##### 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, 2001

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:
$11,681,000

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 27, 2002 was $8,858,146.

As of February 27, 2002, there were 1,488,764shares 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 2001 Annual Meeting of
Shareholders to be held April 18, 2001, to the extent expressly so stated
herein, are incorporated by reference into Part III of this Report.





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TABLE OF CONTENTS



|                                            |                                                                                                                          |  |  |  |  |  |  | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I                                     
|                                            | Item 1. Description of Business.                                                                                        
|                                            | Item 2. Description of Properties.                                                                                      
|                                            | Item 3. Legal Proceedings.                                                                                              
|                                            | Item 4. Submission of Matters to a Vote of Security Holders.                                                            
|PART II                                    
|                                            | Item 5. Market for Common Stock and Related Stockholder Matters.                                                        
|                                            | Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations.                          
|                                            | Item 7. Financial Statements.                                                                                           
|                                            | Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.                           
|PART III                                   
|                                            | Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.
|                                            | Item 10. Executive Compensation.                                                                                        
|                                            | Item 11. Security Ownership of Certain Beneficial Owners and Management.                                                
|                                            | Item 12. Certain Relationships and Related Transactions.                                                                
|                                            | Item 13. Exhibits, List and Reports on Form 8-K.                                                                        
|SIGNATURES                                 
|EXHIBIT INDEX                              
|EX-11 Statement Re: Computation of Earnings



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##### Table of Contents



TABLE OF CONTENTS

|              |  |                                                                                             |  |     
|------------- |  | ------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                             |  | Page
|              |  |                                                                                             |  |     
|PART I        |  |                                                                                             |  |     
|Item 1        |  | Description of Business                                                                     |  | 2   
|Item 2        |  | Description of Properties                                                                   |  | 7   
|Item 3        |  | Legal Proceedings                                                                           |  | 7   
|Item 4        |  | Submission of Matters to a Vote of Security Holders                                         |  | 7   
|PART II       |  |                                                                                             |  |     
|Item 5        |  | Market for Common Stock and Related Stockholder Matters                                     |  | 8   
|Item 6        |  | Managements Discussion and Analysis                                                        |  | 9   
|Item 7        |  | Financial Statements                                                                        |  | 17  
|Item 8        |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure        |  | 17  
|PART III      |  |                                                                                             |  |     
|Item 9        |  | Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) |  | 18  
|Item 10       |  | Executive Compensation                                                                      |  | 18  
|Item 11       |  | Security Ownership of Certain Beneficial Owners and Management                              |  | 18  
|Item 12       |  | Certain Relationships and Related Transactions                                              |  | 18  
|Item 13       |  | Exhibits, List and Reports on Form 8-K                                                      |  | 18  
|Signatures    |  |                                                                                             |  | 48  
|Exhibit Index |  |                                                                                             |  | 49  

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. 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.

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##### Table of Contents






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. Michigan Heritage 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 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 main office in the rapidly developing Haggerty
Road corridor in the southeast corner of Novi, Michigan. The Bank leases and
has renovated a former bank branch building. 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 branch office is leased with leasehold improvements of
approximately $80,000. Furniture and equipment purchased for the new location
was approximately $50,000.

The headquarters for both the Company and the Bank was relocated to the
northeast area of Farmington Hills in December 1999. Leasehold improvements,
furniture and equipment for the new headquarters were approximately $400,000.
The Bank entered into a 15 year lease 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.
Furniture and equipment purchased for the new location was approximately
$24,000.

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 October 2001, the Bank, upon receiving regulatory approval, designated the
Farmington Hills branch as its new principal main office and the former main
office located in Novi was designated as a branch office.

2



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Lending

The Banks lending activities include commercial equipment leases, direct
financing leases, commercial loans, commercial real estate loans, 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 period ended December 31, 2001,
impaired loans and leases were $840,000. Specific allowances for impaired
credits were $170,000 at year-end 2001. Management believes the total specific
allowances for impaired credits will adequately provide for expected
charge-offs.

The general downturn in the economy exacerbated by the tragic events of
September 11 has, in managements opinion, required a higher loan loss
provision of $877,000 for 2001 as compared to $60,000 in 2000. Of the $877,000
loan loss provision expensed in 2001, $283,000 was allocated for a national
retailer credit. While this loan is currently performing satisfactorily,
deterioration in its financial condition has occurred which management believes
warrants the additional reserve.

Management is not aware of any other potential problem loans or leases which
could have a material effect on the Banks operating results, liquidity, or
capital resources. Furthermore, except as noted, 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, 2001 and 2000, by category of credit.

|                                       |                        |      |                           |         |  |   |        |        | 
|-------------------------------------- | ---------------------- | ---- | ------------------------- | ------- |  | - | ------ | ------ | 
|                                       |                        |      | ($ in 000s)              
|                                       |                        |      | Amount as of December 31,
|                                       |                        |      |                          
|Type of Loan or Lease                  |                        | 2001 |                           | 2000   
|                                       |                        |      |                           |        
|Commercial, financial and agricultural |                        | $    | 84,817                    |         |  | $ | 76,804 |       
|Real estate construction              |                        |      | 3,870                     |         |  |   | 2,985  |       
|Real estate mortgage                  |                        |      | 15,709                    |         |  |   | 11,349 |       
|Home equity                            |                        |      | 4,611                     |         |  |   | 1,865  |       
|Installment loans to individuals       |                        |      | 373                       |         |  |   | 301    |       
|Lease financing                        |                        |      | 9,985                     |         |  |   | 1,833  |       
|                                       |                        |      |                           |         |  |   |        |       
|                                       | Total loans and leases |      | $                         | 119,365 |  |   | $      | 95,137 | 
|                                       |                        |      |                           |         |  |   |        |       

The Bank has made only domestic loans.

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##### Table of Contents



Allowance for Credit Losses

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.

|                                                                                   |  |                           |         |      |  |  |        |  
|---------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  |  | ------ | -
|                                                                                   |  | ($ in 000s)              
|                                                                                   |  | Amount as of December 31,
|                                                                                   |  |                          
|                                                                                   |  | 2001                      |         | 2000
|                                                                                   |  |                           |         |     
|Average loans and leases outstanding                                               |  |                           | 106,090 |      |  |  | 85,789 |  
|Total loans and leases at year end                                                 |  |                           | 119,365 |      |  |  | 95,137 |  
|Allowance for credit losses at beginning of
period                                 |  |                           | 1,887   |      |  |  | 1,987  |  
|Provision charged to expense                                                       |  |                           | 877     |      |  |  | 60     |  
|Loan and lease charge-offs during the period                                       |  |                           | 964     |      |  |  | 160    |  
|Loan and lease recoveries during the period                                        |  |                           | 2       |      |  |  | 0      |  
|Allowance for credit losses at end of year                                         |  |                           | 1,802   |      |  |  | 1,887  |  
|Ratio of net charge-offs during the period to
average loans and leases outstanding |  |                           | 0.91    | %    |  |  | 0.19   | %
|Allowance for credit losses as a percentage
of loans and leases at period end      |  |                           | 1.51    | %    |  |  | 1.98   | %
|Specific allowance for impaired loans and
leases                                   |  |                           | 170     |      |  |  | 124    |  
|Unallocated allowance                                                              |  |                           | 1,632   |      |  |  | 1,763  |  
|Total allowance for credit losses                                                  |  |                           | 1,802   |      |  |  | 1,887  |  

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.

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Deposits

The following summarizes certain information regarding deposits with the Bank.

|                                                        |                |        |                                 |          |      |        |             |          |      |   |        |        |  |  |      |      | 
|------------------------------------------------------- | -------------- | ------ | ------------------------------- | -------- | ---- | ------ | ----------- | -------- | ---- | - | ------ | ------ |  |  | ---- | ---- | 
|                                                        |                |        |                                 |          |      |        | ($ in 000s) |          |      |   |       
|                                                        |                |        | For the Year Ended December 31,
|                                                        |                |        |                                
|                                                        |                |        | 2001                            |          | 2000
|                                                        |                |        |                                 |          |     
|                                                        |                |        | Average                         |          | Rate |        | Average     |          | Rate
|Type of Deposit                                         |                | Amount |                                 | Paid (%) |      | Amount |             | Paid (%)
|                                                        |                |        |                                 |          |      |        |             |         
|Noninterest bearing demand deposits                     |                | $      | 2,560                           |          |      |        | 0.00        |          |      | $ | 1,858  |        |  |  | 0.00 |     
|Interest bearing checking and
and money market deposits |                |        | 12,274                          |          |      |        | 3.85        |          |      |   | 9,084  |        |  |  | 4.58 |     
|Savings deposits                                        |                |        | 48                              |          |      |        | 2.08        |          |      |   | 19     |        |  |  | 3.00 |     
|Time deposits                                           |                |        | 92,004                          |          |      |        | 6.01        |          |      |   | 86,251 |        |  |  | 6.14 |     
|                                                        |                |        |                                 |          |      |        |             |          |      |   |        |        |  |  |      |     
|                                                        | Total deposits |        | $                               | 106,886  |      |        |             | 5.62     |      |   | $      | 97,212 |  |  |      | 5.88 | 
|                                                        |                |        |                                 |          |      |        |             |          |      |   |        |        |  |  |      |     

The Bank has no foreign banking offices.

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,                       |  | 2001                              |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                                       |  |                                   |         |      |  |      |         |      |  |     
|Net interest income before provision for credit
losses |  | $                                 | 4,614   |      |  | $    | 4,083   |      |  | $    | 3,403   |   |  | $ | 2,440   |   |  | $ | 896    |  
|Net income (loss)                                      |  | $                                 | 110     |      |  | $    | 504     |      |  | $    | 475     |   |  | $ | (113    | ) |  | $ | (602   | )
|Net income (loss) per diluted
share of common stock    |  | $                                 | 0.07    |      |  | $    | 0.34    |      |  | $    | 0.36    |   |  | $ | (0.09   | ) |  | $ | (0.57  | )
|Cash dividends declared per
common share of stock      |  |                                   |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |       |  
|Dividend payout ratio                                  |  |                                   | n/a     |      |  |      | n/a     |      |  |      | n/a     |   |  |   | n/a     |   |  |   | n/a    |  
|Total assets at year-end                               |  | $                                 | 143,529 |      |  | $    | 120,568 |      |  | $    | 108,887 |   |  | $ | 100,267 |   |  | $ | 51,438 |  
|Total stockholders equity at year-end                 |  | $                                 | 12,514  |      |  | $    | 12,323  |      |  | $    | 11,718  |   |  | $ | 10,041  |   |  | $ | 10,145 |  
|Total average assets                                   |  | $                                 | 126,101 |      |  | $    | 110,036 |      |  | $    | 102,935 |   |  | $ | 74,321  |   |  | $ | 26,220 |  
|Total average stockholders equity                     |  | $                                 | 12,659  |      |  | $    | 12,010  |      |  | $    | 10,566  |   |  | $ | 10,358  |   |  | $ | 8,591  |  
|Return on average total assets                         |  |                                   | 0.09    | %    |  |      | 0.46    | %    |  |      | 0.46    | % |  |   | -0.15   | % |  |   | -2.30  | %
|Return on average stockholders equity                 |  |                                   | 0.87    | %    |  |      | 4.20    | %    |  |      | 4.50    | % |  |   | -1.09   | % |  |   | -7.01  | %
|Average equity to average assets                       |  |                                   | 10.04   | %    |  |      | 10.91   | %    |  |      | 10.26   | % |  |   | 13.94   | % |  |   | 32.77  | %

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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, 2001, the Company employed 36 people on a full-time basis at
the Bank. Over the next 12 months, management does not expect to appreciably
add additional full-time people to the Bank. The Bank has retained Harrison
Capital Corporation to assist in managing MHB Leasing, Inc. on a contractual
basis.

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.

6



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##### Table of Contents



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
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 could the Bank.




Item 2. Description of Properties.

The Bank leases a 3,000 square foot building at 21211 Haggerty Road, Novi,
Michigan 48375 originally for use as its main office but in 2001 the Novi
location was designated a branch office. The Company also used the same
building as its headquarters from inception until December 1999. The lease
term extends until June 30, 2002, at an annual rent of $45,000. The building
was originally built in 1988 to be a bank branch and has one drive-up window
and three drive-up bays. The building has substantial on-site parking. There
is one entrance/exit on Haggerty Road as well as a rear exit to Orchard Hill
Place. Access to the main office is available to Oakland and Wayne County
residents by using I-275, I-96, I-696, and Grand River Avenue. A renewed lease
is currently being negotiated by management.

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 lease extends until January 18, 2004, at an annual rent of $32,000. The
branch has two teller windows, two customer service desks, a mutual funds room,
and a conference room.

The Bank signed a 15 year lease for approximately 10,000 square feet for a new
headquarters in Farmington Hills, Michigan which was 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 two
teller windows, two customer service desks, a mutual funds room, and a
conference room. There were minimal leasehold improvements for the branch.
Additional equipment for the branch was approximately $24,000.

During 2001, the Bank leased approximately 2,500 square feet of office space at
33312 Grand River, Farmington, MI 48336 for its newly formed mortgage division
at an annual cost of $25,800. The lease was on a month-to-month basis, and in
February 2002, the mortgage division was relocated to the Novi branch office.

All of the Banks facilities are in good physical condition.




Item 3. Legal Proceedings.

None




Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

7



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##### Table of Contents






PART II




Item 5. Market for Common Stock 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 72 holders of record as of December 31, 2001.
Included among the 72 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. There were no cash
dividends paid during 2001 and 2000.

The Company completed a rights offering to existing shareholders in October
1999. Up to 500,000 shares of common stock were offered for sale in order to
contribute additional capital to Michigan Heritage Bank. The shares were
offered for a limited period of time exclusively to shareholders of Michigan
Heritage Bancorp, Inc. at $6.00 per share. Shareholders were entitled to
purchase one share for each three shares they owned on July 14, 1999. The
common stock offering to existing shareholders began on July 30, 1999 and ended
on October 1, 1999. A total of 223,765 shares of common stock were sold
resulting in $1,248,000 in additional capital after payment of offering
expenses. The number of shares of common stock now outstanding after the
rights offering is 1,488,764.

The following sets forth the quarterly high and low bid price per share
during each of the four quarters in 2001 and 2000. These quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission, and may
not represent actual transactions.

|     |  |             |  |            
|---- |  | ----------- |  | -----------
|     |  |             |  | High/Low   
|     |  |             |  |            
|2001 |  | 4th Quarter |  | $6.00/$5.00
|     |  | 3rd Quarter |  | $6.00/$5.20
|     |  | 2nd Quarter |  | $5.25/$4.25
|     |  | 1st Quarter |  | $5.63/$4.00
|    
|2000 |  | 4th Quarter |  | $4.38/$3.94
|     |  | 3rd Quarter |  | $4.88/$3.94
|     |  | 2nd Quarter |  | $5.50/$3.13
|     |  | 1st Quarter |  | $4.88/$3.25

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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, Michigan
Heritage Bank opened for business. As of December 31, 2001, the Bank has been
operational almost 58 months and has completed its fourth full fiscal year of
operations.

Results of Operations

Year 2001 Compared to Year 2000

The Company earned $110,000 in net profits for 2001, a $394,000 reduction from
2000 which was primarily the result of $817,000 additional credit loss
provisions expensed during 2001 compared to 2000. Management believes that the
additional credit loss provisions in 2001 were necessary to adequately provide
for an estimate of inherent losses in the exiting loan and lease portfolio at
2001 year end. The additional credit loss provisions were offset partially by
an increase in net interest income before credit losses of $531,000 or 13% to
$4,614,000. The increase resulted from earning asset growth and a lower cost
of funds. Also, other income increased $651,000 due mostly to additional gains
on mortgage loans sold. Other expenses increased by $976,000 primarily due to
increases in commissions, loan and lease expenses, and number of employees.
Provision for federal income taxes applicable to operating income decreased
$217,000. Quarterly net results for 2001 were net profits of $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.

