michigan. Advertising and promotional
expenses increased by $38,000 to $247,000 primarily due to the Banks efforts
to increase its core deposits through a local cable advertisement campaign.
Lien, recording, and other loan fees declined by $59,000 due primary to a
reduction in volume of refinancing of residential mortgages. Michigan single
business taxes increased $36,000 for 2003 due primarily to the increase in
salaries and commissions. Other expenses increased by $140,000 due primarily
to $70,000 in sale expenses for other real estate owned offset by $212,000 in
gains on the sale of other real estate owned. In 2002, other expenses increased by $753,000 to $5,192,000. Salaries and
employee benefits increased by $218,000 to $2,752,000 due to increases in
mortgage commission expense. Occupancy expense decreased by $30,000 to
$393,000 due primarily to relocating the mortgage division to our Novi
location. Data processing expense increased by $22,000 mostly due to increases
in volume and software enhancements. Advertising/promotion expense increased
by $56,000 to $209,000 due to the Banks efforts to increase its core deposits.
Professional fees went up by $192,000 due to increases in legal fees relating
primarily to loans and leases and management fees for MHB Leasing, Inc., the
Banks wholly-owned subsidiary formed in 2001. Other loan and lease expense
increased by $181,000 mostly due to the increased volume in mortgage loans
originated and sold into the secondary market. Other expenses increased by a
net $117,000 due to ATM processing fees, membership fees, and other
miscellaneous expenses. Federal income taxes increased by $567,000 reflecting
the Banks increase in net operating income. Liquidity and Capital Resources The Companys current cash projections indicate adequate cash balances as of
December 31, 2003. The Bank has credit facilities with national lending
institutions to add funding capacity through overnight borrowings. There is a
$3,000,000 line of credit with a bank that the Company has available to use as
additional resources of capital. This line is up for renewal in March of 2004.
The Company has received indication from this bank that the line will be
renewed. In total the Bank had $14,000,000 of Fed Funds available to purchase
in overnight rollover accounts with three outside banks of which, the Bank had
no outstanding balances at December 31, 2003. Management has also established
a network of banks that can be used to sell or participate a portion of its
loan and lease portfolio. These techniques allow the Bank to service its
business relationships and generate fee and servicing revenue. The Companys liquidity remained adequate throughout 2003. As of December 31,
2003, the Bank had $2,602,000 in cash and cash equivalents, including $711,000
in federal funds sold. In addition, investment securities with a total market
value of $23,071,000 are all available for sale. The Bank has also proven its
ability to attract deposits and build a stable deposit base from which to fund
loans. In addition, the Bank is a member of the Federal Home Loan Bank of
Indianapolis, Indiana and is currently utilizing various funding products
available from the Federal Home Loan Bank in addition to deposits. The Bank is subject to various regulatory capital requirements. Normally, to
be considered adequately-capitalized or well-capitalized, the Bank must
maintain a capital leverage ratio of 4.00% or 5.00%, respectively. The Banks
Tier 1 leverage ratios were 10.50% and 9.50% at December 31, 2003 and 2002,
respectively. The Bank plans to remain well-capitalized on an ongoing basis.
Additional information concerning capital is found in the Notes to Consolidated
Financial Statements. 19




---



##### Table of Contents



Item 7. Financial Statements. The consolidated financial statements of the Company and its subsidiary,
together with the report thereon of Plante & Moran, PLLC, included in this
report under this item are listed under Item 13 of this report. No
supplementary financial statement schedules are required to be filed with this
report. 
 Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. Not applicable. 
 Item 8A. Controls and Procedures. Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be disclosed in the Companys periodic SEC
reports. There have been no significant changes in the Companys internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation. 20




---



##### Table of Contents



PART III 
 Item 9. Directors and Executive Officers of the Registrant. The information required by this Item is included in the Proxy Statement under
the captions Information about Directors and Nominees as Directors, Section
16(a) Beneficial Ownership Reporting Compliance, and Code of Ethics and is
hereby incorporated herein by reference. 
 Item 10. Executive Compensation. The information required by this Item is included in the Proxy Statement under
the caption Compensation of Executive Officers and is hereby incorporated
herein by reference. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. The information required by this Item is included in the Proxy Statement under
the caption Stock Ownership of Certain Beneficial Owners and Management and
is hereby incorporated herein by reference. 
 Item 12. Certain Relationships and Related Transactions. The information required by this Item is included in the Proxy Statement under
the caption Related Party Transactions and is hereby incorporated herein by
reference. 
 Item 13. Exhibits, List and Reports on Form 8-K.  (a)
    
    The following financial statements and financial statement schedules are
filed with this report: PageNumber1.
    
    
    Financial Statements:Report of Independent Auditors
    
    
    23Consolidated Balance Sheet at December 31, 2003 and 2002
    
    
    24Consolidated Statement of Changes in Stockholders Equity for the
years ended December 31, 2003, 2002, and 2001
    
    
    25Consolidated Statement of Income for the years ended
December 31, 2003, 2002 and 2001
    
    
    26Consolidated Statement of Cash Flows for the years ended
December 31, 2003, 2002, and 2001
    
    
    27Notes to Consolidated Financial Statements
    
    
    28
  2.
    
    Financial Statement Schedules: None(b)
    
    Reports on Form 8-K.No Current Reports on Form 8-K were filed during the quarter ended
December 31, 2003.(c)
    
    The Exhibits required to be filed as part of this Form 10-K are the
following: 21




---



##### Table of Contents



Exhibit No.
    
    Description3.1
    
    Restated Articles of Incorporation, as amended to date (previously filed
as Exhibit No. 3.1 to the Registrants Form SB-2 Registration Statement,
File No. 333-17317, and incorporated herein by reference).3.2
    
    Bylaws, as amended to date (previously filed as Exhibit No. 3.2 to the
Registrants Form SB-2 Registration Statement, File No. 333-17317, and
incorporated herein by reference).10.1*
    
    Michigan Heritage Bancorp, Inc. 1997 Non-Employee Director Stock Option
Plan (previously filed as Exhibit No. 10.1 to the Registrants Form SB-2
Registration Statement, File No. 333-17317, and incorporated herein by
reference).10.2*
    
    Michigan Heritage Bancorp, Inc. 1997 Employee Stock Option Plan
(previously filed as Exhibit No. 10.2 to the Registrants Form SB-2
Registration Statement, File No. 333-17317, and incorporated herein by
reference).10.3
    
    Office Building Lease between Rontal Investment Company as Landlord and
Michigan Heritage Bancorp, Inc. as Tenant for headquarters floor space
located at 28300 Orchard Lake Road, Suite 200, Farmington Hills, Michigan
(previously filed as Exhibit No. 10.3 to the Registrants Form 10-KSB for
the year ended December 31, 1999 and incorporated herein by reference).11
    
    Computation of Per Share Earnings (filed herewith).31.1
    
    Rule 13a-14(a)/15d-14(a) certification (filed herewith).31.2
    
    Rule 13a-14(a)/15d-14(a) certification (filed herewith).32.1
    
    Section 1350 certification (filed herewith).32.2
    
    Section 1350 certification (filed herewith).
   *
    
    Management contract or compensatory plan or arrangement. 22




---



##### Table of Contents



|                       |  |                                                                                                                               
|---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|(PLANTE & MORAN, LOGO) |  | Plante & Moran, PLLC
Suite 50C
2601 Cambridge Court
Auburn Hills, MI 48326
Tel: 248.375.710C
Fax: 248.375.7101
plantemoran.com

Independent Auditors Report

To the Board of Directors and
Stockholders
 Michigan Heritage Bancorp, Inc.

We have audited the consolidated balance sheet of Michigan Heritage Bancorp,
Inc. and subsidiary as of December 31, 2003 and 2002 and the related
consolidated statements of changes in stockholders equity, income, and cash
flows for each year in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Corporations
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 consolidated financial position of
Michigan Heritage Bancorp, Inc. and subsidiary as of December 31, 2003 and 2002
and the consolidated results of their operations and their cash flows for each
year in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.

(PLANTE & MORAN, PLLC)

Auburn Hills, Michigan
January 30, 2004

(MRI LOGO)

23



---



##### Table of Contents



Michigan Heritage Bancorp, Inc.