Year 2000 Compared to Year 1999

The Company earned $504,000 in net profits for 2000, a $29,000 improvement over
1999. Net interest income after provision for credit losses increased by
$1,692,000 or 73% to $4,023,000 for 2000 due to increases in both the volume
and net interest margin of average earning assets and a reduction in the
provision for credit loss expense. Other income decreased by $1,933,000 to
$177,000 due primarily to reductions in operating lease rental income, gain on
sale of the operating lease equipment, and gain on sale of loans and leases.
Other expenses decreased by $215,000 to $3,463,000. Increases in salaries and
employee benefits and occupancy expense were more than offset by reductions in
depreciation of property on operating lease and provision of other asset
losses. Quarterly net profits for 2000 were $130,000, $123,000, $117,000, and
$134,000 for the first, second, third, and fourth quarters, respectively.
Quarterly net profits for 1999 were $114,000, $120,000, $111,000, and $130,000
for the first, second, third, and fourth quarters, respectively.

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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 2001, 2000, and 1999. Total operating income is
net interest income after provision for credit losses plus other operating
income. The addition of 223,765 shares of common stock from a rights offering
of common stock completed in October 1999 affected net earnings per share in
the fourth quarter of 1999.

|                            |             |   |                                       |       |      |   |       |       |  |   |       |     | 
|--------------------------- | ----------- | - | ------------------------------------- | ----- | ---- | - | ----- | ----- |  | - | ----- | --- | 
|                            |             |   | ($ in 000s Except per Share Earnings)
|                            |             |   |                                      
|                            |             |   | 2001                                  |       | 2000 |   | 1999 
|                            |             |   |                                       |       |      |   |      
|Net Interest Income Before  |             |   |                                       |       |      |   |       |       |  |   |       |    
|Provision for Credit Losses |             |   |                                       |       |      |   |       |       |  |   |       |    
|                            |             |   |                                       |       |      |   |       |       |  |   |       |    
|                            | 1st Quarter |   | $                                     | 1,033 |      |   | $     | 980   |  |   | $     | 854 | 
|                            | 2nd Quarter |   |                                       | 1,067 |      |   |       | 1,039 |  |   |       | 857 | 
|                            | 3rd Quarter |   |                                       | 1,163 |      |   |       | 1,000 |  |   |       | 827 | 
|                            | 4th Quarter |   |                                       | 1,351 |      |   |       | 1,064 |  |   |       | 865 | 
|                            |             |   |                                       |       |      |   |       |       |  |   |       |    
|Total Net Interest Income   |             | $ | 4,614                                 |       |      | $ | 4,083 |       |  | $ | 3,403 |    
|                            |             |   |                                       |       |      |   |       |       |  |   |       |    

|                       |             |   |       |       |  |   |       |       |  |   |       |       | 
|---------------------- | ----------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|Total Operating Income |             |   |       |       |  |   |       |       |  |   |       |      
|                       |             |   |       |       |  |   |       |       |  |   |       |      
|                       | 1st Quarter |   | $     | 1,190 |  |   | $     | 1,006 |  |   | $     | 1,031 | 
|                       | 2nd Quarter |   |       | 1,253 |  |   |       | 1,052 |  |   |       | 956   | 
|                       | 3rd Quarter |   |       | 1,072 |  |   |       | 1,027 |  |   |       | 1,188 | 
|                       | 4th Quarter |   |       | 1,050 |  |   |       | 1,115 |  |   |       | 1,266 | 
|                       |             |   |       |       |  |   |       |       |  |   |       |      
|Total Operating Income |             | $ | 4,565 |       |  | $ | 4,200 |       |  | $ | 4,441 |      
|                       |             |   |       |       |  |   |       |       |  |   |       |      

|                        |             |   |     |      |   |   |     |     |  |   |     |     | 
|----------------------- | ----------- | - | --- | ---- | - | - | --- | --- |  | - | --- | --- | 
|Consolidated Net Income |             |   |     |      |   |   |     |     |  |   |     |    
|                        |             |   |     |      |   |   |     |     |  |   |     |    
|                        | 1st Quarter |   | $   | 130  |   |   | $   | 130 |  |   | $   | 114 | 
|                        | 2nd Quarter |   |     | 103  |   |   |     | 123 |  |   |     | 120 | 
|                        | 3rd Quarter |   |     | (18  | ) |   |     | 117 |  |   |     | 111 | 
|                        | 4th Quarter |   |     | (105 | ) |   |     | 134 |  |   |     | 130 | 
|                        |             |   |     |      |   |   |     |     |  |   |     |    
|Total Net Income        |             | $ | 110 |      |   | $ | 504 |     |  | $ | 475 |    
|                        |             |   |     |      |   |   |     |     |  |   |     |    

|                                    |             |   |      |       |   |   |      |      |  |   |      |      | 
|----------------------------------- | ----------- | - | ---- | ----- | - | - | ---- | ---- |  | - | ---- | ---- | 
|Net Earnings (Loss) per Share       |             |   |      |       |   |   |      |      |  |   |      |     
|                                    |             |   |      |       |   |   |      |      |  |   |      |     
|                                    | 1st Quarter |   | $    | 0.09  |   |   | $    | 0.09 |  |   | $    | 0.09 | 
|                                    | 2nd Quarter |   |      | 0.06  |   |   |      | 0.08 |  |   |      | 0.09 | 
|                                    | 3rd Quarter |   |      | (0.01 | ) |   |      | 0.08 |  |   |      | 0.09 | 
|                                    | 4th Quarter |   |      | (0.07 | ) |   |      | 0.09 |  |   |      | 0.09 | 
|                                    |             |   |      |       |   |   |      |      |  |   |      |     
|Total Net Earnings (Loss) per Share |             | $ | 0.07 |       |   | $ | 0.34 |      |  | $ | 0.36 |     
|                                    |             |   |      |       |   |   |      |      |  |   |      |     

Return on Average Equity and Average Assets

For 2001, the return on average equity was 0.87% compared to 4.20% for 2000 and
4.50% for 1999. The return for average assets for 2001 was 0.09% and 0.46% for
both 2000 and 1999. 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.

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##### Table of Contents



Balance Sheet Comparisons at Year End2001 Compared to 2000

The Companys total assets at December 31, 2001 were $143,529,000 compared to
$120,568,000 at the end of 2000, an increase of $22,961,000 or 19%. Gross
loans and leases increased by $24,228,000 or 25% to $119,365,000 at the end of
2001. The loan and lease increase was funded mostly by deposits and borrowed
funds. Deposits increased by $4,592,000 or 4% to a 2001 year-end balance of
$111,252,000. Federal Home Loan Bank borrowings were $13,500,000 and federal
funds purchased were $5,000,000 at 2001 year end. Federal funds borrowed at
the end of 2000 were $500,000 and there were no Federal Home Loan Bank
borrowings at 2000 year end. Cash and cash equivalents were $6,732,000 at the
end of 2001, a decrease of $5,920,000 from 2000 year end. The $5,920,000
decrease was comprised mostly of interest bearing deposits with banks and
federal funds sold which were reallocated to higher yielding investments, loans
and leases.

As of December 31, 2001, the Bank had reserves for possible credit losses of
1.51% of gross loans and leases outstanding. During 2001, management provided
an additional $283,000 in reserves for a national retailer credit with an
outstanding balance of $873,000 as of March 5, 2002. While currently
performing satisfactorily, deterioration in its financial condition has
occurred which, in managements opinion, warrants the additional reserves. The
national retailer is making efforts to restructure itself in an extremely
competitive environment and stressed economy. In addition, the current
downturn in both the economy in general and the local automotive industry in
particularboth exacerbated by the tragic events of September 11together with
net charge-offs during the year have been taken into account by management
while reviewing the adequacy of credit loss reserves. Furthermore, outstanding
gross loans and leases have increased $24,228,000 requiring additional
reserves. As a result, management has provided, in addition to the $283,000
for the national retailer credit stated above, an additional $594,000 in
reserves during 2001. Management believes that the resulting $1,802,000 credit
reserve at year-end 2001 is adequate relative to the overall quality of the
loan and lease portfolio.

At 2001 year end, specific allowances of $170,000 were allocated for impaired
loans and leases classified by management of $840,000. At the end of 2000,
specific allowances of $124,000 were allocated for impaired loans and leases
classified by management of $265,000. During 2001, there were $962,000 in net
charge-offs. In 2000, there were $160,000 in net charge-offs and in 1999,
there were $901,000 in net charge-offs primarily due to a single customer
situation. There were no charge-offs during 1998 or 1997.

The Banks loan and lease portfolio at the end of 2001 and 2000 by category and
as a percentage of total loans and leases outstanding is summarized below.

|                            |                        |             |              |         |      |             |      |       |   |   |        |        |      |  |      |       |  
|--------------------------- | ---------------------- | ----------- | ------------ | ------- | ---- | ----------- | ---- | ----- | - | - | ------ | ------ | ---- |  | ---- | ----- | -
|                            |                        |             | ($ in 000s) 
|                            |                        |             | December 31,
|                            |                        |             |             
|                            |                        |             | 2001         |         | 2000
|                            |                        |             |              |         |     
|                            |                        |             |              |         |      |             | % of |       |   |   |        |        | % of
|Type of Loan or Lease       |                        | Outstanding |              | Total   |      | Outstanding |      | Total
|                            |                        |             |              |         |      |             |      |      
|Commercial loans discounted |                        | $           | 44,780       |         |      |             | 37.4 | %     |   | $ | 56,937 |        |      |  | 59.9 | %    
|Commercial loans direct     |                        |             | 2,844        |         |      |             | 2.4  | %     |   |   | 5,091  |        |      |  | 5.4  | %    
|Commercial lines of credit  |                        |             | 13,465       |         |      |             | 11.3 | %     |   |   | 6,691  |        |      |  | 7.0  | %    
|Commercial construction    |                        |             | 4,203        |         |      |             | 3.5  | %     |   |   |       |        |      |  | 0.0  | %    
|Commercial real estate      |                        |             | 19,525       |         |      |             | 16.4 | %     |   |   | 8,085  |        |      |  | 8.5  | %    
|Real estate construction   |                        |             | 3,870        |         |      |             | 3.2  | %     |   |   | 2,985  |        |      |  | 3.1  | %    
|Real estate mortgage       |                        |             | 15,709       |         |      |             | 13.2 | %     |   |   | 11,349 |        |      |  | 11.9 | %    
|Home equity                 |                        |             | 4,611        |         |      |             | 3.9  | %     |   |   | 1,865  |        |      |  | 2.0  | %    
|Installment loans and other |                        |             | 373          |         |      |             | 0.3  | %     |   |   | 301    |        |      |  | 0.3  | %    
|Lease financing             |                        |             | 9,985        |         |      |             | 8.4  | %     |   |   | 1,833  |        |      |  | 1.9  | %    
|                            |                        |             |              |         |      |             |      |       |   |   |        |        |      |  |      |      
|                            | Total loans and leases |             | $            | 119,365 |      |             |      | 100.0 | % |   | $      | 95,137 |      |  |      | 100.0 | %
|                            |                        |             |              |         |      |             |      |       |   |   |        |        |      |  |      |      

Loans and leases were funded primarily by deposits consisting mostly of time
deposits which represented 80% of total deposits at 2001 year end compared to
91% of total deposits at 2000 year end. Additional loan and lease information
can be found elsewhere in this report in the Notes to Consolidated Financial
Statements.

11



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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, 2001,
2000, and 1999. Net interest income for 2001 increased $531,000 or 13% to
$4,614,000. Net interest income for 2000 increased $680,000 or 20% to
$4,083,000 compared to $3,403,000 for 1999.