Consolidated Balance Sheet
(000s omitted, except per share data)

|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |        |         |   |         | 
|-------------------------------------- | ------------------------------------------------ | -------------------------------------------------------------------------------------------------------- | ------- | ------------------------------------------ | ------- | ----------- | ------- | ------ | ------- | - | ------- | 
|                                       |                                                  |                                                                                                          |         |                                            |         | December 31
|                                       |                                                  |                                                                                                          |         |                                            |         |            
|                                       |                                                  |                                                                                                          |         |                                            |         | 2003        |         | 2002  
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |       
|                                       |                                                  |                                                                                                          |         | Assets                                     |         |             |         |        |         |   |         | 
|Cash and Cash Equivalents              |                                                  |                                                                                                          |         |                                            |         |             |         |       
|                                       | Cash and due from banks                          |                                                                                                          | $       | 1,807                                      |         |             | $       | 1,031  |        
|                                       | Interest-bearing deposits with other banks       |                                                                                                          |         | 84                                         |         |             |         | 58     |        
|                                       | Federal funds sold                               |                                                                                                          |         | 711                                        |         |             |         | 9,897  |        
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |        |        
|                                       |                                                  | Total cash and cash equivalents                                                                          |         |                                            | 2,602   |             |         |        | 10,986  |  
|Securities available for sale (Note 2) |                                                  |                                                                                                          | 23,071  |                                            |         |             | 17,913  |       
|Federal Reserve Bank Stock - At cost   |                                                  |                                                                                                          | 362     |                                            |         |             | 362     |       
|Federal Home Loan Bank Stock - At cost |                                                  |                                                                                                          | 815     |                                            |         |             | 775     |       
|Loans and leases - Net (Note 3)        |                                                  |                                                                                                          | 115,509 |                                            |         |             | 116,431 |       
|Loans held for sale                    |                                                  |                                                                                                          |        |                                            |         |             | 3,136   |       
|Bank premises and equipment (Note 6)   |                                                  |                                                                                                          | 554     |                                            |         |             | 588     |       
|Interest receivable and other assets   |                                                  |                                                                                                          | 2,470   |                                            |         |             | 2,137   |       
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |        |        
|                                       |                                                  | Total assets                                                                                             |         | $                                          | 145,383 |             |         | $      | 152,328 |  
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |       
|                                       |                                                  |                                                                                                          |         | Liabilities and Stockholders Equity       |         |             |         |        |         |   |         | 
|Liabilities                            |                                                  |                                                                                                          |         |                                            |         |             |         |       
|                                       | Deposits (Note 7):                               |                                                                                                          |         |                                            |         |             |         |        |        
|                                       |                                                  | Interest-bearing                                                                                         |         | $                                          | 106,047 |             |         | $      | 114,998 |  
|                                       |                                                  | Noninterest-bearing                                                                                      |         |                                            | 7,946   |             |         |        | 5,244   |  
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |        |        
|                                       |                                                  |                                                                                                          |         | Total deposits                             |         |             | 113,993 |        |         |   | 120,242 | 
|                                       | Note payable - Bank (Note 8)                     |                                                                                                          |         |                                           |         |             |         | 200    |        
|                                       | Short-term borrowings                            |                                                                                                          |         |                                           |         |             |         | 4,000  |        
|                                       | FHLB advances (Note 9)                           |                                                                                                          |         | 14,500                                     |         |             |         | 12,500 |        
|                                       | Interest payable and other liabilities (Note 10) |                                                                                                          |         | 1,714                                      |         |             |         | 1,329  |        
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |        |        
|                                       |                                                  |                                                                                                          |         | Total liabilities                          |         |             | 130,207 |        |         |   | 138,271 | 
|Stockholders Equity                   |                                                  |                                                                                                          |         |                                            |         |             |         |       
|                                       | Common stock - No par value :                    |                                                                                                          |         |                                            |         |             |         |        |        
|                                       |                                                  | Authorized - 4,500,000 shares                                                                            |         |                                            |         |             |         |        |         |  
|                                       |                                                  | Issued and outstanding - 1,490,964 shares at December 31, 2003 and 1,488,764 shares at December 31, 2002 |         |                                            | 13,744  |             |         |        | 13,730  |  
|                                       | Retained earnings (Accumulated deficit)          |                                                                                                          |         | 1,152                                      |         |             |         | (109   | )      
|                                       | Accumulated other comprehensive income           |                                                                                                          |         | 280                                        |         |             |         | 436    |        
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |        |        
|                                       |                                                  |                                                                                                          |         | Total stockholders equity                 |         |             | 15,176  |        |         |   | 14,057  | 
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |        |        
|                                       |                                                  |                                                                                                          |         | Total liabilities and stockholders equity |         | $           | 145,383 |        |         | $ | 152,328 | 
|                                       |                                                  |                                                                                                          |         |                                            |         |             |         |        |        

See Notes to Consolidated
   Financial Statements.

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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Consolidated Statement of Changes in Stockholders Equity
(000s omitted)

|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |       |       | 
|--------------------------- | ----------------------------------------------------------------------------------------- | -------------------------- | --------- | ----------- |  | ------- | ------ | ----------- |  | ------------- | ------ | ------------- |  | ----- | --- | ----------- | - | - | ------ | ----- | ----- | 
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     | Accumulated |   |   |        |      
|                            |                                                                                           |                            |           | Common      |  |         |        |             |  |               |        |               |  | Other |     | Total      
|                            |                                                                                           |                            |           | Shares      |  | Capital |        | Accumulated |  | Comprehensive |        | Stockholders
|                            |                                                                                           |                            |           | Outstanding |  | Stock   |        | Deficit     |  | Income (Loss) |        | Equity       
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |              
|Balance - January 1, 2001   |                                                                                           |                            | 1,488,764 |             |  | $       | 13,730 |             |  | $             | (1,471 | )             |  | $     | 64  |             |   | $ | 12,323 |      
|Comprehensive income:       |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|                            | Net income                                                                                |                            |           |            |  |         |        |            |  |               |        | 110           |  |       |     |            |   |   |        | 110   |      
|                            | Change in net unrealized gain
on securities available for
sale, net of tax effect of $42  |                            |           |            |  |         |        |            |  |               |        |              |  |       |     | 81          |   |   |        | 81    |      
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|                            |                                                                                           | Total comprehensive income |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |       | 191   | 
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|Balance - December 31, 2001 |                                                                                           |                            | 1,488,764 |             |  |         | 13,730 |             |  |               | (1,361 | )             |  |       | 145 |             |   |   | 12,514 |      
|Comprehensive income:       |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|                            | Net income                                                                                |                            |           |            |  |         |        |            |  |               |        | 1,252         |  |       |     |            |   |   |        | 1,252 |      
|                            | Change in net unrealized gain
on securities available for
sale, net of tax effect of $150 |                            |           |            |  |         |        |            |  |               |        |              |  |       |     | 291         |   |   |        | 291   |      
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|                            |                                                                                           | Total comprehensive income |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |       | 1,543 | 
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|Balance - December 31, 2002 |                                                                                           |                            | 1,488,764 |             |  |         | 13,730 |             |  |               | (109   | )             |  |       | 436 |             |   |   | 14,057 |      
|Stock options exercised     |                                                                                           |                            | 2,200     |             |  |         | 14     |             |  |               |       |               |  |       |    |             |   |   | 14     |      
|Comprehensive income:       |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|                            | Net income                                                                                |                            |           |            |  |         |        |            |  |               |        | 1,261         |  |       |     |            |   |   |        | 1,261 |      
|                            | Change in net unrealized loss
on securities available for
sale, net of tax effect of $80  |                            |           |            |  |         |        |            |  |               |        |              |  |       |     | (156        | ) |   |        | (156  | )    
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|                            |                                                                                           | Total comprehensive income |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |       | 1,105 | 
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      
|Balance - December 31, 2003 |                                                                                           |                            | 1,490,964 |             |  | $       | 13,744 |             |  | $             | 1,152  |               |  | $     | 280 |             |   | $ | 15,176 |      
|                            |                                                                                           |                            |           |             |  |         |        |             |  |               |        |               |  |       |     |             |   |   |        |      

See Notes to Consolidated
   Financial Statements.

25



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Michigan Heritage Bancorp, Inc.