|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |      |      | 
|----------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------ | ----- | -------- | ------- | ---- | ----- | ------- | ------ | -------- | ---- | ---- | ---- | ------- | ----- | -------- | ------- | ------- | ----- | ------- | ----- |  | ---- | ------ | ---- | - | ----- | ------ | ------- | ------- | ----- | ----- | ----- |  | ---- | ---- | ---- | 
|Consolidated Average Balance Sheets                         |                                                        | 2001                                       |       | 2000     |         | 1999
|and Analysis
of Net Interest Income                         |                                                        |                                            |       |          |         |     
|(Taxable Equivalent
Basis)                                  |                                                        |                                            |       |          |         |      |       |         |        | Average  |      |      |      |         |       |          |         |         |       | Average |       |  |      |        |      |   |       |        |         | Average
|For the Years Ended
December 31,                            |                                                        | Average                                    |       |          |         |      |       | Yield/  |        | Average  |      |      |      |         |       | Yield/   |         | Average |       |         |       |  |      | Yield/
|($ in 000s)                                                 |                                                        | Balance                                    |       | Interest |         | Rate |       | Balance |        | Interest |      | Rate |      | Balance |       | Interest |         | Rate   
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |        
|Assets                                                      |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|                                                            | Interest bearing balances in other banks               |                                            | $     | 2,189    |         |      | $     | 96      |        |          |      | 4.39 | %    |         | $     | 3,398    |         |         | $     | 211     |       |  |      | 6.21   | %    |   | $     | 3,574  |         |         | $     | 182   |       |  |      | 5.09 | %   
|                                                            | Federal funds sold                                     |                                            |       | 2,194    |         |      |       | 109     |        |          |      | 4.97 |      |         |       | 6,556    |         |         |       | 408     |       |  |      | 6.22   |      |   |       | 8,156  |         |         |       | 409   |       |  |      | 5.01 |     
|                                                            | Investment securities                                  |                                            |       | 13,113   |         |      |       | 788     |        |          |      | 6.01 |      |         |       | 13,243   |         |         |       | 866     |       |  |      | 6.54   |      |   |       | 5,872  |         |         |       | 322   |       |  |      | 5.48 |     
|                                                            | Loans and leases, net                                  |                                            |       | 106,090  |         |      |       | 9,768   |        |          |      | 9.21 |      |         |       | 85,789   |         |         |       | 8,310   |       |  |      | 9.69   |      |   |       | 82,523 |         |         |       | 7,473 |       |  |      | 9.06 |     
|                                                            | Loans held for sale                                    |                                            |       | 1,091    |         |      |       | 92      |        |          |      | 8.39 |      |         |       |         |         |         |       |         |       |  |      |        |      |   |       |       |         |         |       |       |       |  |      |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|                                                            |                                                        | Total earning assets                       |       |          | 124,677 |      |       |         | 10,853 |          |      |      | 8.70 |         |       |          | 108,986 |         |       |         | 9,795 |  |      |        | 8.99 |   |       |        | 100,125 |         |       |       | 8,386 |  |      |      | 8.38 | 
|                                                            | Cash and due from banks                                |                                            |       | 1,054    |         |      |       |         |        |          |      |      |      |         |       | 945      |         |         |       |         |       |  |      |        |      |   |       | 811    |         |         |       |       |       |  |      |      |     
|                                                            | Allowance for credit losses                            |                                            |       | (1,773   | )       |      |       |         |        |          |      |      |      |         |       | (1,988   | )       |         |       |         |       |  |      |        |      |   |       | (1,682 | )       |         |       |       |       |  |      |      |     
|                                                            | Operating lease equipment, net                         |                                            |       |         |         |      |       |         |        |          |      |      |      |         |       |         |         |         |       |         |       |  |      |        |      |   |       | 1,831  |         |         |       |       |       |  |      |      |     
|                                                            | Other assets                                           |                                            |       | 2,143    |         |      |       |         |        |          |      |      |      |         |       | 2,093    |         |         |       |         |       |  |      |        |      |   |       | 1,850  |         |         |       |       |       |  |      |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|                                                            |                                                        | Total assets                               |       | $        | 126,101 |      |       |         |        |          |      |      |      |         |       | $        | 110,036 |         |       |         |       |  |      |        |      |   |       | $      | 102,935 |         |       |       |       |  |      |      |      | 
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Liabilities and Stockholders Equity                        |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|                                                            | Interest on checking and
Money market deposit accounts |                                            | $     | 12,274   |         |      | $     | 473     |        |          |      | 3.85 | %    |         | $     | 9,084    |         |         | $     | 416     |       |  |      | 4.58   | %    |   | $     | 8,001  |         |         | $     | 360   |       |  |      | 4.50 | %   
|                                                            | Savings deposits                                       |                                            |       | 48       |         |      |       | 1       |        |          |      | 2.08 |      |         |       | 19       |         |         |       | 1       |       |  |      | 3.00   |      |   |       | 36     |         |         |       | 1     |       |  |      | 2.78 |     
|                                                            | Other time deposits less than $100,000                 |                                            |       | 49,694   |         |      |       | 2,952   |        |          |      | 5.94 |      |         |       | 57,831   |         |         |       | 3,487   |       |  |      | 6.03   |      |   |       | 60,059 |         |         |       | 3,362 |       |  |      | 5.60 |     
|                                                            | Time deposits $100,000 and greater                     |                                            |       | 42,310   |         |      |       | 2,581   |        |          |      | 6.10 |      |         |       | 28,420   |         |         |       | 1,808   |       |  |      | 6.36   |      |   |       | 21,982 |         |         |       | 1,259 |       |  |      | 5.73 |     
|                                                            | Borrowed funds                                         |                                            |       | 5,769    |         |      |       | 232     |        |          |      | 4.02 |      |         |       | 4        |         |         |       | 0       |       |  |      | 6.88   |      |   |       | 14     |         |         |       | 1     |       |  |      | 5.25 |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|                                                            |                                                        | Total interest bearing liabilities         |       |          | 110,095 |      |       |         | 6,239  |          |      |      | 5.67 |         |       |          | 95,358  |         |       |         | 5,712 |  |      |        | 5.99 |   |       |        | 90,092  |         |       |       | 4,983 |  |      |      | 5.53 | 
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|                                                            | Other deposits, non-interest bearing                   |                                            |       | 2,560    |         |      |       |         |        |          |      |      |      |         |       | 1,858    |         |         |       |         |       |  |      |        |      |   |       | 1,670  |         |         |       |       |       |  |      |      |     
|                                                            | Other liabilities                                      |                                            |       | 787      |         |      |       |         |        |          |      |      |      |         |       | 810      |         |         |       |         |       |  |      |        |      |   |       | 607    |         |         |       |       |       |  |      |      |     
|                                                            | Stockholders equity                                   |                                            |       | 12,659   |         |      |       |         |        |          |      |      |      |         |       | 12,010   |         |         |       |         |       |  |      |        |      |   |       | 10,566 |         |         |       |       |       |  |      |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|                                                            |                                                        | Total liabilities and stockholders equity |       | $        | 126,101 |      |       |         |        |          |      |      |      |         |       | $        | 110,036 |         |       |         |       |  |      |        |      |   |       | $      | 102,935 |         |       |       |       |  |      |      |      | 
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Net interest income                                         |                                                        |                                            |       |          |         | $    | 4,614 |         |        |          |      |      |      |         |       |          |         | $       | 4,083 |         |       |  |      |        |      |   |       |        |         | $       | 3,403 |       |       |  |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Net interest rate spread                                    |                                                        |                                            |       |          |         |      |       |         |        |          | 3.03 | %    |      |         |       |          |         |         |       |         |       |  | 3.00 | %      |      |   |       |        |         |         |       |       |       |  | 2.85 | %   
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Cost of earning assets                                      |                                                        |                                            |       |          |         |      |       |         |        |          | 5.00 | %    |      |         |       |          |         |         |       |         |       |  | 5.24 | %      |      |   |       |        |         |         |       |       |       |  | 4.98 | %   
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Net interest margin                                         |                                                        |                                            |       |          |         |      |       |         |        |          | 3.70 | %    |      |         |       |          |         |         |       |         |       |  | 3.75 | %      |      |   |       |        |         |         |       |       |       |  | 3.40 | %   
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Net interest-earning assets to
interest-bearing liabilities |                                                        |                                            | 113   | %        |         |      |       |         |        |          |      |      |      |         | 114   | %        |         |         |       |         |       |  |      |        |      |   | 111   | %      |         |         |       |       |       |  |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Net income after taxes                                      |                                                        | $                                          | 110   |          |         |      |       |         |        |          |      |      |      | $       | 504   |          |         |         |       |         |       |  |      |        |      | $ | 475   |        |         |         |       |       |       |  |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Return on equity                                            |                                                        |                                            | 0.87  | %        |         |      |       |         |        |          |      |      |      |         | 4.20  | %        |         |         |       |         |       |  |      |        |      |   | 4.50  | %      |         |         |       |       |       |  |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Return on assets                                            |                                                        |                                            | 0.09  | %        |         |      |       |         |        |          |      |      |      |         | 0.46  | %        |         |         |       |         |       |  |      |        |      |   | 0.46  | %      |         |         |       |       |       |  |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Dividend payout ratio                                       |                                                        |                                            |      | %        |         |      |       |         |        |          |      |      |      |         |      | %        |         |         |       |         |       |  |      |        |      |   |      | %      |         |         |       |       |       |  |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     
|Equity to assets ratio                                      |                                                        |                                            | 10.04 | %        |         |      |       |         |        |          |      |      |      |         | 10.91 | %        |         |         |       |         |       |  |      |        |      |   | 10.26 | %      |         |         |       |       |       |  |      |     
|                                                            |                                                        |                                            |       |          |         |      |       |         |        |          |      |      |      |         |       |          |         |         |       |         |       |  |      |        |      |   |       |        |         |         |       |       |       |  |      |     

12



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##### Table of Contents



The 3.70% net interest margin for 2001 is a 0.05% or 5 basis points (bps)
decrease from 2000. While the yield on earning assets went down 29 bps in
2001, 8.70% compared to 8.99%, due to a change in mix of earning assets and a
lower rate environment, the cost of earning assets also went down 24 bps, 5.00%
in 2001 compared to 5.24% in 2000. The 24 bps reduction is primarily the
result of (1) certificates of deposits being repriced during 2001 at lower
rates, (2) the Bank utilizing low cost Federal Home Loan Bank borrowings, and
(3) the successful efforts of the Bank to increase the outstanding balances of
checking, escrow, and money market demand accounts by $11,770,000 or 116%,
$21,874,000 compared to $10,104,000 at year-end 2001 and 2000, respectively.

The 3.75% net interest margin for 2000 is a 35 bps increase from the 3.40% net
interest margin for 1999. While the yield on earning assets went up 61 bps in
2000, 8.99% compared to 8.38%, the cost of earning assets also went up 26 bps
to 5.24% in 2000 compared to 4.98% in 1999 primarily due to higher costs of
time deposits in 2000 compared to 1999 The ratio of net interest-bearing assets
to interest-bearing liabilities was 113%, 114%, and 111% for 2001, 2000, and
1999, respectively.

The net interest spread for 2001 of 3.03% increased 3 bps over the 3.00% spread
for 2000. The average yield on earning assets of 8.70% decreased 29 bps from
2000 primarily due to the change in mix of earning assets and a lower rate
environment. The 5.67% cost of interest-bearing liabilities for 2001 decreased
32 bps from 5.99% in 2000 due primarily to higher costing time deposits being
repriced at lower rates in 2001 and new time deposits being acquired at rates
lower than existing time deposits. In addition, the Bank successfully
increased the outstanding balances of lower costing checking, escrow, and money
market demand accounts at 2001 year end by $11,770,000 or 116%.

The net interest spread for 2000 of 3.00% increased 15 bps over the 2.85%
spread for 1999. The 2000 average yield on earning assets of 8.99% increased
61 bps from 1999 primarily due to the change in mix of earning assets and
higher yields. The 5.99% cost of interest-bearing liabilities for 2000
increased 46 bps from 5.53% in 1999 due primarily to higher costing time
deposits in 2000. The cost of interest-bearing liabilities for 2000 and 1999
reflect slightly higher market rates being paid on time deposits. These higher
rates were paid to attract and retain depositors since the Bank was relatively
new.

13



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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 $531,000 net interest income increase in 2001 resulted
primarily from a $676,000 increase due to increases in average balances
partially offset by a $433,000 decrease due to changes in yields received on
earning assets and rates paid on funds provided, and there was a $288,000
increase due to a change in the mix. The $680,000 net interest income increase
in 2000 resulted primarily from a $320,000 increase due to increases in average
balances, $318,000 increase due to changes in yields received on earning
assets and rates paid on funds provided, and a $42,000 increase due to a change
in the mix. Loan and lease fee income included in loan and lease interest
income was $625,000, $501,000, and $276,000 for 2001, 2000, and 1999,
respectively. Average balances of nonaccrual loans and leases for 2001 were
$796,000 which reduced 2001 net interest income by approximately $73,000.
Nonaccrual loans and leases had an insignificant effect on 2000 and 1999 net
interest income due to the average amount of nonaccrual credits being
insignificant for 2000 and 1999.

Analysis of Net Interest Income Changes
(Taxable Equivalent Basis)
($ in 000s)

|                                        |                                                        |                               |   |                       |       |                       |   |      |      |       |   |        |      |            |   |       |       |       |   |      |     |  |   |     |     |  |   |     |    |  |   |     |       | 
|--------------------------------------- | ------------------------------------------------------ | ----------------------------- | - | --------------------- | ----- | --------------------- | - | ---- | ---- | ----- | - | ------ | ---- | ---------- | - | ----- | ----- | ----- | - | ---- | --- |  | - | --- | --- |  | - | --- | -- |  | - | --- | ----- | 
|                                        |                                                        |                               |   | 2001 Compared to 2000 |       | 2000 Compared to 1999
|                                        |                                                        |                               |   |                       |       |                      
|                                        |                                                        |                               |   | Volume &Yield/Rate    |       | Volume &Yield/Rate   
|                                        |                                                        |                               |   | Volume                |       | Yield/Rate            |   | Mix  |      | Total |   | Volume |      | Yield/Rate |   | Mix   |       | Total
|                                        |                                                        |                               |   |                       |       |                       |   |      |      |       |   |        |      |            |   |       |       |      
|Increase (Decrease) in Interest Income  |                                                        |                               |   |                       |       |                       |   |      |      |       |   |        |      |            |   |       |       |       |   |      |     |  |   |     |     |  |   |     |    |  |   |    
|                                        | Interest bearing balances in other banks               |                               | $ | (75                   | )     |                       | $ | (62  | )    |       | $ | 22     |      |            | $ | (115  | )     |       | $ | (9   | )   |  | $ | 40  |     |  | $ | (2  | )  |  | $ | 29  |      
|                                        | Federal funds sold                                     |                               |   | (271                  | )     |                       |   | (82  | )    |       |   | 54     |      |            |   | (299  | )     |       |   | (80  | )   |  |   | 99  |     |  |   | (20 | )  |  |   | (1  | )    
|                                        | Taxable investment securities                          |                               |   | (9                    | )     |                       |   | (70  | )    |       |   | 1      |      |            |   | (78   | )     |       |   | 404  |     |  |   | 62  |     |  |   | 78  |    |  |   | 544 |      
|                                        | Loans and leases, net                                  |                               |   | 1,966                 |       |                       |   | (411 | )    |       |   | (97    | )    |            |   | 1,458 |       |       |   | 296  |     |  |   | 521 |     |  |   | 20  |    |  |   | 837 |      
|                                        | Loans held for sale                                    |                               |   |                      |       |                       |   |     |      |       |   | 92     |      |            |   | 92    |       |       |   |     |     |  |   |    |     |  |   |    |    |  |   |    |      
|                                        |                                                        |                               |   |                       |       |                       |   |      |      |       |   |        |      |            |   |       |       |       |   |      |     |  |   |     |     |  |   |     |    |  |   |    
|                                        |                                                        | Total interest income change  |   |                       | 1,611 |                       |   |      | (625 | )     |   |        | 72   |            |   |       | 1,058 |       |   |      | 611 |  |   |     | 722 |  |   |     | 76 |  |   |     | 1,409 | 
|Increase (Decrease) in Interest Expense |                                                        |                               |   |                       |       |                       |   |      |      |       |   |        |      |            |   |       |       |       |   |      |     |  |   |     |     |  |   |     |    |  |   |    
|                                        | Interest on checking and
Money market deposit accounts |                               |   | 146                   |       |                       |   | (66  | )    |       |   | (23    | )    |            |   | 57    |       |       |   | 49   |     |  |   | 6   |     |  |   | 1   |    |  |   | 56  |      
|                                        | Savings deposits                                       |                               |   | 1                     |       |                       |   |     |      |       |   | (1     | )    |            |   |      |       |       |   |     |     |  |   |    |     |  |   |    |    |  |   |    |      
|                                        | Other time deposits less than $100,000                 |                               |   | (491                  | )     |                       |   | (52  | )    |       |   | 8      |      |            |   | (535  | )     |       |   | (125 | )   |  |   | 259 |     |  |   | (9  | )  |  |   | 125 |      
|                                        | Time deposits $100,000 and greater                     |                               |   | 883                   |       |                       |   | (74  | )    |       |   | (36    | )    |            |   | 773   |       |       |   | 368  |     |  |   | 139 |     |  |   | 42  |    |  |   | 549 |      
|                                        | Borrowed funds                                         |                               |   | 396                   |       |                       |   |     |      |       |   | (164   | )    |            |   | 232   |       |       |   | (1   | )   |  |   |    |     |  |   |    |    |  |   | (1  | )    
|                                        |                                                        |                               |   |                       |       |                       |   |      |      |       |   |        |      |            |   |       |       |       |   |      |     |  |   |     |     |  |   |     |    |  |   |    
|                                        |                                                        | Total interest expense change |   |                       | 935   |                       |   |      | (192 | )     |   |        | (216 | )          |   |       | 527   |       |   |      | 291 |  |   |     | 404 |  |   |     | 34 |  |   |     | 729   | 
|                                        |                                                        |                               |   |                       |       |                       |   |      |      |       |   |        |      |            |   |       |       |       |   |      |     |  |   |     |     |  |   |     |    |  |   |    
|                                        |                                                        | Net interest income change    |   | $                     | 676   |                       |   | $    | (433 | )     |   | $      | 288  |            |   | $     | 531   |       |   | $    | 320 |  |   | $   | 318 |  |   | $   | 42 |  |   | $   | 680   | 
|                                        |                                                        |                               |   |                       |       |                       |   |      |      |       |   |        |      |            |   |       |       |       |   |      |     |  |   |     |     |  |   |     |    |  |   |    

A time deposit maturity analysis as of December 31, 2001 is presented in the
following table.

|                        |               |                |          |                 |  |                     |        |      |   |        |        |       |  |        |        |      |   |      |        |        |  |        |        |      |   |      |      |  
|----------------------- | ------------- | -------------- | -------- | --------------- |  | ------------------- | ------ | ---- | - | ------ | ------ | ----- |  | ------ | ------ | ---- | - | ---- | ------ | ------ |  | ------ | ------ | ---- | - | ---- | ---- | -
|Time Deposit            |               | Under $100,000 |          | $100,000 & Over |  | Total Time Deposits
|Maturity Analysis       |               |                |          |                 |  |                    
|As of December 31, 2001 |               | Amount         |          | %               |  | Amount              |        | %    |   | Amount |        | %    
|                        |               |                |          |                 |  |                     |        |      |   |        |        |      
|                        |               | Maturing in:   |          |                 |  |                     |        |      |   |        |        |       |  |        |        |      |   |      |        |        |  |        |        |      |   |     
|                        | 3 mos or less |                | $        | 9,223           |  |                     |        | 5.58 | % |        | $      | 7,736 |  |        |        | 6.07 | % |      | $      | 16,959 |  |        |        | 5.80 | %
|                        |               |                |          | 4-6 mos         |  |                     | 7,763  |      |   |        | 5.04   | %     |  |        | 5,735  |      |   |      | 5.47   | %      |  |        | 13,498 |      |   |      | 5.22 | %
|                        |               |                | 7-12 mos |                 |  | 11,849              |        |      |   | 4.65   | %      |       |  | 15,681 |        |      |   | 5.30 | %      |        |  | 27,530 |        |      |   | 5.02 | %   
|Greater than 12 mos     |               |                | 10,524   |                 |  |                     | 5.01   | %    |   |        | 20,751 |       |  |        | 4.91   | %    |   |      | 31,275 |        |  |        | 4.94   | %   
|                        |               |                |          |                 |  |                     |        |      |   |        |        |       |  |        |        |      |   |      |        |        |  |        |        |     
|                        |               |                |          | TOTAL           |  | $                   | 39,359 |      |   |        | 5.04   | %     |  | $      | 49,903 |      |   |      | 5.28   | %      |  | $      | 89,262 |      |   |      | 5.17 | %
|                        |               |                |          |                 |  |                     |        |      |   |        |        |       |  |        |        |      |   |      |        |        |  |        |        |     

14



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##### Table of Contents



The following table summarizes on a consolidated basis, investments as of
December 31, 2001 and 2000. The amortized cost of securities increased by
$2,112,000 or 17% ($14,512,00 for year-end 2001 compared to $12,400,000 for
year-end 2000) and the overall yield at year end decreased 84 bps (5.82% for
2001 compared to 6.66% for 2000). This decrease was primarily due to
reinvesting maturing securities and adding additional volume during 2001 at
lower yields.