Consolidated Statement of Income
(000s omitted, except per share data)

|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |       |        | 
|------------------------------------------------------- | ----------------------------------------------- | ------------------------ | ----- | ---------------------- | ----- | ---- | ----- | ----- | ------ | - | ----- | ----- | ------ | 
|                                                        |                                                 |                          |       | Year Ended December 31
|                                                        |                                                 |                          |       |                       
|                                                        |                                                 |                          |       | 2003                   |       | 2002 |       | 2001 
|                                                        |                                                 |                          |       |                        |       |      |       |      
|Interest Income                                         |                                                 |                          |       |                        |       |      |       |       |        |   |       |      
|                                                        | Interest and fees on loans and leases           |                          | $     | 7,805                  |       |      | $     | 9,376 |        |   | $     | 9,407 |       
|                                                        | Interest and dividends on investments - Taxable |                          |       | 849                    |       |      |       | 826   |        |   |       | 712   |       
|                                                        | Interest on tax-exempt securities               |                          |       | 103                    |       |      |       | 88    |        |   |       | 76    |       
|                                                        | Interest on federal funds sold                  |                          |       | 26                     |       |      |       | 15    |        |   |       | 109   |       
|                                                        | Interest on deposits with other banks           |                          |       | 25                     |       |      |       | 3     |        |   |       | 96    |       
|                                                        | Interest on direct financing leases             |                          |       | 1,028                  |       |      |       | 860   |        |   |       | 453   |       
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |       |       
|                                                        |                                                 | Total interest income    |       |                        | 9,836 |      |       |       | 11,168 |   |       |       | 10,853 | 
|Interest Expense                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |      
|                                                        | Interest on deposits                            |                          |       | 3,515                  |       |      |       | 4,440 |        |   |       | 6,007 |       
|                                                        | Interest on borrowed funds                      |                          |       | 311                    |       |      |       | 424   |        |   |       | 232   |       
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |       |       
|                                                        |                                                 | Total interest expense   |       |                        | 3,826 |      |       |       | 4,864  |   |       |       | 6,239  | 
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |       |       
|Net Interest Income -Before provision for credit losses |                                                 |                          | 6,010 |                        |       |      | 6,304 |       |        |   | 4,614 |      
|Provision
for Credit Losses(Note 4)                     |                                                 |                          | 18    |                        |       |      | 701   |       |        |   | 877   |      
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |       |       
|Net Interest Income                                     |                                                 |                          | 5,992 |                        |       |      | 5,603 |       |        |   | 3,737 |      
|Noninterest Income                                      |                                                 |                          |       |                        |       |      |       |       |        |   |       |      
|                                                        | Service charges on deposit accounts             |                          |       | 128                    |       |      |       | 138   |        |   |       | 109   |       
|                                                        | Gain on sale of securities                      |                          |       | 45                     |       |      |       |      |        |   |       | 44    |       
|                                                        | Gain on sale of loans                           |                          |       | 1,130                  |       |      |       | 1,281 |        |   |       | 675   |       
|                                                        | Gain on sale of other real estate               |                          |       | 212                    |       |      |       |      |        |   |       |      |       
|                                                        | Other                                           |                          |       |                       |       |      |       | 5     |        |   |       |      |       
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |       |       
|                                                        |                                                 | Total noninterest income |       |                        | 1,515 |      |       |       | 1,424  |   |       |       | 828    | 
|Other Expenses                                          |                                                 |                          |       |                        |       |      |       |       |        |   |       |      
|                                                        | Salaries and employee benefits                  |                          |       | 2,991                  |       |      |       | 2,752 |        |   |       | 2,534 |       
|                                                        | Occupancy of bank premises (Note 12)            |                          |       | 501                    |       |      |       | 393   |        |   |       | 423   |       
|                                                        | Processing                                      |                          |       | 140                    |       |      |       | 129   |        |   |       | 107   |       
|                                                        | Advertising                                     |                          |       | 247                    |       |      |       | 209   |        |   |       | 153   |       
|                                                        | Equipment expense                               |                          |       | 239                    |       |      |       | 245   |        |   |       | 248   |       
|                                                        | Professional fees                               |                          |       | 555                    |       |      |       | 562   |        |   |       | 370   |       
|                                                        | Other loan and lease expenses                   |                          |       | 301                    |       |      |       | 360   |        |   |       | 179   |       
|                                                        | Other expenses                                  |                          |       | 682                    |       |      |       | 542   |        |   |       | 425   |       
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |       |       
|                                                        |                                                 | Total other expenses     |       |                        | 5,656 |      |       |       | 5,192  |   |       |       | 4,439  | 
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |       |       
|Income -Before income taxes                             |                                                 |                          | 1,851 |                        |       |      | 1,835 |       |        |   | 126   |      
|Income
Tax Expense(Note 10)                             |                                                 |                          | 590   |                        |       |      | 583   |       |        |   | 16    |      
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |      
|Net Income                                              |                                                 | $                        | 1,261 |                        |       | $    | 1,252 |       |        | $ | 110   |      
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |      
|Basic Earnings per Share                                |                                                 | $                        | 0.85  |                        |       | $    | 0.84  |       |        | $ | 0.07  |      
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |      
|Diluted Earnings per Share                              |                                                 | $                        | 0.82  |                        |       | $    | 0.83  |       |        | $ | 0.07  |      
|                                                        |                                                 |                          |       |                        |       |      |       |       |        |   |       |      

See Notes to Consolidated
   Financial Statements.

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Michigan Heritage Bancorp, Inc.

Consolidated Statement of Cash Flows

(000s omitted, except per share data)


|                                                                       |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |         |    |         |         |  
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------ | --------------------------------------------- | --------------------------------------------------------------------- | --- | ---------------------- | ------ | -------- | - | ------- | ------ | ------- | -- | ------- | ------- | -
|                                                                       |                                                                                     |              |                                               |                                                                       |     | Year Ended December 31
|                                                                       |                                                                                     |              |                                               |                                                                       |     |                       
|                                                                       |                                                                                     |              |                                               |                                                                       |     | 2003                   |        | 2002     |   | 2001   
|                                                                       |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |        
|Cash Flows from Operating Activities                                   |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |        
|                                                                       | Net income                                                                          |              | $                                             | 1,261                                                                 |     |                        | $      | 1,252    |   |         | $      | 110     |   
|                                                                       | Adjustments to reconcile net income to net cash from
operating activities:          |              |                                               |                                                                       |     |                        |        |          |   |         |        |         |   
|                                                                       |                                                                                     |              | Depreciation and amortization                 |                                                                       |     | 209                    |        |          |   | 209     |        |         |    | 241     |        
|                                                                       |                                                                                     |              | Provision for credit losses                   |                                                                       |     | 18                     |        |          |   | 701     |        |         |    | 877     |        
|                                                                       |                                                                                     |              | Gain on sale of other real estate             |                                                                       |     | (212                   | )      |          |   |        |        |         |    |        |        
|                                                                       |                                                                                     |              | Gain on sale of securities available for sale |                                                                       |     | (45                    | )      |          |   |        |        |         |    | (44     | )      
|                                                                       |                                                                                     |              | Proceeds from the sale of loans held for sale |                                                                       |     | 56,689                 |        |          |   | 62,374  |        |         |    | 38,920  |        
|                                                                       |                                                                                     |              | Originations of loans held for sale           |                                                                       |     | (53,553                | )      |          |   | (63,921 | )      |         |    | (40,509 | )      
|                                                                       |                                                                                     |              | Deferred income taxes                         |                                                                       |     | 370                    |        |          |   | 340     |        |         |    | 658     |        
|                                                                       |                                                                                     |              | Amortization and accretion of securities      |                                                                       |     | 218                    |        |          |   | 127     |        |         |    | 9       |        
|                                                                       |                                                                                     |              | Changes in assets and liabilities:            |                                                                       |     |                        |        |          |   |         |        |         |    |         |        
|                                                                       |                                                                                     |              |                                               | Increase in accrued interest
receivable and other assets              |     |                        | (121   | )        |   |         | (172   | )       |    |         | (1,677  | )
|                                                                       |                                                                                     |              |                                               | Increase (decrease) in accrued interest payable
and other liabilities |     |                        | 95     |          |   |         | (84    | )       |    |         | 178     |  
|                                                                       |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |         |   
|                                                                       |                                                                                     |              |                                               | Net cash provided by (used in) operating activities                   |     |                        | 4,929  |          |   |         | 826    |         |    |         | (1,237  | )
|Cash Flows from Investing Activities                                   |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |        
|                                                                       | Proceeds from maturities of securities available for sale                           |              |                                               | 3,677                                                                 |     |                        |        | 3,933    |   |         |        | 6,426   |   
|                                                                       | Proceeds from sales of securities available for sale                                |              |                                               | 3,049                                                                 |     |                        |        |         |   |         |        | 1,522   |   
|                                                                       | Purchase of securities available for sale                                           |              |                                               | (12,293                                                               | )   |                        |        | (7,805   | ) |         |        | (9,440  | ) 
|                                                                       | Purchase of Federal Home Loan Bank stock                                            |              |                                               | (40                                                                   | )   |                        |        | (100     | ) |         |        | (581    | ) 
|                                                                       | Purchase of Federal Reserve Bank stock                                              |              |                                               |                                                                      |     |                        |        | (32      | ) |         |        | (5      | ) 
|                                                                       | Decrease (increase) in loans and leases                                             |              |                                               | 904                                                                   |     |                        |        | 309      |   |         |        | (25,068 | ) 
|                                                                       | Proceeds from sales of equipment                                                    |              |                                               |                                                                      |     |                        |        |         |   |         |        | 11      |   
|                                                                       | Premises and equipment expenditures                                                 |              |                                               | (175                                                                  | )   |                        |        | (67      | ) |         |        | (140    | ) 
|                                                                       |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |         |   
|                                                                       |                                                                                     |              |                                               | Net cash used in investing activities                                 |     |                        | (4,878 | )        |   |         | (3,762 | )       |    |         | (27,275 | )
|Cash Flows from Financing Activities                                   |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |        
|                                                                       | Net increase (decrease) in interest-bearing and noninterest-bearing
demand accounts |              |                                               | 133                                                                   |     |                        |        | 22,263   |   |         |        | 11,860  |   
|                                                                       | Net increase (decrease) in time certificates                                        |              |                                               | (6,382                                                                | )   |                        |        | (13,273  | ) |         |        | (7,268  | ) 
|                                                                       | Proceeds from the exercise of stock options                                         |              |                                               | 14                                                                    |     |                        |        |         |   |         |        |        |   
|                                                                       | Net proceeds from note payable - Bank                                               |              |                                               |                                                                      |     |                        |        | 200      |   |         |        |        |   
|                                                                       | Payments on note payable - Bank                                                     |              |                                               | (200                                                                  | )   |                        |        |         |   |         |        |        |   
|                                                                       | Proceeds from short-term borrowings                                                 |              |                                               |                                                                      |     |                        |        | 243,334  |   |         |        | 5,000   |   
|                                                                       | Payments on short-term borrowings                                                   |              |                                               | (4,000                                                                | )   |                        |        | (244,334 | ) |         |        | (500    | ) 
|                                                                       | Proceeds from FHLB advances                                                         |              |                                               | 10,000                                                                |     |                        |        | 20,000   |   |         |        | 13,500  |   
|                                                                       | Payments on FHLB advances                                                           |              |                                               | (8,000                                                                | )   |                        |        | (21,000  | ) |         |        |        |   
|                                                                       |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |         |   
|                                                                       |                                                                                     |              |                                               | Net cash provided by (used in) financing activities                   |     |                        | (8,435 | )        |   |         | 7,190  |         |    |         | 22,592  |  
|                                                                       |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |         |   
|Net (Decrease) Increase in Cash and Cash Equivalents                   |                                                                                     |              | (8,384                                        | )                                                                     |     |                        | 4,254  |          |   |         | (5,920 | )      
|Cash and Cash Equivalents- Beginning of year                           |                                                                                     |              | 10,986                                        |                                                                       |     |                        | 6,732  |          |   |         | 12,652 |        
|                                                                       |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |         |   
|Cash and Cash Equivalents- End of year                                 |                                                                                     | $            | 2,602                                         |                                                                       |     | $                      | 10,986 |          |   | $       | 6,732  |        
|                                                                       |                                                                                     |              |                                               |                                                                       |     |                        |        |          |   |         |        |        
|Supplemental Cash Flow and Noncash Information- Cash paid for
Interest |                                                                                     | $            | 3,871                                         |                                                                       |     | $                      | 4,670  |          |   | $       | 6,392  |        
|                                                                       |                                                                                     | Income taxes |                                               |                                                                       | 149 |                        |        |          |  |         |        |         | 85 |        

See Notes to Consolidated
   Financial Statements.

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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial StatementsDecember 31, 2003 and 2002 Note 1 - Summary of Significant Accounting Policies  Principles of Consolidation- The consolidated financial statements
include the accounts of Michigan Heritage Bancorp, Inc. (the
Corporation) and its wholly owned subsidiary, Michigan Heritage Bank
(the Bank). The Bank also includes the accounts of its wholly owned
subsidiary, MHB Leasing, Inc. All significant intercompany accounts
and transactions have been eliminated upon consolidation.Basis of Presentation- The accounting and reporting policies of the
Corporation conform to generally accepted accounting principles.
Management is required to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates
and assumptions. Material estimates that are particularly susceptible
to significant change in the near term relate to the determination of
the allowance for credit losses, the valuation of foreclosed assets,
unguaranteed residuals of leased property and deferred tax assets. The
000s have been omitted in tabular presentations.Nature of Operations- The Bank conducts full-service commercial and
consumer banking and provides other financial products and services
through its three branch networks to communities in Wayne and Oakland
counties. MHB Leasing, Inc. originates leases to customers primarily
in Michigan. The Bank and leasing company have a lending concentration
to companies who operate hospitals.Cash Equivalents- Cash equivalents include cash on hand, amounts due
from banks and federal funds sold. Interest-bearing deposits in banks
mature within one year and are carried at cost.Securities- Securities are classified as available-for-sale securities
and are reported at fair value, with unrealized gains and losses, net
of related deferred income taxes, included in other comprehensive
income in stockholders equity. Federal Reserve Bank and Federal Home
Loan Bank stock is restricted and carried at cost.Purchase premiums and discounts are recognized in interest income using
the interest method over the terms of the securities. Declines in the
fair value of securities available for sale below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses. Gains and losses on the sale of securities are recorded on the
trade date and are determined using the specific identification method. 28




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial StatementsDecember 31, 2003 and 2002 Note 1 - Summary of Significant Accounting Policies (Continued)  Loans and Leases- The Corporation grants mortgage, commercial, and
consumer loans and leases to customers. Loans are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the
allowance for credit losses, and any deferred fees or costs on
originated loans and leases. Interest income is accrued on the unpaid
principal balance. Loan and lease origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment
to the related yield using the interest method.The accrual of interest on loans and leases is discontinued at the time
the loan or lease is 90 days delinquent unless the credit is
well-secured and in process of collection. In all cases, loans and
leases 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 collected for loans and leases that are
placed on nonaccrual or charged off is reversed against interest
income. The interest on these loans and leases is accounted for on the
cash basis or cost-recovery method, until qualifying for return to
accrual. Loans and leases are returned to accrual status when all the
principal and interest amounts contractually due are brought current
and future payments are reasonably assured.Lease Financing- The Bank uses the finance method of accounting for
direct lease contracts. Under this method of accounting, a receivable
is recorded for the present value of lease payments due and estimated
residual values. Lease income, represented by the excess of the total
contract receivable plus estimated equipment residual value over the
cost of the equipment, is recorded over the term of the lease at a
level rate of return on the unrecovered net investment.Unguaranteed residual values are estimated at the inception of the
lease. If, subsequent to the date a lease is entered into, the Company
determines that the unguaranteed residual will be less than amounts
originally estimated, a provision for write-downs in residual will be
accrued in the financial statements. No residual write-downs were
required in 2003, 2002 and 2001. To the extent the actual residual at
the termination of the lease is different from its carrying amount, a
gain or loss will be recorded.Allowance for Credit Losses- The allowance for credit losses is
established as losses are estimated to have occurred through a
provision for credit losses charged to earnings. Credit losses are
charged against the allowance when management believes the
uncollectibility of a loan or lease balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. 29




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial StatementsDecember 31, 2003 and 2002 Note 1 - Summary of Significant Accounting Policies (Continued)  The allowance for credit losses is evaluated on a regular basis by
management and is based upon managements periodic review of the
collectibility of the loans and leases in light of historical
experience, the nature and volume of the portfolio, adverse situations
that may affect the borrowers ability to repay, estimated value of any
underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.The allowance consists of specific, general, and unallocated
components. The specific components relate to loans or leases that are
classified as either doubtful, substandard or special mention. For such
loans or leases that are also classified as impaired, an allowance is
established when the discounted cash flow (or collateral value or
observable market price) of the impaired loan or lease is lower than
the carrying value of that loan or lease. The general component covers
non-classified loans and leases and is based on historical loss
experience adjusted for qualitative factors. An unallocated component
is maintained to cover uncertainties that could affect managements
estimate of probable losses. The unallocated component of the allowance
reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and
general losses in the portfolio.A loan or lease is considered impaired when, based on current
information and events, it is probable that the Corporation will be
unable to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan or lease agreement.
Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans and leases
that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding
the loan and the borrower, including length of the delay, the reasons
for the delay, the borrowers prior payment record, and the amount of
the shortfall in relation to the principal and interest owed.
Impairment is measured on an individual loan or lease basis for
commercial loans and leases and construction loans by either the
present value of expected future cash flows discounted at the loans or
leases effective interest rate, the loans and leases obtainable
market price, or the fair value of the collateral if the loan or lease
is collateral dependent.Large groups of homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures. 30