Maturities of Securities
December 31, 2001 and December 31, 2000
At Amortized Cost and Taxable Equivalent Basis
($ in 000s)

|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |      |      |  
|---------------------------------- | ----------------------------------------- | -------- | - | ------------ | ----- | ---------- |  | ----------- | ---- | ------------ | - | ----- | ----- | ------ |  | ----- | ---- | ------ | - | ----- | ----- |  |  | ---- | ---- | - | - | - | - |  |  | - | - | - | - | ----- | ------ |  |  | ---- | ---- | -
|                                   |                                           |          |   | Maturity     |       | 1 - 5 Year |  | 6 - 10 Year |      | Over 10 Year |   |       |       |        |  |       |      |       
|                                   |                                           |          |   | Under 1 Year |       | Maturity   |  | Maturity    |      | Maturity     |   | Total
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |      
|December 31, 2001                  |                                           | Amount   |   | Yield        |       | Amount     |  | Yield       |      | Amount       |   | Yield |       | Amount |  | Yield |      | Amount |   | Yield
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |      
|Securities Available for Sale (a): |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |     
|                                   | U.S. Treasury                             |          | $ | 500          |       |            |  | 6.23        | %    |              | $ | 533   |       |        |  | 3.42  | %    |        | $ |      |       |  |  |     | %    |   | $ |  |   |  |  |  | % |   | $ | 1,033 |        |  |  | 4.78 | %   
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |     
|                                   | U.S. Government agencies
and corporations |          |   | 1,748        |       |            |  | 5.79        |      |              |   | 498   |       |        |  | 4.90  |      |        |   |      |       |  |  |     |      |   |   |  |   |  |  |  |   |   |   | 2,246 |        |  |  | 5.59 |     
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |     
|                                   | States and political
subdivisions         |          |   |             |       |            |  |            |      |              |   | 3,014 |       |        |  | 5.96  |      |        |   | 1,810 |       |  |  | 6.38 |      |   |   |  |   |  |  |  |   |   |   | 4,824 |        |  |  | 6.12 |     
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |     
|                                   | Other bonds, notes and
debentures         |          |   | 502          |       |            |  | 7.18        |      |              |   | 2,813 |       |        |  | 5.56  |      |        |   |      |       |  |  |     |      |   |   |  |   |  |  |  |   |   |   | 3,315 |        |  |  | 5.81 |     
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |     
|                                   |                                           | Subtotal |   |              | 2,750 |            |  |             | 6.13 |              |   |       | 6,858 |        |  |       | 5.52 |        |   |       | 1,810 |  |  |      | 6.38 |   |   |   |  |  |  |   |  |   |   |       | 11,418 |  |  |      | 5.80 |  
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |     
|                                   | Mortgage backed
securities (b)            |          |   |             |       |            |  |            |      |              |   |      |       |        |  |      |      |        |   |      |       |  |  |     |      |   |   |  |   |  |  |  |   |   |   | 2,089 |        |  |  | 5.55 |     
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |     
|                                   |                                           | Total    |   | $            | 2,750 |            |  |             | 6.13 | %            |   | $     | 6,858 |        |  |       | 5.52 | %      |   | $     | 1,810 |  |  |      | 6.38 | % |   |   |  |  |  |   |  | % |   | $     | 13,507 |  |  |      | 5.76 | %
|                                   |                                           |          |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |       |  |  |      |      |   |   |   |   |  |  |   |   |   |   |       |        |  |  |     

|                                   |                                           |        |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |     |  |  |      |      |   |   |       |       |  |  |      |      |   |   |       |        |  |  |      |      |  
|---------------------------------- | ----------------------------------------- | ------ | - | ------------ | ----- | ---------- |  | ----------- | ---- | ------------ | - | ----- | ----- | ------ |  | ----- | ---- | ------ | - | ----- | --- |  |  | ---- | ---- | - | - | ----- | ----- |  |  | ---- | ---- | - | - | ----- | ------ |  |  | ---- | ---- | -
|                                   |                                           |        |   | Maturity     |       | 1 - 5 Year |  | 6 - 10 Year |      | Over 10 Year |   |       |       |        |  |       |      |       
|                                   |                                           |        |   | Under 1 Year |       | Maturity   |  | Maturity    |      | Maturity     |   | Total
|                                   |                                           |        |   |              |       |            |  |             |      |              |   |      
|December 31, 2000                  |                                           | Amount |   | Yield        |       | Amount     |  | Yield       |      | Amount       |   | Yield |       | Amount |  | Yield |      | Amount |   | Yield
|                                   |                                           |        |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |      
|Securities Available for Sale (a): |                                           |        |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |     |  |  |      |      |   |   |       |       |  |  |      |      |   |   |       |        |  |  |     
|                                   | U.S. Treasury                             |        | $ | 501          |       |            |  | 6.23        | %    |              | $ | 500   |       |        |  | 6.23  | %    |        | $ |      |     |  |  |     | %    |   | $ |      |       |  |  |     | %    |   | $ | 1,001 |        |  |  | 6.23 | %   
|                                   |                                           |        |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |     |  |  |      |      |   |   |       |       |  |  |      |      |   |   |       |        |  |  |     
|                                   | U.S. Government agencies
and corporations |        |   | 3,490        |       |            |  | 6.44        |      |              |   | 1,249 |       |        |  | 6.51  |      |        |   |      |     |  |  |     |      |   |   | 1,000 |       |  |  | 6.50 |      |   |   | 5,739 |        |  |  | 6.47 |     
|                                   |                                           |        |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |     |  |  |      |      |   |   |       |       |  |  |      |      |   |   |       |        |  |  |     
|                                   | States and political
subdivisions         |        |   | 200          |       |            |  | 7.15        |      |              |   | 1,176 |       |        |  | 6.97  |      |        |   | 852   |     |  |  | 6.96 |      |   |   | 170   |       |  |  | 7.04 |      |   |   | 2,398 |        |  |  | 6.99 |     
|                                   |                                           |        |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |     |  |  |      |      |   |   |       |       |  |  |      |      |   |   |       |        |  |  |     
|                                   | Other bonds, notes and
debentures         |        |   | 1,098        |       |            |  | 6.77        |      |              |   | 1,745 |       |        |  | 7.05  |      |        |   |      |     |  |  |     |      |   |   |      |       |  |  |     |      |   |   | 2,843 |        |  |  | 6.94 |     
|                                   |                                           |        |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |     |  |  |      |      |   |   |       |       |  |  |      |      |   |   |       |        |  |  |     
|                                   |                                           | Total  |   | $            | 5,289 |            |  |             | 6.52 | %            |   | $     | 4,670 |        |  |       | 6.80 | %      |   | $     | 852 |  |  |      | 6.96 | % |   | $     | 1,170 |  |  |      | 6.58 | % |   | $     | 11,981 |  |  |      | 6.66 | %
|                                   |                                           |        |   |              |       |            |  |             |      |              |   |       |       |        |  |       |      |        |   |       |     |  |  |      |      |   |   |       |       |  |  |      |      |   |   |       |        |  |  |     



---

|(a) |  | There were no securities Held to Maturity as of December 31, 2001 and
2000. Expected maturities will differ from contractual maturities. Issuers
may have the right to call or prepay obligations.                               
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Mortgage backed securities have monthly principal and interest payments
which may widely vary depending on current and future rates and other
factors influencing mortgage prepayment speeds and are listed here as a
total only.

15



---



##### Table of Contents



Other Income Analysis

For the year 2001, other income increased by $651,000 to $828,000 resulting
mostly from additional gains on loans and leases sold in 2001 of $609,000
primarily from the Banks new mortgage division and a $44,000 gain on
securities sold. Other remaining income decreased $2,000.

For the year 2000, other income decreased by $1,933,000 to $177,000 resulting
primarily from the termination of an operating lease and sale of the related
operating lease equipment in December 1999. In 1999, the Company reported
$1,236,000 of operating lease rental income from this lease and realized a gain
on sale of the equipment of $500,000. Gain on sale of loans and leases also
decreased by $198,000 due to less loans and leases sold in 2000 as compared to
1999 and other income increased by $1,000.

Other Expense Analysis

In 2001, other expenses increased by $976,000 to $4,439,000. Salaries and
employee benefits increased by $633,000 to $2,534,000 due to increases in
mortgage commission expense and 4 net additional employees added in 2001.
Occupancy expense increased by $17,000 to $423,000 due primarily to additional
overhead expenses relating to the new mortgage division formed in 2001.
Equipment expense went up by $19,000 due mostly to additional equipment rent
expense and data processing expense increased by $18,000 mostly due to
increases in volume and software enhancements. Professional fees went up by
$107,000 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 $147,000 mostly due
to the increased volume in mortgage loans and Michigan single business tax went
up by $15,000. Marketing expense went down by $19,000 and remaining
other expenses increased by a net $39,000 due to
increases in correspondent bank fees, ATM processing fees, membership fees, and
other miscellaneous expenses. Federal income taxes decreased by $217,000.

In 2000, other expenses decreased by $215,000 to $3,463,000. Salaries and
employee benefits increased by $528,000 to $1,901,000 due primarily to
increases in commission and employee insurance expense and 7 net additional
employees added in 2000. Occupancy expense increased by $224,000 to $406,000
due to additional overhead expenses relating to the new headquarters the Bank
moved into in December 1999 and the third branch which opened in January 2000.
However, depreciation of property on operating lease decreased by $974,000 due
to the sale of the operating lease equipment in December 1999. Other expenses
increased by a net $7,000. Federal income taxes decreased by $55,000 due
partially to tax exempt income in 2000there was no tax exempt income in 1999.

Liquidity and Capital Resources

The Companys current cash projections indicate adequate cash balances as of
December 31, 2001. The Bank has credit facilities with national lending
institutions to add funding capacity through overnight borrowings. 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 2001. As of December 31,
2001, the Bank had $6,732,000 in cash and cash equivalents including $5,700,000
in federal funds sold. In addition, investment securities with a total market
value of $13,727,000 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 4.0% or 5.0%, respectively. The Banks
Tier 1 leverage ratios were 9.0% and 9.5% at December 31, 2001 and 2000,
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.

16



---



##### 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, LLP, 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.

17



---



##### Table of Contents






PART III




Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.

The information required by this Item is included in the Proxy Statement under
the captions Information about Directors and Nominees as Directors and
Section 16(a) Beneficial Ownership Reporting Compliance 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.

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:
|--- |  | ------------------------------------------------------------------------------------------------

|   |  |                                                                                                                 |  |       
|-- |  | --------------------------------------------------------------------------------------------------------------- |  | ------
|   |  |                                                                                                                 |  | Page  
|   |  |                                                                                                                 |  | Number
|   |  |                                                                                                                 |  |       
|1. |  | Financial Statements:                                                                                           |  |       
|   |  | Report of Independent Auditors                                                                                  |  | 20    
|   |  | Consolidated Balance Sheet at December 31, 2001 and 2000                                                        |  | 21    
|   |  | Consolidated Statement of Changes in Stockholders Equity for the
years ended December 31, 2001, 2000, and 1999 |  | 22    
|   |  | Consolidated Statement of Income for the years ended
December 31, 2001, 2000 and 1999                           |  | 23    
|   |  | Consolidated Statement of Cash Flows for the years ended
December 31, 2001, 2000, and 1999                      |  | 24    
|   |  | Notes to Consolidated Financial Statements                                                                      |  | 25    
|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, 2001.

18



---



##### Table of Contents





|(c) |  | The Exhibits required to be filed as part of this Form 10-K are the following:
|--- |  | ------------------------------------------------------------------------------

|            |  |                                                                                                                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                   
|3.1         |  | 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)             
|11          |  | Computation of Per Share Earnings (filed herewith)                                                                                                                                                                                



---

|* |  | Management contract or compensatory plan or arrangement.
|- |  | --------------------------------------------------------

19



---



##### Table of Contents



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, 2001 and 2000 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, 2001. 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, 2001 and 2000
and the consolidated results of their operations and their cash flows for each
year in the three-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.



| | -s- Plante & Moran, LLP
| | -----------------------

Auburn Hills, Michigan
February 15, 2002

20



---



##### Table of Contents



Michigan Heritage Bancorp, Inc.