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial StatementsDecember 31, 2003 and 2002 Note 1 - Summary of Significant Accounting Policies (Continued)  Loans Held for Sale- Loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated fair
value in the aggregate. Net unrealized losses, if any, are recognized
in a valuation allowance by charges to income. No valuation allowances
were recorded as of December 31, 2003 and 2002 and there was no
activity in valuation allowances for the three years ended December 31,
2003.Off Balance Sheet Instruments- In the ordinary course of business, the
Corporation has entered into commitments to extend credit, including
commercial letters of credit and standby letters of credit.In November 2002, the FASB issued Interpretation No. 45, (FIN 45)
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which
elaborates on the disclosures to be made by a guarantor about its
obligations under certain guarantees issued. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing
the guarantee. The initial recognition and measurement provisions of
this Interpretation have been applied on a prospective basis to
guarantees issued or modified after December 31, 2002. However, the
value of such guarantees is immaterial and the adoption of this
Standard did not have a material effect on the Corporations financial
statements.Premises and Equipment- Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation, computed
on the straight-line method, is charged to operations over the useful
lives of the properties. Leasehold improvements are amortized over the
terms of their respective leases or the estimated useful lives of the
improvements, whichever is shorter.Foreclosed Assets- Assets acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair value
at the date of the foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount
or fair value less costs to sell. Revenue and expenses from operations
and changes in valuation allowance are included in net expenses from
foreclosed assets.Income Taxes- Deferred tax assets and liabilities are recognized for
temporary differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. 31




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial StatementsDecember 31, 2003 and 2002 Note 1 - Summary of Significant Accounting Policies (Continued)  Short-term Borrowings- Short-term borrowings include federal funds
purchased by the Bank. Federal funds purchased generally mature in one
to four days.Stock Compensation Plans- The Corporation applies intrinsic value
method of accounting under the provisions of APB Opinion No. 25,
Accounting for Stock-Based Compensation for all employee stock
opinion grants. Disclosure of pro forma net income and earnings per
share amounts as if the fair-value based method has been applied in
measuring compensation costs is presented in the following table for
the years ended December 31 (000s omitted, except per share data): 2003
    
    2002
    
    2001As reported, net income available to
common shareholders
    
    $
    1,261
    
    
    $
    1,252
    
    
    $
    110Less: Stock-based compensation
expense (benefit) determined
under fair value method, net of tax
    
    
    12
    
    
    
    (15
    )
    
    
    (169
    )Pro forma net income
    
    $
    1,249
    
    
    $
    1,267
    
    
    $
    279As reported earnings per share
    
    $
    0.85
    
    
    $
    0.84
    
    
    $
    0.07Proforma earnings per share
    
    $
    0.84
    
    
    $
    0.85
    
    
    $
    0.19As reported earnings per diluted share
    
    $
    0.82
    
    
    $
    0.83
    
    
    $
    0.07Pro forma earnings per diluted share
    
    $
    0.81
    
    
    $
    0.84
    
    
    $
    0.19
  Compensation expense in the pro forma disclosures is not indicative of
future amounts, as options vest over several years and additional grants are
generally made each year.The weighted average fair value of options granted was $3.01 in 2003 and
$2.34 in 2001. 32




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements December31, 2003 and 2002 Note 1 - Summary of Significant Accounting Policies (Continued)  The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants in 2003, 2002 and 2001: 2003
    
    2002
    
    2001Dividend yield
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Expected average life (years)
    
    
    6.00
    
    
    
    
    
    
    
    8.00Volatility
    
    
    29.00
    %
    
    
    
    
    
    
    30.00
    %Risk-free interest rate
    
    
    4.00
    %
    
    
    
    
    
    
    5.00
    %
  Earnings Per Common Share- Basic earnings per share represents income
available to common stockholders divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share
reflects additional common shares that would have been outstanding if
dilutive potential common shares had been issued, as well as any adjustment
to income that would result from the assumed issuance. Potential common
shares that may be issued by the Corporation relate solely to outstanding
stock options, and are determined using the treasury stock method. Earnings
per common share have been computed based on the following: 2003
    
    2002
    
    2001Average common shares outstanding
    
    $
    1,489,114
    
    
    $
    1,488,764
    
    
    $
    1,488,764Dilutive impact of stock options
    
    
    50,039
    
    
    
    22,375
    
    
    
    5,564Average common shares outstanding
used to calculate diluted earnings
per common share
    
    $
    1,539,153
    
    
    $
    1,511,139
    
    
    $
    1,494,328
  Other Comprehensive Income- Accounting principles generally require that
recognized revenue, expenses, gains, and losses be included in net income.
Certain changes in assets and liabilities, however, such as unrealized
gains and losses on securities available for sale, are reported as a direct
adjustment to the equity section of the balance sheet. Such items, along
with net income, are components of comprehensive income. Accumulated other
comprehensive income at December 31, 2003 and 2002 is comprised solely of
unrealized gains on securities available for sale, net of related income
taxes. 33




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements December31, 2003 and 2002 Note 2 - Securities  The amortized cost and estimated market value of investment
securities at December 31 are as follows (000s omitted): 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueSecurities available for sale:U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
    
    $
    4,853
    
    
    $
    58
    
    
    $
    
    
    
    $
    4,911Municipal notes
    
    
    7,940
    
    
    
    300
    
    
    
    57
    
    
    
    8,183Corporate bonds
    
    
    4,433
    
    
    
    105
    
    
    
    1
    
    
    
    4,537Mortgage-backed securities
    
    
    5,420
    
    
    
    57
    
    
    
    37
    
    
    
    5,440Total
    
    $
    22,646
    
    
    $
    520
    
    
    $
    95
    
    
    $
    23,071
 2002Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueSecurities available for sale:U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
    
    $
    4,825
    
    
    $
    133
    
    
    $
    
    
    
    $
    4,958Municipal notes
    
    
    5,082
    
    
    
    333
    
    
    
    2
    
    
    
    5,413Corporate bonds
    
    
    4,106
    
    
    
    104
    
    
    
    1
    
    
    
    4,209Mortgage-backed securities
    
    
    3,239
    
    
    
    94
    
    
    
    
    
    
    
    3,333Total
    
    $
    17,252
    
    
    $
    664
    
    
    $
    3
    
    
    $
    17,913
 34




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements December31, 2003 and 2002 Note 2 - Securities (Continued)  At December 31, 2003 and 2002, securities having a carrying value and
fair value of $10,868,000 and $3,880,000 respectively, were pledged
at for purposes of obtaining borrowings from the Federal Home Loan
Bank.The amortized cost and estimated market value of securities at
December 31,
2003, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities. Issuers may have the right
to call or prepay obligations with or without call or prepayment
penalties. Available for SaleAmortized
    
    EstimatedCost
    
    Market ValueDue in one year or less
    
    $
    5,282
    
    
    $
    5,378Due after one year through five years
    
    
    10,116
    
    
    
    10,330Due after five years through ten years
    
    
    1,828
    
    
    
    1,923Due after ten years
    
    
    
    
    
    
    Subtotal
    
    
    17,226
    
    
    
    17,631Mortgage-backed securities
    
    
    5,420
    
    
    
    5,440Total
    
    $
    22,646
    
    
    $
    23,071
 Note 3 - Loans and Leases  Certain directors and executive officers of the Corporation were loan
customers of the subsidiary bank during 2003 and 2002. Such loans
were made in the ordinary course of business and do not involve more
than a normal risk of collectibility. The outstanding loan balance
for these persons at December 31, 2003 and 2002 amounted to $28,000
and $29,000, respectively. During the year ended December 31, 2003,
total principal payments were $1,000 and there were no principal
additions. 35




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements December31, 2003 and 2002 Note 3 - Loans and Leases (Continued)  A summary of the balances of loans and leases at December 31 is as
follows (000s omitted): 2003
    
    2002Commercial loans
    
    $
    88,882
    
    
    $
    82,444Direct financing leases (Note 5)
    
    
    17,745
    
    
    
    14,696Residential real estate
    
    
    8,468
    
    
    
    17,860Installment
    
    
    217
    
    
    
    274Home equity
    
    
    2,036
    
    
    
    3,257Subtotal
    
    
    117,348
    
    
    
    118,531Less:Net deferred fees
    
    
    (64
    )
    
    
    (87
    )Allowances for credit losses (Note 4)
    
    
    (1,775
    )
    
    
    (2,013
    )Loans and leases - Net
    
    $
    115,509
    
    
    $
    116,431
  Final loan and lease maturities, excluding unguaranteed lease residuals,
and rate sensitivity of the loan and lease portfolio at December 31, 2003
are as follows (000s omitted): Within
    
    One to
    
    After FiveOne Year
    
    Five Years
    
    Years
    
    TotalCommercial
    
    $
    34,685
    
    
    $
    44,115
    
    
    $
    10,082
    
    
    $
    88,882Direct financing leases
    
    
    654
    
    
    