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


|                                             |                                                 |                                                                                          |                                            |        |         |             |        |        |         |         |  | 
|-------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ----------- | ------ | ------ | ------- | ------- |  | 
|                                             |                                                 |                                                                                          |                                            |        |         | December 31
|                                             |                                                 |                                                                                          |                                            |        |         |            
|                                             |                                                 |                                                                                          |                                            |        |         | 2001        |        | 2000  
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       
|Assets                                      
|Cash and Cash Equivalents                    |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             | Cash and due from banks                         |                                                                                          | $                                          | 966    |         |             | $      | 1,271  |        
|                                             | Interest-bearing deposits with other banks      |                                                                                          |                                            | 66     |         |             |        | 3,981  |        
|                                             | Federal funds sold                              |                                                                                          |                                            | 5,700  |         |             |        | 7,400  |        
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             |                                                 |                                                                                          | Total cash and cash equivalents            |        |         | 6,732       |        |        |         | 12,652  | 
|Securities Available for Sale(Note 2)        |                                                 |                                                                                          | 13,727                                     |        |         |             | 12,078 |       
|Federal Reserve Bank Stock- At cost          |                                                 |                                                                                          | 330                                        |        |         |             | 325    |       
|Federal Home Loan Bank Stock- At cost        |                                                 |                                                                                          | 675                                        |        |         |             | 94     |       
|Loans and Leases, net(Note 3)                |                                                 |                                                                                          | 117,441                                    |        |         |             | 93,250 |       
|Loans Held for Sale                          |                                                 |                                                                                          | 1,589                                      |        |         |             |       |       
|Bank Premises and Equipment(Note 6)          |                                                 |                                                                                          | 730                                        |        |         |             | 842    |       
|Interest Receivable and Other Assets(Note 9) |                                                 |                                                                                          | 2,305                                      |        |         |             | 1,327  |       
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             |                                                 |                                                                                          | Total assets                               |        | $       | 143,529     |        |        | $       | 120,568 | 
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       
|Liabilities and Stockholders Equity        
|Liabilities                                  |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             | Deposits (Note 7):                              |                                                                                          |                                            |        |         |             |        |        |        
|                                             |                                                 | Interest-bearing                                                                         |                                            | $      | 107,916 |             |        | $      | 104,832 |        
|                                             |                                                 | Noninterest-bearing                                                                      |                                            |        | 3,336   |             |        |        | 1,828   |        
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             |                                                 |                                                                                          | Total deposits                             |        |         | 111,252     |        |        |         | 106,660 | 
|                                             | Short-term borrowings                           |                                                                                          |                                            | 5,000  |         |             |        | 500    |        
|                                             | FHLB Advances (Note 8)                          |                                                                                          |                                            | 13,500 |         |             |        |       |        
|                                             | Interest payable and other liabilities (Note 9) |                                                                                          |                                            | 1,263  |         |             |        | 1,085  |        
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             |                                                 |                                                                                          | Total liabilities                          |        |         | 131,015     |        |        |         | 108,245 | 
|Stockholders Equity                         |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             | Preferred stock  No par value:                 |                                                                                          |                                            |        |         |             |        |        |        
|                                             |                                                 | Authorized - 500,000 shares                                                              |                                            |        |         |             |        |        |         |        
|                                             |                                                 | Issued and outstanding  None                                                            |                                            |        |        |             |        |        |        |        
|                                             | Common stock  No par value :                   |                                                                                          |                                            |        |         |             |        |        |        
|                                             |                                                 | Authorized - 4,500,000 shares
Issued and outstanding - 1,488,764 shares in
2001 and 2000 |                                            |        | 13,730  |             |        |        | 13,730  |        
|                                             | Accumulated deficit                             |                                                                                          |                                            | (1,361 | )       |             |        | (1,471 | )      
|                                             | Accumulated other comprehensive income          |                                                                                          |                                            | 145    |         |             |        | 64     |        
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             |                                                 |                                                                                          | Total stockholders equity                 |        |         | 12,514      |        |        |         | 12,323  | 
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       
|                                             |                                                 |                                                                                          | Total liabilities and stockholders equity |        | $       | 143,529     |        |        | $       | 120,568 | 
|                                             |                                                 |                                                                                          |                                            |        |         |             |        |       

See Notes to Consolidated
Financial Statements.

21



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##### Table of Contents



Michigan Heritage Bancorp, Inc.




Consolidated Statement of Changes in Stockholders Equity
(000s omitted, except per share data)


|                           |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |     |     | 
|-------------------------- | ---------------------------------------------------------------------------------------- | -------------------------- | --------- | ----------- | - | ------- | ------ | ----------- | - | ------------- | ------ | ------------- | - | ----- | --- | ----------- | - | - | ------ | --- | --- | 
|                           |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     | Accumulated |   |   |        |    
|                           |                                                                                          |                            |           | Common      |   |         |        |             |   |               |        |               |   | Other |     | Total      
|                           |                                                                                          |                            |           | Shares      |   | Capital |        | Accumulated |   | Comprehensive |        | Stockholders'
|                           |                                                                                          |                            |           | Outstanding |   | Stock   |        | Deficit     |   | Income (Loss) |        | Equity       
|                           |                                                                                          |                            |           |             |   |         |        |             |   |               |        |              
|Balance- December 31, 1998 |                                                                                          |                            | 1,264,999 |             |   | $       | 12,482 |             |   | $             | (2,450 | )             |   | $     | 9   |             |   | $ | 10,041 |    
|Comprehensive income:      |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |    
|                           | Net income                                                                               |                            |           |            |   |         |        |            |   |               |        | 475           |   |       |     |            |   |   |        | 475 |    
|                           | Change in net unrealized loss
on securities available for
sale, net of tax effect of $24 |                            |           |            |   |         |        |            |   |               |        |              |   |       |     | (46         | ) |   |        | (46 | )  
|                           |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |    
|                           |                                                                                          | Total comprehensive income |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |     | 429 | 
|Issuance of common stock   |                                                                                          |                            | 223,765   |             |   |         | 1,248  |             |   |               |       |               |   |       |    |             |   |   | 1,248  |    
|                           |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |    
|Balance- December 31, 1999 |                                                                                          |                            | 1,488,764 |             |   |         | 13,730 |             |   |               | (1,975 | )             |   |       | (37 | )           |   |   | 11,718 |    
|Comprehensive income:      |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |    
|                           | Net income                                                                               |                            |           |            |   |         |        |            |   |               |        | 504           |   |       |     |            |   |   |        | 504 |    
|                           | Change in net unrealized gain
on securities available for
sale, net of tax effect of $52 |                            |           |            |   |         |        |            |   |               |        |              |   |       |     | 101         |   |   |        | 101 |    
|                           |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |    
|                           |                                                                                          | Total comprehensive income |           |             |  |         |        |             |  |               |        |               |  |       |     |             |  |   |        |     | 605 | 
|                           |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |    
|Balance- December 31, 2000 |                                                                                          |                            | 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 |    
|                           |                                                                                          |                            |           |             |   |         |        |             |   |               |        |               |   |       |     |             |   |   |        |    

See Notes to Consolidated
Financial Statements.

22



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##### Table of Contents



Michigan Heritage Bancorp, Inc.




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


|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |       |       | 
|--------------------------------------------------- | ----------------------------------------------- | ---------------------- | ----- | ---------------------- | ------ | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                                    |                                                 |                        |       | Year Ended December 31
|                                                    |                                                 |                        |       |                       
|                                                    |                                                 |                        |       | 2001                   |        | 2000 |       | 1999 
|                                                    |                                                 |                        |       |                        |        |      |       |      
|Interest Income                                     |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|                                                    | Interest and fees on loans and leases           |                        | $     | 9,407                  |        |      | $     | 8,203 |       |   | $     | 7,403 |      
|                                                    | Interest and dividends on investments  Taxable |                        |       | 712                    |        |      |       | 839   |       |   |       | 321   |      
|                                                    | Interest on tax-exempt securities               |                        |       | 76                     |        |      |       | 27    |       |   |       | 1     |      
|                                                    | Interest on federal funds sold                  |                        |       | 109                    |        |      |       | 408   |       |   |       | 409   |      
|                                                    | Interest on deposits with other banks           |                        |       | 96                     |        |      |       | 211   |       |   |       | 180   |      
|                                                    | Interest on direct financing leases             |                        |       | 453                    |        |      |       | 107   |       |   |       | 72    |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|                                                    |                                                 | Total interest income  |       |                        | 10,853 |      |       |       | 9,795 |   |       |       | 8,386 | 
|Interest Expense                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|                                                    | Interest on deposits                            |                        |       | 6,007                  |        |      |       | 5,712 |       |   |       | 4,983 |      
|                                                    | Interest on borrowed funds                      |                        |       | 232                    |        |      |       |      |       |   |       |      |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|                                                    |                                                 | Total interest expense |       |                        | 6,239  |      |       |       | 5,712 |   |       |       | 4,983 | 
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|Interest Income- Before provision for credit losses |                                                 |                        | 4,614 |                        |        |      | 4,083 |       |       |   | 3,403 |      
|Provision for Credit Losses(Note 4)                 |                                                 |                        | 877   |                        |        |      | 60    |       |       |   | 1,072 |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|Net Interest Income                                 |                                                 |                        | 3,737 |                        |        |      | 4,023 |       |       |   | 2,331 |      
|Other Income                                        |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|                                                    | Service charges on deposit accounts             |                        |       | 109                    |        |      |       | 111   |       |   |       | 110   |      
|                                                    | Operating lease rental income                   |                        |       |                       |        |      |       |      |       |   |       | 1,236 |      
|                                                    | Gain on sale of securities                      |                        |       | 44                     |        |      |       |      |       |   |       |      |      
|                                                    | Gain on sale of loans                           |                        |       | 675                    |        |      |       | 66    |       |   |       | 264   |      
|                                                    | Gain on sale of property on operating lease     |                        |       |                       |        |      |       |      |       |   |       | 500   |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|                                                    |                                                 | Total other income     |       |                        | 828    |      |       |       | 177   |   |       |       | 2,110 | 
|Other Expenses                                      |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|                                                    | Salaries and employee benefits                  |                        |       | 2,534                  |        |      |       | 1,901 |       |   |       | 1,373 |      
|                                                    | Occupancy of bank premises (Note 11)            |                        |       | 423                    |        |      |       | 406   |       |   |       | 182   |      
|                                                    | Processing                                      |                        |       | 107                    |        |      |       | 89    |       |   |       | 60    |      
|                                                    | Marketing                                       |                        |       | 153                    |        |      |       | 172   |       |   |       | 145   |      
|                                                    | Equipment expense                               |                        |       | 248                    |        |      |       | 229   |       |   |       | 177   |      
|                                                    | Depreciation of property on operating lease     |                        |       |                       |        |      |       |      |       |   |       | 974   |      
|                                                    | Professional fees                               |                        |       | 370                    |        |      |       | 263   |       |   |       | 289   |      
|                                                    | Other assets provision                          |                        |       |                       |        |      |       |      |       |   |       | 120   |      
|                                                    | Other loan and lease expenses                   |                        |       | 179                    |        |      |       | 32    |       |   |       | 16    |      
|                                                    | Other expenses                                  |                        |       | 425                    |        |      |       | 371   |       |   |       | 342   |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|                                                    |                                                 | Total other expenses   |       |                        | 4,439  |      |       |       | 3,463 |   |       |       | 3,678 | 
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|Income- Before income taxes                         |                                                 |                        | 126   |                        |        |      | 737   |       |       |   | 763   |      
|Income Tax Expense(Note 9)                          |                                                 |                        | 16    |                        |        |      | 233   |       |       |   | 288   |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|Net Income                                          |                                                 | $                      | 110   |                        |        | $    | 504   |       |       | $ | 475   |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|Basic Earnings per Share                            |                                                 | $                      | 0.07  |                        |        | $    | 0.34  |       |       | $ | 0.36  |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      
|Diluted Earnings per Share                          |                                                 | $                      | 0.07  |                        |        | $    | 0.34  |       |       | $ | 0.36  |      
|                                                    |                                                 |                        |       |                        |        |      |       |       |       |   |       |      

See Notes to Consolidated
Financial Statements

23



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##### Table of Contents



Michigan Heritage Bancorp, Inc.




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


|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |         |       |       |       |  
|---------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------- | ------- | ---------------------- | ------- | ------- | --- | ----- | ------- | ------- | ----- | ----- | ----- | -
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         | Year Ended December 31
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                       
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         | 2001                   |         | 2000    |     | 1999 
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |      
|Cash Flows from Operating Activities                 |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|                                                     | Net income                                                                          |                                               | $                                                                     | 110                                                 |         |                        | $       | 504     |     |       | $       | 475     |      
|                                                     | Adjustments to reconcile net income to net cash from
operating activities:          |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |         |      
|                                                     |                                                                                     | Depreciation and amortization                 |                                                                       |                                                     | 241     |                        |         |         | 234 |       |         |         | 1,139 |      
|                                                     |                                                                                     | Provision for credit losses                   |                                                                       |                                                     | 877     |                        |         |         | 60  |       |         |         | 1,072 |      
|                                                     |                                                                                     | Gain on sale of operating lease equipment     |                                                                       |                                                     |        |                        |         |         |    |       |         |         | (500  | )    
|                                                     |                                                                                     | Gain on sale of equipment                     |                                                                       |                                                     | (4      | )                      |         |         |    |       |         |         |      |      
|                                                     |                                                                                     | Gain on sale of available-for-sale securities |                                                                       |                                                     | (44     | )                      |         |         |    |       |         |         |      |      
|                                                     |                                                                                     | Proceeds from the sale of loans held for sale |                                                                       |                                                     | 38,920  |                        |         |         |    |       |         |         |      |      
|                                                     |                                                                                     | Originations of loans held for sale           |                                                                       |                                                     | (40,509 | )                      |         |         |    |       |         |         |      |      
|                                                     |                                                                                     | Deferred income taxes                         |                                                                       |                                                     | 658     |                        |         |         |    |       |         |         | 150   |      
|                                                     |                                                                                     | Amortization and accretion of securities      |                                                                       |                                                     | 9       |                        |         |         | (82 | )     |         |         | (139  | )    
|                                                     |                                                                                     | Changes in assets and liabilities:            |                                                                       |                                                     |         |                        |         |         |     |       |         |         |       |      
|                                                     |                                                                                     |                                               | (Increase) decrease in accrued interest
receivable and other assets   |                                                     |         | (1,677                 | )       |         |     | (327  | )       |         |       | 28    |      
|                                                     |                                                                                     |                                               | Increase (decrease) in accrued interest payable
and other liabilities |                                                     |         | 178                    |         |         |     | (130  | )       |         |       | 393   |      
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|                                                     |                                                                                     |                                               |                                                                       | Net cash provided by (used in) operating activities |         |                        | (1,241  | )       |     |       | 259     |         |       |       | 2,618 |  
|Cash Flows from Investing Activities                 |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|                                                     | Proceeds from maturities of available-for-sale securities                           |                                               |                                                                       | 6,426                                               |         |                        |         | 7,340   |     |       |         | 23,000  |      
|                                                     | Proceeds from sales of available-for-sale securities                                |                                               |                                                                       | 1,522                                               |         |                        |         |        |     |       |         |        |      
|                                                     | Purchase of available-for-sale securities                                           |                                               |                                                                       | (9,440                                              | )       |                        |         | (10,476 | )   |       |         | (23,641 | )    
|                                                     | Purchase of federal home loan bank stock                                            |                                               |                                                                       | (581                                                | )       |                        |         | (94     | )   |       |         |        |      
|                                                     | Purchase of federal reserve bank stock                                              |                                               |                                                                       | (5                                                  | )       |                        |         | (31     | )   |       |         | (58     | )    
|                                                     | Increase in loans and leases                                                        |                                               |                                                                       | (25,068                                             | )       |                        |         | (13,427 | )   |       |         | (1,170  | )    
|                                                     | Proceeds from sales of operating lease equipment                                    |                                               |                                                                       |                                                    |         |                        |         |        |     |       |         | 1,858   |      
|                                                     | Proceeds from sales of equipment                                                    |                                               |                                                                       | 11                                                  |         |                        |         |        |     |       |         |        |      
|                                                     | Premises and equipment expenditures                                                 |                                               |                                                                       | (136                                                | )       |                        |         | (313    | )   |       |         | (475    | )    
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|                                                     |                                                                                     |                                               |                                                                       | Net cash used in investing activities               |         |                        | (27,271 | )       |     |       | (17,001 | )       |       |       | (486  | )
|Cash Flows from Financing Activities                 |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|                                                     | Net increase (decrease) in interest-bearing and noninterest-bearing
demand accounts |                                               |                                                                       | 11,860                                              |         |                        |         | (3,666  | )   |       |         | 3,953   |      
|                                                     | Net increase (decrease) in time certificates                                        |                                               |                                                                       | (7,268                                              | )       |                        |         | 14,372  |     |       |         | 4,347   |      
|                                                     | Proceeds from short-term borrowings                                                 |                                               |                                                                       | 5,000                                               |         |                        |         | 500     |     |       |         |        |      
|                                                     | Payments on short-term borrowings                                                   |                                               |                                                                       | (500                                                | )       |                        |         |        |     |       |         | (1,750  | )    
|                                                     | Proceeds from FHLB advances                                                         |                                               |                                                                       | 13,500                                              |         |                        |         |        |     |       |         |        |      
|                                                     | Proceeds from public stock offering                                                 |                                               |                                                                       |                                                    |         |                        |         |        |     |       |         | 1,248   |      
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|                                                     |                                                                                     |                                               |                                                                       | Net cash provided by financing activities           |         |                        | 22,592  |         |     |       | 11,206  |         |       |       | 7,798 |  
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|Net Increase (Decrease) in Cash and Cash Equivalents |                                                                                     |                                               | (5,920                                                                | )                                                   |         |                        | (5,536  | )       |     |       | 9,930   |        
|Cash and Cash Equivalents- Beginning of year         |                                                                                     |                                               | 12,652                                                                |                                                     |         |                        | 18,188  |         |     |       | 8,258   |        
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|Cash and Cash Equivalents- End of year               |                                                                                     | $                                             | 6,732                                                                 |                                                     |         | $                      | 12,652  |         |     | $     | 18,188  |        
|                                                     |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|Supplemental Cash Flow and Noncash Information       |                                                                                     |                                               |                                                                       |                                                     |         |                        |         |         |     |       |         |        
|                                                     |                                                                                     | Cash paid for:                                |                                                                       |                                                     |         |                        |         |         |     |       |         |         |       |      
|                                                     |                                                                                     |                                               | Interest                                                              |                                                     | $       | 6,392                  |         |         | $   | 5,445 |         |         | $     | 4,874 |      
|                                                     |                                                                                     |                                               | Income taxes                                                          |                                                     |         | 85                     |         |         |     | 203   |         |         |       | 90    |      

See Notes to Consolidated
Financial Statements

24



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##### Table of Contents



Michigan Heritage Bancorp, Inc.




Notes to Consolidated Financial Statements
December 31, 2001 and 2000


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 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
Michigan Heritage Bancorp, Inc. and its subsidiary 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 real estate and repossessed assets
and deferred tax assets. The 000s have been omitted in tabular
presentations.
|
| |  | Nature of Operations- Michigan Heritage Bank (the Bank) conducts
full-service commercial and consumer banking and provides other
financial products and services through its three branch network to
communities in Wayne and Oakland counties. MHB Leasing, Inc.
originates leases to customers primarily in Michigan. The Bank and
leasing company has a lending concentration to companies who operate
hospitals. Loans and leases to these companies were 10 percent and 19
percent of total loans and leases at December 31, 2001 and 2000,
respectively.                                                                                                                                             
|
| |  | Cash Equivalents- Cash equivalents include cash on hand and amounts
due from banks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | 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 are 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 available-for-sale securities below their cost
that are deemed to be other that 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.                                                                                                                                                                                                                                                                   

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##### Table of Contents



Michigan Heritage Bancorp, Inc.




Notes to Consolidated Financial Statements
December 31, 2001 and 2000


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.                                                                           
|
| |  | 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.                                                                                                                                                                            
|
| |  | 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.

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##### Table of Contents



Michigan Heritage Bancorp, Inc.




Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 1  Summary of Significant Accounting Policies (Continued)



| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Operating Lease- Lease income is recognized straight-line over the
term of the lease as payments are due. Depreciation on leased assets
is computed using the straight-line method over the lease term to the
Banks estimate of the residual value of the property at the end of
the lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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##### Table of Contents



Michigan Heritage Bancorp, Inc.




Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 1  Summary of Significant Accounting Policies (Continued)



| |  | Short-term Borrowings- Short-term borrowings includes federal funds
purchased by the Bank. Federal funds purchased generally mature in
one to four days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Stock Compensation Plans- The Corporation has chosen to measure
compensation cost for employee stock compensation plans using the
intrinsic value method of accounting, whereby compensation cost is
the excess, if any, of the quoted market price of the stock at the
grant date (or other measurement date) over the amount an employee
must pay to acquire the stock. Stock options issued under the
Corporations stock option plan have no intrinsic value at the grant
date, and no compensation cost is recognized for them. The fair
value based method of accounting for employee stock compensation
plans measures compensation cost at the grant date based on the value
of the award and is recognized over the service period, which is
usually the vesting period. The Corporation has provided pro forma
disclosures of net income and earnings per share and other
disclosures, as if the fair value based method of accounting has been
applied.
|
| |  | 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:                                                                                                                                                                                                                                                                                              

|                                  |  |      |           |      |  |      |           |  |  |  |           | 
|--------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                  |  | 2001 |           | 2000 |  | 1999
|                                  |  |      |           |      |  |     
|Average common shares outstanding |  |      | 1,488,764 |      |  |      | 1,488,764 |  |  |  | 1,309,966 | 
|Dilutive impact of stock options  |  |      | 5,564     |      |  |      |          |  |  |  |          | 
|                                  |  |      |           |      |  |      |           |  |  |  |           | 
|Diluted common shares outstanding |  |      | 1,494,328 |      |  |      | 1,488,764 |  |  |  | 1,309,966 | 
|                                  |  |      |           |      |  |      |           |  |  |  |           | 



| |  | Other Comprehensive Income (Loss)- 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 available-for-sale
securities, 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, 2001 and 2000
is comprised solely of unrealized gains on available-for-sale
securities, net of related income taxes.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Michigan Heritage Bancorp, Inc.




Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 1  Summary of Significant Accounting Policies (Continued)



| |  | Recent Accounting Pronoucements- In July 2001, Statement of Financial
Accounting Standards No. 142 Goodwill and Other Intangibles(FAS 142)
was issued. FAS 142 changes the accounting treatment for goodwill
effective January 1, 2002. The Corporation has not recorded any
goodwill or intangible assets, therefore, the adoption of FAS 142 has
no impact on the Corporation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2  Securities

| |                                                                                       
| | --------------------------------------------------------------------------------------
| | The amortized cost and estimated market value of investment securities
are as follows:

|                               |                                                                                       |       |   |           |        |            |   |            |     |        |   |           |    |  |   |       |        | 
|------------------------------ | ------------------------------------------------------------------------------------- | ----- | - | --------- | ------ | ---------- | - | ---------- | --- | ------ | - | --------- | -- |  | - | ----- | ------ | 
|                               |                                                                                       |       |   | 2001     
|                               |                                                                                       |       |   |          
|                               |                                                                                       |       |   |           |        |            |   | Gross      |     | Gross  |   | Estimated
|                               |                                                                                       |       |   | Amortized |        | Unrealized |   | Unrealized |     | Market
|                               |                                                                                       |       |   | Cost      |        | Gains      |   | Losses     |     | Value 
|                               |                                                                                       |       |   |           |        |            |   |            |     |       
|Available-for-sale securities: |                                                                                       |       |   |           |        |            |   |            |     |        |   |           |    |  |   |      
|                               | U.S. Treasury securities and
obligations of U.S. government
corporations and agencies |       | $ | 3,279     |        |            | $ | 47         |     |        | $ | 5         |    |  | $ | 3,321 |       
|                               | Municipal notes                                                                       |       |   | 4,824     |        |            |   | 149        |     |        |   | 26        |    |  |   | 4,947 |       
|                               | Corporate bonds                                                                       |       |   | 3,315     |        |            |   | 68         |     |        |   |          |    |  |   | 3,383 |       
|                               | Mortgage backed securities                                                            |       |   | 2,089     |        |            |   | 3          |     |        |   | 16        |    |  |   | 2,076 |       
|                               |                                                                                       |       |   |           |        |            |   |            |     |        |   |           |    |  |   |      
|                               |                                                                                       | Total |   | $         | 13,507 |            |   | $          | 267 |        |   | $         | 47 |  |   | $     | 13,727 | 
|                               |                                                                                       |       |   |           |        |            |   |            |     |        |   |           |    |  |   |      

|                               |                                                                                       |       |   |           |        |            |   |            |    |        |   |           |   |  |   |       |        | 
|------------------------------ | ------------------------------------------------------------------------------------- | ----- | - | --------- | ------ | ---------- | - | ---------- | -- | ------ | - | --------- | - |  | - | ----- | ------ | 
|                               |                                                                                       |       |   | 2000     
|                               |                                                                                       |       |   |          
|                               |                                                                                       |       |   |           |        |            |   | Gross      |    | Gross  |   | Estimated
|                               |                                                                                       |       |   | Amortized |        | Unrealized |   | Unrealized |    | Market
|                               |                                                                                       |       |   | Cost      |        | Gains      |   | Losses     |    | Value 
|                               |                                                                                       |       |   |           |        |            |   |            |    |       
|Available-for-sale securities: |                                                                                       |       |   |           |        |            |   |            |    |        |   |           |   |  |   |      
|                               | U.S. Treasury securities and
obligations of U.S. government
corporations and agencies |       | $ | 6,740     |        |            | $ | 20         |    |        | $ |          |   |  | $ | 6,760 |       
|                               | Municipal notes                                                                       |       |   | 2,397     |        |            |   | 55         |    |        |   |          |   |  |   | 2,452 |       
|                               | Corporate bonds                                                                       |       |   | 2,844     |        |            |   | 22         |    |        |   |          |   |  |   | 2,866 |       
|                               |                                                                                       |       |   |           |        |            |   |            |    |        |   |           |   |  |   |      
|                               |                                                                                       | Total |   | $         | 11,981 |            |   | $          | 97 |        |   | $         |  |  |   | $     | 12,078 | 
|                               |                                                                                       |       |   |           |        |            |   |            |    |        |   |           |   |  |   |      

29



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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 2  Securities (Continued)



| |  | The amortized cost and estimated market value of securities at
December 31, 2001, 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-Sale
|                                       |          |   |                   
|                                       |          |   | Amortized          |        | Estimated   
|                                       |          |   | Cost               |        | Market Value
|                                       |          |   |                    |        |             
|Due in one year or less                |          | $ | 2,750              |        |              | $ | 2,801 |       
|Due after one year through five years  |          |   | 6,858              |        |              |   | 7,039 |       
|Due after five years through ten years |          |   | 1,810              |        |              |   | 1,811 |       
|Due after ten years                    |          |   |                   |        |              |   |      |       
|                                       |          |   |                    |        |              |   |       |       
|                                       | Subtotal |   |                    | 11,418 |              |   |       | 11,651 | 
|Mortgage backed securities             |          |   | 2,089              |        |              |   | 2,076 |       
|                                       |          |   |                    |        |              |   |       |       
|                                       | Total    |   | $                  | 13,507 |              |   | $     | 13,727 | 
|                                       |          |   |                    |        |              |   |       |       



| |  | Securities having a carrying and market value of $3,116,000 were
pledged at December 31, 2001 for purposes of obtaining borrowings
from the Federal Home Loan Bank.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 3  Loans and Leases



| |  | Certain directors and executive officers of the Corporation were loan
customers of the subsidiary bank during 2001 and 2000. 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, 2001 and 2000 amounted to $210,000
and $212,000, respectively. During 2001, no new loans were made and
repayments totaled $2,000.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 3  Loans and Leases (Continued)



| |  | A summary of the balances of loans and leases at December 31 follows:
| |  | ---------------------------------------------------------------------

|                                 |                                       |   |         |         |      |   |        |        |  
|-------------------------------- | ------------------------------------- | - | ------- | ------- | ---- | - | ------ | ------ | -
|                                 |                                       |   | 2001    |         | 2000
|                                 |                                       |   |         |         |     
|Commercial loans                 |                                       | $ | 84,817  |         |      | $ | 76,804 |       
|Direct financing leases (Note 5) |                                       |   | 9,985   |         |      |   | 1,833  |       
|Residential real estate          |                                       |   | 19,579  |         |      |   | 14,334 |       
|Installment                      |                                       |   | 373     |         |      |   | 301    |       
|Home equity                      |                                       |   | 4,611   |         |      |   | 1,865  |       
|                                 |                                       |   |         |         |      |   |        |       
|                                 | Subtotal                              |   |         | 119,365 |      |   |        | 95,137 |  
|Less: Net deferred fees          |                                       |   | (122    | )       |      |   |       |       
|                                 | Allowances for credit losses (Note 4) |   |         | (1,802  | )    |   |        | (1,887 | )
|                                 |                                       |   |         |         |      |   |        |       
|Loans and leases, net            |                                       | $ | 117,441 |         |      | $ | 93,250 |       
|                                 |                                       |   |         |         |      |   |        |       



| |  | Final loan and lease maturities and rate sensitivity of the loan and
lease portfolio at December 31, 2001 are as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------

|                                            |       |   |          |        |            |   |            |        |       |   |       |       |  |   |        |         | 
|------------------------------------------- | ----- | - | -------- | ------ | ---------- | - | ---------- | ------ | ----- | - | ----- | ----- |  | - | ------ | ------- | 
|                                            |       |   | Within   |        | One to     |   | After      |        |       |   |      
|                                            |       |   | One Year |        | Five Years |   | Five Years |        | Total
|                                            |       |   |          |        |            |   |            |        |      
|Commercial                                  |       | $ | 45,447   |        |            | $ | 36,691     |        |       | $ | 2,780 |       |  | $ | 84,918 |        
|Direct financing leases                     |       |   | 2,887    |        |            |   | 6,508      |        |       |   | 590   |       |  |   | 9,985  |        
|Real estate                                 |       |   | 9,644    |        |            |   | 7,407      |        |       |   | 2,528 |       |  |   | 19,579 |        
|Installment                                 |       |   | 71       |        |            |   | 201        |        |       |   |      |       |  |   | 272    |        
|Home equity                                 |       |   | 3,461    |        |            |   | 509        |        |       |   | 641   |       |  |   | 4,611  |        
|                                            |       |   |          |        |            |   |            |        |       |   |       |       |  |   |        |        
|                                            | Total |   | $        | 61,510 |            |   | $          | 51,316 |       |   | $     | 6,539 |  |   | $      | 119,365 | 
|                                            |       |   |          |        |            |   |            |        |       |   |       |       |  |   |        |        
|Loans and leases at fixed interest rates    |       | $ | 31,564   |        |            | $ | 45,531     |        |       | $ | 4,307 |       |  | $ | 81,402 |        
|Loans and leases at variable interest rates |       |   | 29,946   |        |            |   | 5,785      |        |       |   | 2,232 |       |  |   | 37,963 |        
|                                            |       |   |          |        |            |   |            |        |       |   |       |       |  |   |        |        
|                                            | Total |   | $        | 61,510 |            |   | $          | 51,316 |       |   | $     | 6,539 |  |   | $      | 119,365 | 
|                                            |       |   |          |        |            |   |            |        |       |   |       |       |  |   |        |        

31



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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 4  Allowance for Possible Credit Losses



| |  | A summary of the activity in the allowance for possible credit losses
is as follows:
| |  | ------------------------------------------------------------------------------------

|                                       |  |      |       |      |  |   |       |  
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                       |  | 2001 |       | 2000
|                                       |  |      |       |     
|Balance- Beginning of year             |  | $    | 1,887 |      |  | $ | 1,987 |  
|Provision charged to operations        |  |      | 877   |      |  |   | 60    |  
|Credit losses                          |  |      | (964  | )    |  |   | (160  | )
|Credit loss recoveries                 |  |      | 2     |      |  |   |      |  
|Balance- End of year                   |  | $    | 1,802 |      |  | $ | 1,887 |  
|                                       |  |      |       |      |  |   |       |  
|As a percent of total loans and leases |  |      | 1.51  | %    |  |   | 1.98  | %
|                                       |  |      |       |      |  |   |       |  



| |  | The recorded investment in impaired loans and leases was $840,000 and
$265,000 at December 31, 2001 and 2000, respectively. The average
recorded investment in impaired loans and leases during 2001 was
$551,000. The average recorded investment in impaired loans and lease
during 2000 was $101,000. Included in the impaired loan and lease
total were $840,000 ($101,000 in 2000) of impaired loans and leases
for which the specific allowance for possible credit losses was
$170,000 and $124,000 at December 31, 2001 and 2000, respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