    11,616
    
    
    
    2,217
    
    
    
    14,487Real estate
    
    
    1,198
    
    
    
    5,982
    
    
    
    1,288
    
    
    
    8,468Installment
    
    
    61
    
    
    
    12
    
    
    
    144
    
    
    
    217Home equity
    
    
    143
    
    
    
    299
    
    
    
    1,594
    
    
    
    2,036Total
    
    $
    36,741
    
    
    $
    62,024
    
    
    $
    15,325
    
    
    $
    114,090Loans and leases at fixed interest rates
    
    $
    14,837
    
    
    $
    52,011
    
    
    $
    9,094
    
    
    $
    75,942Loans and leases at variable interest rates
    
    
    21,904
    
    
    
    10,013
    
    
    
    6,231
    
    
    
    38,148Total
    
    $
    36,741
    
    
    $
    62,024
    
    
    $
    15,325
    
    
    $
    114,090
 36




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 4 - Allowance for Possible Credit Losses  A summary of the activity in the allowance for possible credit losses for
thee years
ended December 31 is as follows (000s omitted): 2003
    
    2002
    
    2001Balance- Beginning of year
    
    $
    2,013
    
    
    $
    1,802
    
    
    $
    1,887Provision charged to operations
    
    
    18
    
    
    
    701
    
    
    
    877Credit losses
    
    
    (314
    )
    
    
    (560
    )
    
    
    (964
    )Credit loss recoveries
    
    
    58
    
    
    
    70
    
    
    
    2Balance- End of year
    
    $
    1,775
    
    
    $
    2,013
    
    
    $
    1,802As a percent of total loans and leases
    
    
    1.51
    %
    
    
    1.70
    %
    
    
    1.51
    %
  The Bank considers a loan impaired when it is probable that all interest
and principal will not be collected in accordance with the contractual
terms of the loan agreement. Consistent with this definition, all
nonaccrual (with the exception of residential mortgages and consumer loans)
are considered impaired. Information pertaining to impaired, nonaccrual
and delinquent loans is as follows (000s omitted): 2003
    
    2002Impaired loans without a valuation allowance
    
    $
    
    
    
    $
    Impaired loans with a valuation allowance
    
    
    1,475
    
    
    
    708Total impaired loans
    
    $
    1,475
    
    
    $
    708Valuation allowance related to impaired loans
    
    $
    249
    
    
    $
    98Total nonaccrual loans
    
    $
    1,475
    
    
    $
    708Total loans past due 90 days or more and still accruing
    
    $
    
    
    
    $
    424
 2003
    
    2002
    
    2001Average investment in impaired loans
    
    $
    1,785
    
    
    $
    578
    
    
    $
    513Interest income recognized
on impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    Interest income recognized
on a cash basis on impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    
 37




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 5 - Direct Financing Leases  The following lists the components of the net investment in direct
financing leases
(000s omitted): 2003
    
    2002Minimum lease payments receivable
    
    $
    17,091
    
    
    $
    15,051Estimated residual values of leased
property (unguaranteed)
    
    
    3,258
    
    
    
    2,148Less unearned income
    
    
    (2,604
    )
    
    
    (2,503
    )Net investment in direct
financing leases
    
    $
    17,745
    
    
    $
    14,696
  The following is a schedule by years of minimum future payments on direct
financing leases as of December 31, 2003 (000s omitted): 2004
    
    $
    5,6102005
    
    
    4,2532006
    
    
    3,2302007
    
    
    2,4672008
    
    
    1,086Thereafter
    
    
    445Total
    
    $
    17,091
 Note 6 - Bank Premises and Equipment  A summary of the cost and accumulated depreciation of premises and
equipment at
December 31, 2003 and 2002 consisted of the following: 2003
    
    2002Buildings and improvements
    
    $
    385
    
    
    $
    385Furniture and equipment
    
    
    1,379
    
    
    
    1,205Total
    
    
    1,764
    
    
    
    1,590Less accumulated depreciation
    
    
    1,210
    
    
    
    1,002Net carrying amount
    
    $
    554
    
    
    $
    588
  Depreciation expense for the years ended December 31, 2003, 2002, and 2001
amounted to approximately $209,000, $209,000 and $241,000, respectively. 38




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 7 - Deposits  The following is a summary of the distribution of deposits at December 31,
2003 and
2002 (000s omitted): 2003
    
    2002Noninterest-bearing - Demand
    
    $
    7,946
    
    
    $
    5,244Interest-bearing:NOW accounts
    
    $
    8,740
    
    
    $
    10,249Savings
    
    
    211
    
    
    
    158Money market demand
    
    
    27,489
    
    
    
    28,602Time:$100,000 and over
    
    
    48,982
    
    
    
    50,408Under $100,000
    
    
    20,625
    
    
    
    25,581Total interest-bearing
    
    $
    106,047
    
    
    $
    114,998
  The remaining maturities of time deposits at December 31, 2003 are as
follows (000s omitted): Under
    
    $100,000 and$100,000
    
    Over2004
    
    $
    13,791
    
    
    $
    12,7322005
    
    
    2,670
    
    
    
    15,8002006
    
    
    3,546
    
    
    
    18,1532007
    
    
    534
    
    
    
    2,2972008
    
    
    84
    
    
    
    Total
    
    $
    20,625
    
    
    $
    48,982
 Note 8 - Note Payable - Bank  The Corporation has a $3,000,000 line of credit with a bank that
expires in March 2004. Interest is charged at the prime rate (4
percent at December 31, 2003). The line is collateralized by the
stock of the Corporation. There were no outstanding advances on the
line of credit at December 31, 2003. There was $200,000 outstanding
on the line of credit at December 31, 2002. 39




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 9 - Federal Home Loan Bank Advances  Advances from the Federal Home Loan Bank of Indianapolis,
collateralized by mortgage loans under a blanket collateral
agreement, consist of the following as of December 31(000s
omitted): 2003Fixed Rate
    
    Floating Rate
    
    TotalDue in 2004
    
    $
    7,500
    
    
    $
    4,000
    
    
    $
    11,500Due in 2005
    
    
    
    
    
    
    
    
    
    
    Due in 2006
    
    
    
    
    
    
    
    
    
    
    Due in 2007
    
    
    
    
    
    
    
    
    
    
    Due in 2008
    
    
    1,000
    
    
    
    
    
    
    
    1,000Thereafter
    
    
    2,000
    
    
    
    
    
    
    
    2,000Total FHLB advances
    
    $
    10,500
    
    
    $
    4,000
    
    
    $
    14,500
  At December 31, 2003, the interest rates on fixed rate advances
ranged from 1.16 percent to 5.22 percent. At December 31, 2003,
the weighted average interest rates on fixed-rate advances was 2.82
percent. At December 31, 2003, the interest rate on all variable
rate advances was 1.11 percent. The advances are subject to
prepayment penalties subject to the provisions and conditions of
the credit policy of the Federal Home Loan Bank. Note 10 - Income Taxes  Michigan Heritage Bancorp, Inc. and its subsidiary file a
consolidated federal income tax return. The following is a summary
of the provision for income taxes for the years ended December 31
(000s omitted): 2003
    
    2002
    
    2001Current
    
    $
    220
    
    
    $
    243
    
    
    $
    (642
    )Deferred
    
    
    370
    
    
    
    340
    
    
    
    658Net income tax expense
    
    $
    590
    
    
    $
    583
    
    
    $
    16
 40




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 10 - Income Taxes (Continued)  The following is a reconciliation of the statutory federal income
tax expense to the effective tax expense for the years ended
December 31 (000s omitted): 2003
    
    2002
    
    2001Income tax at statutory rate
    
    $
    629
    
    
    $
    624
    
    
    $
    43Tax-exempt interest
    
    
    (35
    )
    
    
    (30
    )
    
    
    (26
    )Other
    
    
    (4
    )
    
    
    (11
    )
    
    
    (1
    )Net income tax expense
    
    $
    590
    
    
    $
    583
    
    
    $
    16
  The temporary differences that comprise deferred tax assets and
liabilities at December 31 are as follows (000s omitted): 2003
    
    2002
    
    2001Deferred tax assets:Provision for credit losses
    
    $
    441
    
    
    $
    501
    
    
    $
    464Minimum tax credits
    
    
    220
    
    
    
    
    
    
    
    Deferred fees
    
    
    31
    
    
    
    30
    
    
    
    44Net operating loss carryforward
    
    
    130
    
    
    
    
    
    
    
    Other
    
    
    39
    
    
    
    26
    
    
    
    25Total deferred tax assets
    
    
    861
    
    
    
    557
    
    
    
    533Valuation allowance
for deferred tax assets
    
    
    
    
    
    
    
    
    
    
    Deferred tax liabilities:Lease financing
    
    
    (1,522
    )
    
    
    (951
    )
    
    
    (594
    )Unrealized gain on securities
    
    
    (145
    )
    
    
    (225
    )
    
    
    (75
    )Depreciation
    
    
    (37
    )
    
    
    (45
    )
    
    
    (46
    )Installment sale
    
    
    (55
    )
    
    
    
    
    
    
    Original issue discount
    
    
    (155
    )
    
    
    (110
    )
    
    
    (99
    )Other
    
    
    (14
    )
    
    
    (3
    )
    
    
    (6
    )Total deferred tax liabilities
    
    
    (1,928
    )
    
    
    (1,334
    )
    
    
    (820
    )Net deferred tax liability
    
    $
    (1,067
    )
    
    $
    (777
    )
    
    $
    (287
    )
 41




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 11 - Related Party Transactions  Included in professional fees are expenses related to services
performed by certain directors of approximately $162,000, $138,000
and $107,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. Included in the computation of interest income and
gain on sale of loans and leases are amounts paid for broker and
transaction fees performed by a company owned by a certain
director. These fees approximated $463,000, $194,000 and $75,000
for the years ended December 31, 2003, 2002 and 2001. Note 12 - Operating Lease  The Corporation has entered into lease commitments for office buildings.
Rental expense charged to operations was $423,000, $345,000 and $349,000
for the years ended December 31, 2003, 2002 and 2001, respectively. The
future minimum lease payments are as follows (000s omitted): 2004
    
    $
    3642005
    
    
    4012006
    
    
    4032007
    
    
    4072008
    
    
    410
 Note 13 - Stock Option Plans  The Corporation has two stock option plans. Options may be granted
to certain directors and employees at not less than the market
price of the Corporations stock on the date of the grant. The
options granted before 2001 were cancelled effective March 2001.
The options granted in November 2001 were immediately exercisable.
Under the director plan, a maximum of 66,000 options to purchase shares may be granted that expire in 10 years, subject to certain
cancellation provisions related to service. Under the employee
plan, a maximum of 44,000 options to purchase shares may be granted
that expire in 10 years, subject to certain cancellation provisions
related to employment. 42




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##### Table of Contents



Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 13 - Stock Option Plans (Continued)  The following table summarizes stock option transactions and the
related average exercise prices for the last three years: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Average
    
    Number
    
    Average
    
    Number
    
    Averageof
    
    Exercise
    
    of
    
    Exercise
    
    of
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOptions outstanding at
beginning of year
    
    
    99,000
    
    
    $
    5.00
    
    
    
    108,600
    
    
    $
    5.00
    
    
    
    96,700
    
    
    $
    9.14Options cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96,700
    )
    
    
    (9.14
    )Options granted
    
    
    6,000
    
    
    
    8.25
    
    
    
    
    
    
    
    
    
    
    
    108,600
    
    
    
    5.00Options exercised
    
    
    (2,200
    )
    
    
    6.48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    
    
    
    
    (9,600
    )
    
    
    5.00
    
    
    
    
    
    
    
    Options outstanding at end
of year
    
    
    102,800
    
    
    
    5.16
    
    
    
    99,000
    
    
    
    5.00
    
    
    
    108,600
    
    
    
    5.00Exercisable at end of year
    
    
    102,800
    
    
    
    5.16
    
    
    
    99,000
    
    
    
    5.00
    
    
    
    108,600
    
    
    
    5.00
  Information pertaining to options outstanding at December 31, 2003, is as
follows: Number
    
    Weighted AverageExercise
    
    Outstanding and
    
    RemainingPrice
    
    Exercisable
    
    Contractual Life$     5.00
    
    
    97,800
    
    
    7.8 years8.25
    
    
    5,000
    
    
    9.2 years
 Note 14 - Employee Benefit Plans  The Bank has a 401(k) plan that is a defined contribution savings
plan for employees. Employer contributions are discretionary and
are determined annually by the Board of Directors. Employer
contributions were $40,000, $24,000 and $22,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. 43




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 15 - Financial Instruments  The fair value of a financial instrument is the current amount that
would be exchanged between willing parties, other than in a forced
liquidation. Fair value is best determined based upon quoted market
prices. However, in many instances, there are no quoted market
prices for the Corporations various financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument. SFAS 107
excludes all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value
of the Corporation.  The following methods and assumptions were used by the Corporation
in estimating fair value disclosures for financial instruments:Cash and Cash Equivalents- The carrying amounts of cash and
short-term instruments approximate fair values due to their short
maturity.  Securities- Fair values for securities, excluding Federal Reserve
Bank stock and Federal Home Loan Bank stock, are based on quoted
market prices. The carrying value of Federal Reserve Bank stock and
Federal Home Loan Bank stock approximates fair value based on the
redemption provisions of the Federal Reserve Bank and Federal Home
Loan Bank, respectively.  Loan and Lease Receivables- For variable-rate loans and leases
that reprice frequently and with no significant change in credit
risk, fair values are based on carrying values. Fair values for
certain mortgage loans (e.g., one-to-four family residential) and
other consumer loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. Fair values for
other loans and leases (e.g., commercial real estate and investment
property mortgage loans, direct finance leases, commercial and
industrial loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans
and leases with similar terms to borrowers of similar credit
quality. Fair values for non-performing loans and leases are
estimated using discounted cash flow analyses or underlying
collateral values, where
applicable.Loans Held for Sale- Fair values of mortgage loans held for sale
are based on commitments on hand from investors or prevailing
market prices. 44




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 15 - Financial Instruments (Continued)  Deposits- The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and certain
types of money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their
carrying amounts). The carrying amounts of variable-rate, fixed
term money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.  Short-term Borrowings- The carrying amounts of federal funds
purchased maturing within 90 days approximate their fair values.  FHLB Advances- The fair values of the Corporations long-term
borrowings are estimated using discounted cash flow analyses based
on the Corporations current incremental borrowing rates for
similar types of borrowing arrangements.  Accrued Interest- The carrying amounts of accrued interest
receivable and payable approximate fair value due to the short
maturity of such instruments.Off Balance Sheet Instruments- The
fair value of loan commitments, based on discounted cash flow
analyses, is not material.  The estimated fair values and related carrying or notional amounts
of the Corporations financial instruments at December 31 are as
follows: 2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and equivalents
    
    $
    2,602
    
    
    $
    2,602
    
    
    $
    10,986
    
    
    $
    10,986Securities
    
    
    24,248
    
    
    
    24,248
    
    
    
    19,050
    
    
    
    19,050Loans and leases
    
    
    115,509
    
    
    
    116,230
    
    
    
    116,431
    
    
    
    118,151Loans held for sale
    
    
    
    
    
    
    
    
    
    
    3,136
    
    
    
    3,136Interest receivable
    
    
    657
    
    
    
    657
    
    
    
    712
    
    
    
    712Liabilities:Deposits
    
    
    113,993
    
    
    
    115,245
    
    
    
    120,242
    
    
    
    121,791Note payable - Bank
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    200Short-term borrowings
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    4,000FHLB advances
    
    
    14,500
    
    
    
    14,973
    
    
    
    12,500
    
    
    
    12,942Interest payable
    
    
    239
    
    
    
    239
    
    
    
    288
    
    
    
    288
 45




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 16  Off Balance Sheet Activities  Credit-related Financial Instruments- The Corporation is a party
to credit-related financial instruments with off balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
extend credit, standby letters of credit, and commercial letters of
credit. Such commitments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheet.  The Corporations exposure to credit loss is represented by the
contractual amount of these commitments. The Corporation follows
the same credit policies in making commitments as it does for
on-balance-sheet instruments.  Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The
commitments for equity lines of credit may expire without being
drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of
collateral obtained, if it is deemed necessary by the Corporation,
is based on managements credit evaluation of the customer.  Unfunded commitments under commercial lines of credit, revolving
credit lines, and overdraft protection agreements are commitments
for possible future extensions of credit to existing customers.
These lines of credit are collateralized and may not be drawn upon
to the total extent to which the Corporation is committed.  Commercial and standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance
of a customer to a third party. Those letters of credit are
primarily used to support public and private borrowing
arrangements. Essentially all letters of credit issued have
expiration dates within one year. The Corporation generally holds
collateral supporting those commitments if deemed necessary.  Collateral Requirements- To reduce credit risk related to the use
of credit-related financial instruments, the Corporation might deem
it necessary to obtain collateral. The amount and nature of the
collateral obtained is based on the Corporations credit evaluation
of the customer.
Collateral held varies but may include cash, securities, accounts
receivable, inventory, property, plant and equipment, and real
estate. 46