32



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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 5  Direct Financing Leases



| |  | The following lists the components of the net investment in direct
financing leases:
| |  | ------------------------------------------------------------------------------------

|                                                            |                                           |      |        |       |  |   |       |       | 
|----------------------------------------------------------- | ----------------------------------------- | ---- | ------ | ----- |  | - | ----- | ----- | 
|                                                            |                                           | 2001 |        | 2000 
|                                                            |                                           |      |        |      
|Minimum lease payments receivable                           |                                           | $    | 9,515  |       |  | $ | 1,923 |      
|Estimated residual values of leased
property (unguaranteed) |                                           |      | 2,670  |       |  |   | 523   |      
|Less unearned income                                        |                                           |      | (2,200 | )     |  |   | (613  | )    
|                                                            |                                           |      |        |       |  |   |       |       | 
|                                                            | Net investment in direct
financing leases |      | $      | 9,985 |  |   | $     | 1,833 | 
|                                                            |                                           |      |        |       |  |   |       |       | 



| |  | The following is a schedule by years of minimum future rentals on
direct financing leases as of December 31, 2001:
| |  | ------------------------------------------------------------------------------------------------------------------

|           |      |       |  |   |       |  |     |       | 
|---------- | ---- | ----- |  | - | ----- |  | --- | ----- | 
|           | 2002 |       |  |   |       |  | $   | 2,887 | 
|           | 2003 |       |  |   |       |  |     | 2,592 | 
|           | 2004 |       |  |   |       |  |     | 2,064 | 
|           | 2005 |       |  |   |       |  |     | 1,014 | 
|           | 2006 |       |  |   |       |  |     | 658   | 
|Thereafter |      |       |  |   |       |  | 300 |      
|           |      |       |  |   |       |  |     |      
|           |      | Total |  | $ | 9,515 | 
|           |      |       |  |   |       |  |     |      

Note 6  Bank Premises and Equipment



| |  | Bank premises and equipment at December 31, 2001 and 2000 consisted of
the following:
| |  | -------------------------------------------------------------------------------------

|                              |                     |      |       |       |  |   |       |       | 
|----------------------------- | ------------------- | ---- | ----- | ----- |  | - | ----- | ----- | 
|                              |                     | 2001 |       | 2000 
|                              |                     |      |       |      
|Buildings and improvements    |                     | $    | 373   |       |  | $ | 376   |      
|Furniture and equipment       |                     |      | 1,150 |       |  |   | 1,035 |      
|                              |                     |      |       |       |  |   |       |       | 
|                              | Total               |      |       | 1,523 |  |   |       | 1,411 | 
|Less accumulated depreciation |                     |      | 793   |       |  |   | 569   |      
|                              |                     |      |       |       |  |   |       |       | 
|                              | Net carrying amount |      | $     | 730   |  |   | $     | 842   | 
|                              |                     |      |       |       |  |   |       |       | 

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##### Table of Contents



Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 7  Deposits



| |  | The following is a summary of the distribution of deposits at December 31, 2001 and 2000:
| |  | -----------------------------------------------------------------------------------------

|                             |                     |                   |                        |        |        |         |       |       |        |         | 
|---------------------------- | ------------------- | ----------------- | ---------------------- | ------ | ------ | ------- | ----- | ----- | ------ | ------- | 
|                             |                     |                   |                        |        | 2001   |         | 2000 
|                             |                     |                   |                        |        |        |         |      
|Noninterest-bearing  Demand |                     | $                 | 3,336                  |        |        | $       | 1,828 |      
|                             |                     |                   |                        |        |        |         |       |      
|Interest-bearing:            |                     |                   |                        |        |        |         |       |      
|                             | NOW accounts        |                   | $                      | 13,889 |        |         | $     | 5,527 |       
|                             | Savings             |                   |                        | 116    |        |         |       | 28    |       
|                             | Money market demand |                   |                        | 4,649  |        |         |       | 2,747 |       
|                             | Time:               |                   |                        |        |        |         |       |       |       
|                             |                     | $100,000 and over |                        |        | 49,903 |         |       |       | 38,149 |        
|                             |                     | Under $100,000    |                        |        | 39,359 |         |       |       | 58,381 |        
|                             |                     |                   |                        |        |        |         |       |      
|                             |                     |                   | Total interest-bearing |        | $      | 107,916 |       |       | $      | 104,832 | 
|                             |                     |                   |                        |        |        |         |       |      



| |  | The remaining maturities of time deposits at December 31, 2001 are as
follows:
| |  | ------------------------------------------------------------------------------

|     |       |   |          |        |              |   |        |        | 
|---- | ----- | - | -------- | ------ | ------------ | - | ------ | ------ | 
|     |       |   | Under    |        | $100,000 and
|     |       |   | $100,000 |        | Over        
|     |       |   |          |        |             
|2002 |       | $ | 28,835   |        |              | $ | 29,152 |       
|2003 |       |   | 6,532    |        |              |   | 8,397  |       
|2004 |       |   | 3,472    |        |              |   | 2,472  |       
|2005 |       |   | 265      |        |              |   | 5,675  |       
|2006 |       |   | 255      |        |              |   | 4,207  |       
|     |       |   |          |        |              |   |        |       
|     | Total |   | $        | 39,359 |              |   | $      | 49,903 | 
|     |       |   |          |        |              |   |        |       

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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 8  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:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |       |       |          |  |       |       |  |  |   |        | 
|------------------- |  | ----- | ----- | -------- |  | ----- | ----- |  |  | - | ------ | 
|                    |  | 2001 
|                    |  |      
|                    |  | Fixed |       | Floating |  |       |       | 
|                    |  | Rate  |       | Rate     |  | Total
|                    |  |       |       |          |  |      
|Due in 2002         |  | $     |      |          |  | $     | 7,000 |  |  | $ | 7,000  | 
|Due in 2003         |  |       | 2,000 |          |  |       |      |  |  |   | 2,000  | 
|Due in 2004         |  |       | 2,500 |          |  |       |      |  |  |   | 2,500  | 
|Due in 2005         |  |       |      |          |  |       |      |  |  |   |       | 
|Due in 2006         |  |       |      |          |  |       |      |  |  |   |       | 
|Thereafter          |  |       | 2,000 |          |  |       |      |  |  |   | 2,000  | 
|                    |  |       |       |          |  |       |       |  |  |   |        | 
|Total FHLB advances |  | $     | 6,500 |          |  | $     | 7,000 |  |  | $ | 13,500 | 
|                    |  |       |       |          |  |       |       |  |  |   |        | 



| |  | At December 31, 2001, the interest rates on fixed rate advances ranged
from 3.51 percent to 5.22 percent. At December 31, 2001, the weighted
average interest rates on fixed-rate advances was 4.13 percent. At
December 31, 2001, the interest rate on all variable rate advances was
1.82 percent. The advances are subject to prepayment penalties
subject to the provisions and conditions of the credit policy of the
Federal Home Loan Bank.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 9  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:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       |  |      |      |      |  |      |     |  |  |   |     | 
|---------------------- |  | ---- | ---- | ---- |  | ---- | --- |  |  | - | --- | 
|                       |  | 2001 |      | 2000 |  | 1999
|                       |  |      |      |      |  |     
|Current                |  | $    | (642 | )    |  | $    | 233 |  |  | $ | 138 | 
|Deferred               |  |      | 658  |      |  |      |    |  |  |   | 150 | 
|                       |  |      |      |      |  |      |     |  |  |   |     | 
|Net income tax expense |  | $    | 16   |      |  | $    | 233 |  |  | $ | 288 | 
|                       |  |      |      |      |  |      |     |  |  |   |     | 



| |  | The following is a reconciliation of the statutory federal income tax
expense to the effective tax expense for the years ended December 31:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

|                             |  |      |     |      |  |      |     |   |  |   |     | 
|---------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | 
|                             |  | 2001 |     | 2000 |  | 1999
|                             |  |      |     |      |  |     
|Income tax at statutory rate |  | $    | 43  |      |  | $    | 251 |   |  | $ | 259 | 
|Tax exempt interest          |  |      | (26 | )    |  |      | (9  | ) |  |   |    | 
|Other                        |  |      | (1  | )    |  |      | (9  | ) |  |   | 29  | 
|                             |  |      |     |      |  |      |     |   |  |   |     | 
|Net income tax expense       |  | $    | 16  |      |  | $    | 233 |   |  | $ | 288 | 
|                             |  |      |     |      |  |      |     |   |  |   |     | 



| |  | Deferred income taxes are provided for the temporary differences
between the financial reporting bases and the tax bases of the
Corporations assets and liabilities. The source of such temporary
differences and the resulting net tax expense are as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            |  |      |     |      |  |      |     |   |  |   |     | 
|--------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | 
|                            |  | 2001 |     | 2000 |  | 1999
|                            |  |      |     |      |  |     
|Provision for credit losses |  | $    | 91  |      |  | $    | 15  |   |  | $ | 19  | 
|Lease financing             |  |      | 503 |      |  |      | 7   |   |  |   | 34  | 
|Depreciation                |  |      | (3  | )    |  |      | 9   |   |  |   | 40  | 
|Nonaccrual interest         |  |      | 17  |      |  |      | (33 | ) |  |   |    | 
|Deferred loan fees          |  |      | (44 | )    |  |      |    |   |  |   |    | 
|Original issue discount     |  |      | 99  |      |  |      |    |   |  |   |    | 
|Other                       |  |      | (5  | )    |  |      | 2   |   |  |   | 57  | 
|                            |  |      |     |      |  |      |     |   |  |   |     | 
|Total deferred tax expense  |  | $    | 658 |      |  | $    |    |   |  | $ | 150 | 
|                            |  |      |     |      |  |      |     |   |  |   |     | 

36



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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 9  Income Taxes (Continued)



| |  | The temporary differences that comprise deferred tax assets and
liabilities at December 31 are as follows:
| |  | ----------------------------------------------------------------------------------------------------------

|                                            |                               |                                    |   |      |      |      |   |      |      |   |   |     |      |  
|------------------------------------------- | ----------------------------- | ---------------------------------- | - | ---- | ---- | ---- | - | ---- | ---- | - | - | --- | ---- | -
|                                            |                               |                                    |   | 2001 |      | 2000 |   | 1999
|                                            |                               |                                    |   |      |      |      |   |     
|Deferred tax assets:                        |                               |                                    |   |      |      |      |   |      |      |   |   |    
|                                            | Provision for credit losses   |                                    | $ | 464  |      |      | $ | 555  |      |   | $ | 570 |     
|                                            | Unrealized loss on securities |                                    |   |     |      |      |   |     |      |   |   | 19  |     
|                                            | Nonaccrual interest           |                                    |   | 16   |      |      |   | 33   |      |   |   |    |     
|                                            | Deferred fees                 |                                    |   | 44   |      |      |   |     |      |   |   |    |     
|                                            | Other                         |                                    |   | 9    |      |      |   | 35   |      |   |   | 37  |     
|                                            |                               |                                    |   |      |      |      |   |      |      |   |   |    
|                                            |                               | Total deferred tax assets          |   |      | 533  |      |   |      | 623  |   |   |     | 626  |  
|Valuation allowance for deferred tax assets |                               |                                    |  |      |      |      |  |      |      |   |  |    
|Deferred tax liabilities:                   |                               |                                    |   |      |      |      |   |      |      |   |   |    
|                                            | Lease financing               |                                    |   | (594 | )    |      |   | (91  | )    |   |   | (84 | )   
|                                            | Unrealized gain on securities |                                    |   | (75  | )    |      |   | (33  | )    |   |   |    |     
|                                            | Depreciation                  |                                    |   | (46  | )    |      |   | (49  | )    |   |   | (40 | )   
|                                            | Original issue discount       |                                    |   | (99  | )    |      |   |     |      |   |   |    |     
|                                            | Other                         |                                    |   | (6   | )    |      |   | (38  | )    |   |   | (38 | )   
|                                            |                               |                                    |   |      |      |      |   |      |      |   |   |    
|                                            |                               | Total deferred tax liabilities     |   |      | (820 | )    |   |      | (211 | ) |   |     | (162 | )
|                                            |                               |                                    |   |      |      |      |   |      |      |   |   |    
|                                            |                               | Net deferred tax asset (liability) |   | $    | (287 | )    |   | $    | 412  |   |   | $   | 464  |  
|                                            |                               |                                    |   |      |      |      |   |      |      |   |   |    

37



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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 10  Related Party Transactions



| |  | Included in professional fees is expenses related to services
performed by certain directors of approximately $107,000 and $85,800
for the years ended December 31, 2000 and 1999, respectively.
Included in the computation of interest income and gain on sale of
loans and leases is amounts paid for broker and transaction fees
performed by a company owned by a certain director. These fees
approximated $93,000 for the year ended December 31, 2001.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 11  Operating Lease



| |  | The Corporation has entered into lease commitments for office
buildings. Rental expense charged to operations was $349,000 and
$323,000 for the years ended December 31, 2001 and 2000,
respectively. The future minimum lease payments are as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |   |     | 
|---- |  | - | --- | 
|2002 |  | $ | 334 | 
|2003 |  |   | 343 | 
|2004 |  |   | 348 | 
|2005 |  |   | 385 | 
|2006 |  |   | 385 | 

Note 12  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 are exercisable immediately. Under
the director plan, a maximum of 66,000 options to purchase shares
may be granted that expire in seven 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. At December 31, 2001, no shares under the
director and 1,400 shares under the employee plan were available for
future option grants.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Michigan Heritage Bancorp, Inc.