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 16  Off Balance Sheet Activities (Continued)  If the counterparty does not have the right and ability to redeem
the collateral or if the Corporation is permitted to sell or
repledge the collateral on short notice, the Corporation records
the collateral in its balance sheet at fair value with a
corresponding obligation to return it.  At December 31, 2003 and 2002, the following financial instruments
were outstanding whose contract amounts represent credit risk (000s
omitted): Contract Amount2003
    
    2002Commitments to grant loans and leases
    
    $
    20,530
    
    
    $
    4,458Unfunded commitments under lines of credit
    
    
    16,014
    
    
    
    8,793Commercial and standby letters of credit
    
    
    116
    
    
    
    50
 Note 17 - Legal Contingencies  Various legal claims also arise from time to time in the normal
course of business, which, in the opinion of management, will have
no material effect on the Corporations consolidated financial
statements. Note 18 - Restrictions on Dividends, Loans, and Advances  Banking regulations place certain restrictions on dividends paid
and loans or advances made by the Bank to the Corporation. The
total amount of dividends that may be paid at any date is generally
limited to the retained earnings of the Bank. However, dividends
paid by the Bank would be prohibited if the effect thereof would
cause the Banks capital to be reduced below applicable minimum
standards. At December 31, 2003, the Banks retained earnings
available for the payment of dividends totaled $2,659,000.
Accordingly, $12,350,000 of the Corporations investment in the
Bank was restricted at December 31, 2003.Loans or advances made by
the Bank to the Corporation are generally limited to 10 percent of
the Banks capital stock and surplus. Accordingly, at December 31,
2003, Bank funds available for loans or advances to the Corporation
amounted to $1,207,000. 47




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 19 - Regulatory Matters  The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and
discretionary actions by regulators that could have a direct
material effect on the Banks financial statements. Under capital
adequacy guidelines, the Bank must meet specific capital guidelines
that involve quantitative measures of the Banks assets,
liabilities, and certain off balance sheet items as calculated
under regulatory accounting practices.  Normally, to be considered adequately capitalized, the Bank must
maintain a total capital ratio of 4.0 percent. As of December 31,
2003, the most recent notification from the FDIC categorized the
Bank as well-capitalized under the regulatory framework. The
regulations define well-capitalized levels of total capital, Tier
1, and Tier 1 leverage as 10 percent, 6 percent, and 5 percent,
respectively. There are no conditions or events since that
notification that management believes have changed the Banks
capital category.  Capital and risk-based capital and leverage ratios for the Bank are
shown below: RatioAmount
    
    (Percent)December 31, 2003Consolidated:Total capital (to risk-weighted assets)
    
    $
    16,465
    
    
    
    13.1Tier 1 capital (to risk-weighted assets)
    
    
    14,895
    
    
    
    11.9Tier 1 capital (to average assets)
    
    
    14,895
    
    
    
    10.3Michigan Heritage Bank:Total capital (to risk-weighted assets)
    
    
    16,300
    
    
    
    13.0Tier 1 capital (to risk-weighted assets)
    
    
    14,730
    
    
    
    11.8Tier 1 capital (to average assets)
    
    
    14,730
    
    
    
    10.5December 31, 2002Consolidated:Total capital (to risk-weighted assets)
    
    $
    15,177
    
    
    
    12.2Tier 1 capital (to risk-weighted assets)
    
    
    13,620
    
    
    
    11.0Tier 1 capital (to average assets)
    
    
    13,620
    
    
    
    9.2Michigan Heritage Bank:Total capital (to risk-weighted assets)
    
    
    15,254
    
    
    
    12.3Tier 1 capital (to risk-weighted assets)
    
    
    13,698
    
    
    
    11.1Tier 1 capital (to average assets)
    
    
    13,698
    
    
    
    9.5
 48




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 20 - Parent-Only Financial Statements  The following condensed financial information presents the
financial condition of Michigan Heritage Bancorp, Inc. (the
Parent) only, along with the results of its operations and its
cash flows. The Parent has recorded its investment in the Bank at
cost, less the undistributed income of the Bank since it was
formed. The Parent recognizes undistributed earnings of the Bank as
noninterest income (expense). The Parent-only financial information
should be read in conjunction with the Corporations consolidated
financial statements.  The condensed balance sheet at December 31 is as follows (000s
omitted): 2003
    
    2002AssetsCash and Cash EquivalentsCash and deposits at subsidiary bank
    
    $
    32
    
    
    $
    37Interest-bearing deposits with other banks
    
    
    6
    
    
    
    13Total cash and cash equivalents
    
    
    38
    
    
    
    50Investment in Subsidiary
    
    
    15,009
    
    
    
    14,134Interest Receivable and Other Assets
    
    
    129
    
    
    
    93Total assets
    
    $
    15,176
    
    
    $
    14,277Liabilities and Stockholders EquityLiabilities
    
    $
    
    
    
    $
    220Stockholders EquityCommon stock - No par value
    
    
    13,744
    
    
    
    13,730Retained earnings (Accumulated deficit)
    
    
    1,152
    
    
    
    (109
    )Accumulated other comprehensive income
    
    
    280
    
    
    
    436Total stockholders equity
    
    
    15,176
    
    
    
    14,057Total liabilities and stockholders equity
    
    $
    15,176
    
    
    $
    14,277
 49




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 20 - Parent-Only Financial Statements (Continued)  The condensed statement of operations for the years ended December
31, 2003 and 2002 is as follows (000s omitted): 2003
    
    2002Operating Income- Dividends from
subsidiary bank
    
    $
    300
    
    
    $
    Operating Expense
    
    
    106
    
    
    
    158Income (Loss)- Before income taxes and equity in
undistributed income of subsidiary
    
    
    194
    
    
    
    (158
    )Income Tax Benefit
    
    
    (36
    )
    
    
    (54
    )Income (Loss)- Before equity in undistributed income
of subsidiary
    
    
    230
    
    
    
    (104
    )Equity in Undistributed Income of Subsidiary
    
    
    1,031
    
    
    
    1,356Net Income
    
    $
    1,261
    
    
    $
    1,252
 50




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Michigan Heritage Bancorp, Inc. Notes to Consolidated Financial Statements
December 31, 2003 and 2002 Note 20 - Parent-Only Financial Statements (Continued)  The condensed statement of cash flows for the years ended December
31, 2003 and 2002 is as follows: (000s omitted) 2003
    
    2002Cash Flows from Operating ActivitiesNet income
    
    $
    1,261
    
    
    $
    1,252Adjustments to reconcile net income to net
cash from operating activities:Equity in income of subsidiary
    
    
    (1,031
    )
    
    
    (1,356
    )Increase in other assets
    
    
    (36
    )
    
    
    (41
    )Increase (decrease) in other liabilities
    
    
    (220
    )
    
    
    220Net cash provided by (used in)
operating activities
    
    
    (26
    )
    
    
    75Cash Flows from Investing Activities- Investment
in bank subsidiary
    
    
    
    
    
    
    (70
    )Cash Flows from Financing Activities- Exercise of
stock options
    
    
    14
    
    
    
    Net Increase (Decrease) in Cash and Cash
Equivalents
    
    
    (12
    )
    
    
    5Cash and Cash Equivalents- Beginning of year
    
    
    50
    
    
    
    45Cash and Cash Equivalents- End of year
    
    $
    38
    
    
    $
    50
 51




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SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 8, 2004. MICHIGAN HERITAGE BANCORP, INC.By: /s/ Anthony S. AlbaneseAnthony S. Albanese, President
 In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities indicated on March 8, 2004. Signature
    
    Capacity/s/ Richard Zamojski
    
    Chairman and Director (principal executive officer)Richard Zamojski/s/ Anthony S. Albanese
    
    President and Director (principal operating officer)Anthony S. Albanese/s/ Thomas Debolski
    
    Treasurer and Secretary (principal financial officer)Thomas Debolski/s/ H. Perry Driggs
    
    Vice-Chairman and DirectorH. Perry Driggs/s/ Lewis N. George
    
    DirectorLewis N. George/s/ Phillip R. Harrison
    
    DirectorPhillip R. Harrison/s/ Frank A. Scerbo
    
    DirectorFrank A. Scerbo/s/ Philip Sotiroff
    
    DirectorPhilip Sotiroff
 52




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EXHIBIT INDEX Exhibit No.
    
    Description11
    
    Computation of Earnings Per Share31.1
    
    Rule 13a-14(a)/15d-14(a) certification31.2
    
    Rule 13a-14(a)/15d-14(a) certification32.1
    
    Section 1350 certification32.2
    
    Section 1350 certification
 53