---

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 12  Stock Option Plans (Continued)



| |  | The following table summarizes stock option transactions and the
related average exercise prices for the last three years.
| |  | --------------------------------------------------------------------------------------------------------------------------

|                                                                         |  |        |         |          |  |          |      |          |  |        |        |          |  |   |      |  |  |          |        |  |  |   |      | 
|------------------------------------------------------------------------ |  | ------ | ------- | -------- |  | -------- | ---- | -------- |  | ------ | ------ | -------- |  | - | ---- |  |  | -------- | ------ |  |  | - | ---- | 
|                                                                         |  | 2001   |         | 2000     |  | 1999    
|                                                                         |  |        |         |          |  |         
|                                                                         |  |        |         |          |  | Weighted |      |          |  |        |        | Weighted |  |   |      |  |  | Weighted
|                                                                         |  | Number |         | Average  |  | Number   |      | Average  |  | Number |        | Average 
|                                                                         |  | of     |         | Exercise |  | of       |      | Exercise |  | of     |        | Exercise
|                                                                         |  | Shares |         | Price    |  | Shares   |      | Price    |  | Shares |        | Price   
|                                                                         |  |        |         |          |  |          |      |          |  |        |        |         
|Options outstanding at
beginning of year                                 |  |        | 96,700  |          |  | $        | 9.14 |          |  |        | 96,700 |          |  | $ | 9.14 |  |  |          | 96,700 |  |  | $ | 9.14 | 
|Options cancelled                                                        |  |        | (96,700 | )        |  |          | 9.14 |          |  |        |       |          |  |   |     |  |  |          |       |  |  |   |     | 
|Options granted                                                          |  |        | 108,600 |          |  |          | 5.00 |          |  |        |       |          |  |   |     |  |  |          |       |  |  |   |     | 
|Options exercised                                                        |  |        |        |          |  |          |     |          |  |        |       |          |  |   |     |  |  |          |       |  |  |   |     | 
|Options forfeited                                                        |  |        |        |          |  |          |     |          |  |        |       |          |  |   |     |  |  |          |       |  |  |   |     | 
|                                                                         |  |        |         |          |  |          |      |          |  |        |        |          |  |   |      |  |  |          |        |  |  |   |      | 
|Options outstanding at end of year                                       |  |        | 108,600 |          |  |          | 5.00 |          |  |        | 96,700 |          |  |   | 9.14 |  |  |          | 96,700 |  |  |   | 9.14 | 
|Exercisable at end of year                                               |  |        | 108,600 |          |  |          | 5.00 |          |  |        | 89,875 |          |  |   | 9.11 |  |  |          | 83,775 |  |  |   | 9.11 | 
|Weighted average estimated
fair value of options
granted during the year |  |        |         |          |  | $        | 2.34 |          |  |        |        |          |  |   | N/A  |  |  |          |        |  |  |   | N/A  | 



| |  | The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model. The following
weighted average assumptions were used to estimate the fair value of
the options granted for the following:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              |  |      |       |      |  |      |     |  |  |  |     | 
|----------------------------- |  | ---- | ----- | ---- |  | ---- | --- |  |  |  | --- | 
|                              |  | 2001 |       | 2000 |  | 1999
|                              |  |      |       |      |  |     
|Dividend yield                |  |      |      | %    |  |      | N/A |  |  |  | N/A | 
|Expected average life (years) |  |      | 8.00  |      |  |      | N/A |  |  |  | N/A | 
|Volatility                    |  |      | 30.37 | %    |  |      | N/A |  |  |  | N/A | 
|Risk-free interest rate       |  |      | 5.00  | %    |  |      | N/A |  |  |  | N/A | 



| |  | At December 31, 2001, all options outstanding have exercise prices
of $5.00 per share and a weighted average remaining contractual life
of 9.9 years.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 12  Stock Option Plans (Continued)



| |  | The table below displays pro forma amounts for net income and net
income per common share assuming the fair value method of
accounting had been used, which reflects additional compensation
cost for option grants based on the value of the options granted:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |                   |             |           |   |      |      |                        |   |      |      |      |   |      |      |  |  | 
|-------------------- | ----------------- | ----------- | --------- | - | ---- | ---- | ---------------------- | - | ---- | ---- | ---- | - | ---- | ---- |  |  | 
|                     |                   |             |           |   |      |      | Year Ended December 31
|                     |                   |             |           |   |      |      |                       
|                     |                   |             |           |   |      |      | 2001                   |   | 2000 |      | 1999
|                     |                   |             |           |   |      |      |                        |   |      |      |     
|Net income           |                   | As reported |           | $ | 110  |      |                        | $ | 504  |      |      | $ | 475  |     
|                     |                   | Pro forma   |           | $ | 279  |      |                        | $ | 487  |      |      | $ | 432  |     
|                    
|Earnings per share   |                   | As reported |           | $ | 0.07 |      |                        | $ | 0.34 |      |      | $ | 0.36 |     
|                     |                   | Pro forma   |           | $ | 0.19 |      |                        | $ | 0.33 |      |      | $ | 0.33 |     
|                    
|Earnings per share - |                   | As reported |           | $ | 0.07 |      |                        | $ | 0.34 |      |      | $ | 0.36 |     
|                     | assuming dilution |             | Pro forma |   | $    | 0.19 |                        |   | $    | 0.33 |      |   | $    | 0.33 | 

Note 13  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 $44,000 and $22,000 for the years ended December
31, 2001 and 2000, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 14  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 certain financial instruments and 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Loans and leases receivable- 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, 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.                                                 

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 14  Financial Instruments (Continued)



| |  | Loans held for sale- Fair values of mortgage loans held for sale
are based on commitments on hand from investors or prevailing market
prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Deposits- The fair values disclosed for demand deposits (e.g.,
interest and non-interest 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 ninety 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
approximate fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 14  Financial Instruments (Continued)



| |  | The estimated fair values, and related carrying or notional amounts,
of the Corporations financial instruments are as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------

|             |                       |  |          |         |            |  |          |         |            |  |   |         |  |  |   |         | 
|------------ | --------------------- |  | -------- | ------- | ---------- |  | -------- | ------- | ---------- |  | - | ------- |  |  | - | ------- | 
|             |                       |  | 2001     |         | 2000      
|             |                       |  |          |         |           
|             |                       |  | Carrying |         | Estimated  |  | Carrying |         | Estimated 
|             |                       |  | Amount   |         | Fair Value |  | Amount   |         | Fair Value
|             |                       |  |          |         |            |  |          |         |           
|Assets:      |                       |  |          |         |            |  |          |         |            |  |   |         |  |  |   |        
|             | Cash and equivalents  |  | $        | 6,732   |            |  | $        | 6,732   |            |  | $ | 12,652  |  |  | $ | 12,652  | 
|             | Securities            |  |          | 14,732  |            |  |          | 14,732  |            |  |   | 12,497  |  |  |   | 12,497  | 
|             | Loans and leases      |  |          | 117,441 |            |  |          | 119,614 |            |  |   | 93,250  |  |  |   | 90,770  | 
|             | Loans held for sale   |  |          | 1,589   |            |  |          | 1,589   |            |  |   |        |  |  |   |        | 
|             | Interest receivable   |  |          | 720     |            |  |          | 720     |            |  |   | 704     |  |  |   | 704     | 
|Liabilities: |                       |  |          |         |            |  |          |         |            |  |   |         |  |  |   |        
|             | Deposits              |  |          | 111,252 |            |  |          | 112,509 |            |  |   | 106,660 |  |  |   | 107,043 | 
|             | Short-term borrowings |  |          | 5,000   |            |  |          | 5,000   |            |  |   | 500     |  |  |   | 500     | 
|             | FHLB Advances         |  |          | 13,500  |            |  |          | 13,416  |            |  |   |        |  |  |   |        | 
|             | Interest payable      |  |          | 473     |            |  |          | 473     |            |  |   | 627     |  |  |   | 627     | 

Note 15  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 need of its
customer. 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 sheets.                                                                               
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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.

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 15  Off-Balance Sheet Activities (Continued)



| |  | 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.     
|
| |  | If the counterparty does not have the right and ability to redeem
the collateral or 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.                                                                                                                                             
|
| |  | The Bank had loan and lease origination commitments and unfunded
commitments aggregating $11,072,000 and $14,150,000 at December 31,
2001 and 2000, respectively.                                                                                                                                                                                                                                                                        

Note 16  Restrictions on Dividends



| |  | Dividends paid by the Corporation would be provided by dividends
from its subsidiary bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the
Corporation in the form of cash dividends, loans or advances. The
approval of the Banks primary regulator is required for the
Corporations subsidiary bank to pay dividends in excess of
regulatory limitations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 17  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,
2001, the most recent notification from the Banks regulators
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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                       |                                          |  |        |        |       |  |  |      |  
|---------------------- | ---------------------------------------- |  | ------ | ------ | ----- |  |  | ---- | -
|                       |                                          |  | Amount |        | Ratio
|                       |                                          |  |        |        |      
|December 31, 2001:     |                                          |  |        |        |       |  |  |     
|Consolidated           |                                          |  |        |        |       |  |  |     
|                       | Total capital (to risk-weighted assets)  |  | $      | 13,899 |       |  |  | 11.4 | %
|                       | Tier 1 capital (to risk-weighted assets) |  | $      | 12,369 |       |  |  | 10.1 | %
|                       | Tier 1 capital (to average assets)       |  | $      | 12,369 |       |  |  | 9.0  | %
|Michigan Heritage Bank |                                          |  |        |        |       |  |  |     
|                       | Total capital (to risk-weighted assets)  |  | $      | 13,801 |       |  |  | 11.3 | %
|                       | Tier 1 capital (to risk-weighted assets) |  | $      | 12,272 |       |  |  | 10.0 | %
|                       | Tier 1 capital (to average assets)       |  | $      | 12,272 |       |  |  | 9.0  | %
|                      
|December 31, 2000:     |                                          |  |        |        |       |  |  |     
|Consolidated           |                                          |  |        |        |       |  |  |     
|                       | Total capital (to risk-weighted assets)  |  | $      | 13,501 |       |  |  | 13.7 | %
|                       | Tier 1 capital (to risk-weighted assets) |  | $      | 12,259 |       |  |  | 12.4 | %
|                       | Tier 1 capital (to average assets)       |  | $      | 12,259 |       |  |  | 10.3 | %
|Michigan Heritage Bank |                                          |  |        |        |       |  |  |     
|                       | Total capital (to risk-weighted assets)  |  | $      | 12,401 |       |  |  | 12.6 | %
|                       | Tier 1 capital (to risk-weighted assets) |  | $      | 11,161 |       |  |  | 11.3 | %
|                       | Tier 1 capital (to average assets)       |  | $      | 11,161 |       |  |  | 9.5  | %

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 18  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 a 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                     |                                            |                                            |        |      |        |      |        |       |        | 
|------------------------------------ | ------------------------------------------ | ------------------------------------------ | ------ | ---- | ------ | ---- | ------ | ----- | ------ | 
|                                     |                                            |                                            |        | 2001 |        | 2000
|                                     |                                            |                                            |        |      |        |     
|Assets                               |                                            |                                            |        |      |        |      |        |      
|Cash and Cash Equivalents            |                                            |                                            |        |      |        |      |        |      
|                                     | Cash and deposits at subsidiary bank       |                                            | $      | 32   |        |      | $      | 40    |       
|                                     | Interest-bearing deposits with other banks |                                            |        | 13   |        |      |        | 1,017 |       
|                                     |                                            |                                            |        |      |        |      |        |      
|                                     |                                            | Total cash and cash equivalents            |        |      | 45     |      |        |       | 1,057  | 
|Investment in Subsidiary             |                                            |                                            | 12,417 |      |        |      | 11,226 |      
|Interest Receivable and Other Assets |                                            |                                            | 52     |      |        |      | 40     |      
|                                     |                                            |                                            |        |      |        |      |        |      
|                                     |                                            | Total assets                               |        | $    | 12,514 |      |        | $     | 12,323 | 
|                                     |                                            |                                            |        |      |        |      |        |      
|Liabilities and Stockholders Equity |                                            |                                            |        |      |        |      |        |      
|Liabilities                          |                                            | $                                          |       |      |        | $    |       |      
|Stockholders Equity                 |                                            |                                            | 12,514 |      |        |      | 12,323 |      
|                                     |                                            |                                            |        |      |        |      |        |      
|                                     |                                            | Total liabilities and stockholders equity |        | $    | 12,514 |      |        | $     | 12,323 | 
|                                     |                                            |                                            |        |      |        |      |        |      

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2001 and 2000


Note 18  Parent-only Financial Statements
(Continued)



| |  | The condensed statement of
operations for the years ended December 31,
2001 and 2000 is as follows:
| |  | ---------------------------------------------------------------------------------------------------

|                                                            |  |      |     |      |  |   |     | 
|----------------------------------------------------------- |  | ---- | --- | ---- |  | - | --- | 
|                                                            |  | 2001 |     | 2000
|                                                            |  |      |     |     
|Operating Income- Interest on deposits
with other banks     |  | $    | 36  |      |  | $ | 64  | 
|Operating Expense                                           |  |      | 36  |      |  |   | 58  | 
|                                                            |  |      |     |      |  |   |     | 
|Income- Before income taxes, equity in income
of subsidiary |  |      |    |      |  |   | 6   | 
|Income Tax Expense                                          |  |      |    |      |  |   | 2   | 
|                                                            |  |      |     |      |  |   |     | 
|Income- Before equity in income of subsidiary               |  |      |    |      |  |   | 4   | 
|Equity in Income of Subsidiary                              |  |      | 110 |      |  |   | 500 | 
|                                                            |  |      |     |      |  |   |     | 
|Net Income                                                  |  | $    | 110 |      |  | $ | 504 | 
|                                                            |  |      |     |      |  |   |     | 



| |  | The condensed statement of cash flows for the years ended December 31,
2001 and 2000 is as follows:
| |  | ---------------------------------------------------------------------------------------------------

|                                                                    |                                                                            |                                |                                                     |     |      |     |       |     |      |   | 
|------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------ | --------------------------------------------------- | --- | ---- | --- | ----- | --- | ---- | - | 
|                                                                    |                                                                            |                                |                                                     |     | 2001 |     | 2000 
|                                                                    |                                                                            |                                |                                                     |     |      |     |      
|Cash Flows from Operating Activities                                |                                                                            |                                |                                                     |     |      |     |       |    
|                                                                    | Net income                                                                 |                                | $                                                   | 110 |      |     | $     | 504 |     
|                                                                    | Adjustments to reconcile net income to net
cash from operating activities: |                                |                                                     |     |      |     |       |     |     
|                                                                    |                                                                            | Equity in income of subsidiary |                                                     |     | (110 | )   |       |     | (500 | )
|                                                                    |                                                                            | Net change in other assets     |                                                     |     | (12  | )   |       |     |     |  
|                                                                    |                                                                            |                                |                                                     |     |      |     |       |    
|                                                                    |                                                                            |                                | Net cash provided by (used in) operating activities |     |      | (12 | )     |     |      | 4 | 
|Cash Flows from Investing Activities- Investment
in bank subsidiary |                                                                            |                                | (1,000                                              | )   |      |     |      |    
|                                                                    |                                                                            |                                |                                                     |     |      |     |       |    
|Net Increase (Decrease) in Cash and Cash
Equivalents                |                                                                            |                                | (1,012                                              | )   |      |     | 4     |    
|Cash and Cash Equivalents- Beginning of year                        |                                                                            |                                | 1,057                                               |     |      |     | 1,053 |    
|                                                                    |                                                                            |                                |                                                     |     |      |     |       |    
|Cash and Cash Equivalents- End of year                              |                                                                            | $                              | 45                                                  |     |      | $   | 1,057 |    
|                                                                    |                                                                            |                                |                                                     |     |      |     |       |    

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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 5, 2002.

| |                                 |                           
| | ------------------------------- | --------------------------
| | MICHIGAN HERITAGE BANCORP, INC.
|
| | By:                             | /s/    Anthony S. Albanese
| |                                
| | Anthony 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 5, 2002.

|                                             |  |                                                      
|-------------------------------------------- |  | -----------------------------------------------------
|Signature                                    |  | Capacity                                             
|                                             |  |                                                      
|                                            
|/s/ Richard Zamojski

Richard Zamojski       |  | Chairman and Director (principal executive officer)  
|                                            
|/s/ Anthony S. Albanese

Anthony S. Albanese |  | President and Director (principal operating officer) 
|                                            
|/s/ Darryle J. Parker

Darryle J. Parker     |  | Treasurer and Secretary (principal
financial officer)
|                                            
|/s/ H. Perry Driggs

H. Perry Driggs         |  | Vice-Chairman and Director                           
|                                            
|/s/ Lewis N. George

Lewis N. George         |  | Director                                             
|                                            
|/s/ Phillip R. Harrison

Phillip R. Harrison |  | Director                                             
|                                            
|/s/ Frank A. Scerbo

Frank A. Scerbo         |  | Director                                             
|                                            
|/s/ Philip Sotiroff

Philip Sotiroff         |  | Director                                             

48



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##### Table of Contents






EXHIBIT INDEX

|            |  |                                  
|----------- |  | ---------------------------------
|Exhibit No. |  | Description                      
|            |  |                                  
|11          |  | Computation of Earnings Per Share

49