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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, 2002

OR

o 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: o

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: $12,591,000

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 25, 2003 was $13,919,943.

As of February 25, 2003, there were 1,488,764shares of Common Stock of the
Issuer issued and outstanding.

Transitional Small Business Disclosure Format (check one): Yes: o No: x

Portions of the registrants Proxy Statement for its 2002 Annual Meeting of
Shareholders to be held April 15, 2003, 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 Property                                                                    
|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                                                       
|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)
|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                                                    
|Item 14. Controls and Procedures                                                                  
|Signatures                                                                                        
|Exhibit Index                                                                                     
|Computation of Earnings Per Share                                                                 
|906 Certification of Chief Financial Officer                                                      
|906 Certification of Chief Executive Officer                                                      



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##### Table of Contents



TABLE OF CONTENTS

|              |  |                                                                                             |  |      | 
|------------- |  | ------------------------------------------------------------------------------------------- |  | ---- | 
|PART I        |  |                                                                                             |  | Page | 
|              |  |                                                                                             |  |      | 
|Item 1        |  | Description of Business                                                                     |  | 2    | 
|Item 2        |  | Description of Property                                                                     |  | 8    | 
|Item 3        |  | Legal Proceedings                                                                           |  | 8    | 
|Item 4        |  | Submission of Matters to a Vote of Security Holders                                         |  | 8    | 
|              |  |                                                                                             |  |      | 
|PART II       |  |                                                                                             |  |      | 
|              |  |                                                                                             |  |      | 
|Item 5        |  | Market for Common Stock and Related Stockholder Matters                                     |  | 9    | 
|Item 6        |  | Managements Discussion and Analysis                                                        |  | 10   | 
|Item 7        |  | Financial Statements                                                                        |  | 18   | 
|Item 8        |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure        |  | 18   | 
|              |  |                                                                                             |  |      | 
|PART III      |  |                                                                                             |  |      | 
|              |  |                                                                                             |  |      | 
|Item 9        |  | Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) |  | 19   | 
|Item 10       |  | Executive Compensation                                                                      |  | 19   | 
|Item 11       |  | Security Ownership of Certain Beneficial Owners and Management                              |  | 19   | 
|Item 12       |  | Certain Relationships and Related Transactions                                              |  | 19   | 
|Item 13       |  | Exhibits, List and Reports on Form 8-K                                                      |  | 19   | 
|Item 14       |  | Controls and Procedures                                                                     |  | 20   | 
|              |  |                                                                                             |  |      | 
|Signatures    |  |                                                                                             |  | 49   | 
|              |  |                                                                                             |  |      | 
|Exhibit Index |  |                                                                                             |  | 52   | 

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. The Bank, the Companys wholly-owned subsidiary (the Bank),
is a Michigan banking corporation with depository accounts insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation. The Bank provides
a range of commercial and consumer banking services primarily in Oakland and
western Wayne counties including Novi, Farmington, Farmington Hills, Livonia,
Northville, Northville Township, and Troy.

The Banks present lending activities are primarily focused on commercial real
estate, commercial term loans, and to a lessor extent, commercial equipment
financing to businesses secured by the assets of the borrower. The Bank
originates loans and leases both directly and through third party referral
sources such as leasing companies and mortgage brokers, many of whom are known
to management. The Banks retail strategy focuses on single-family mortgage
loans, home equity loans, and, to a lesser extent, other forms of consumer
lending. The Bank offers both ATM and debit cards, competitive rates on
various deposit products and other attractive products and services. The Bank
also offers telephone 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 headquarters for both the Company and the Bank was relocated to the
northeast area of Farmington Hills in December 1999. The Bank entered into a
15 year lease for this facility at approximately $220,000 annual rent, net of
rental income.

In January 2000, the Company opened its third branch on the first floor of the
Banks new headquarters in Farmington Hills, Michigan. The branch office
located in the new building is leased with minimal leasehold improvements.
This branch was subsequently designated as the Banks main office in October
2001.

During 2001, the Bank formed a mortgage division and hired a team of mortgage
professionals to generate single family residential loans and related products.
Also during 2001, the Bank formed a wholly-owned leasing subsidiary, MHB
Leasing, Inc., which has enabled the Bank to strategically affiliate with
business partners to generate lease transactions and fee income.

In 2002, the Bank formed MHB Financial, LLC, a joint venture with the Agents
Assistance Corporation, the for profit arm of the Michigan Association of
Insurance Agents (MAIA), and Indigo Financial Group, Inc. The joint venture
will offer consumers throughout Michigan a complete array of mortgage products
including conventional, adjustable rate and home equity loans. MHB Financial,
LLC is expected to be fully operational by March 2003. The Bank, as the
majority shareholder, will provide warehouse lending and compliance oversight.
The MAIA, which represents Michigan insurance agents, will provide an exclusive
network of mortgage loan originators located in insurance agencies. Indigo
Financial Group, Inc. will provide comprehensive training and the processing
and closing of mortgage loans using its state of the art Internet based
computer system.

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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, 2002,
impaired loans and leases were $708,000. Specific allowances for impaired
credits were $98,000 at year-end 2002. Management believes the total specific
allowances for impaired credits will adequately provide for expected
charge-offs.

Due to the generally weak state of the economy in 2002, management has provided
additional loan loss reserves of $701,000.

In 2001, the Bank allocated $283,000 in loan loss provisions for a national
retail credit. While this loan is currently performing satisfactorily,
deterioration in its financial condition has occurred which management believes
warranted additional reserves. The company, currently in chapter 11 bankruptcy
proceedings, intends to file its plan of reorganization and emerge from
bankruptcy during the second quarter of 2003. Subsequent to the Banks year-
end, the company formally notified the Bank that the plan of reorganization is
expected to include a reaffirmation of its debt obligation to the Bank.

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, 2002 and 2001, by category of credit.

|                            |                        |             |              |         |       |      |      |             |   |   |        |         |  |      |      |       |  
|--------------------------- | ---------------------- | ----------- | ------------ | ------- | ----- | ---- | ---- | ----------- | - | - | ------ | ------- |  | ---- | ---- | ----- | -
|                            |                        |             | ($ in 000s) 
|                            |                        |             | December 31,
|                            |                        |             |              |        
|                            |                        |             | 2002         |         |       | 2001 |     
|                            |                        |             |              |         |       |      |     
|                            |                        |             |              |         |       |      | % of |             |   |   |        |         |  | % of |     
|Type of Loan or Lease       |                        | Outstanding |              |         | Total |      |      | Outstanding |   |   | Total  |        
|                            |                        |             |              |         |       |      |      |             |   |   |        |        
|Commercial loans discounted |                        | $           | 32,461       |         |       |      | 27.5 | %           |   | $ | 44,780 |         |  |      | 37.4 | %    
|Commercial loans direct     |                        |             | 3,258        |         |       |      | 2.7  | %           |   |   | 2,844  |         |  |      | 2.4  | %    
|Commercial lines of credit  |                        |             | 14,467       |         |       |      | 12.2 | %           |   |   | 13,465 |         |  |      | 11.3 | %    
|Commercialconstruction     |                        |             | 6,738        |         |       |      | 5.7  | %           |   |   | 4,203  |         |  |      | 3.5  | %    
|Commercial real estate      |                        |             | 25,520       |         |       |      | 21.5 | %           |   |   | 19,525 |         |  |      | 16.4 | %    
|Real estateconstruction    |                        |             | 4,036        |         |       |      | 3.4  | %           |   |   | 3,870  |         |  |      | 3.2  | %    
|Real estatemortgage        |                        |             | 13,823       |         |       |      | 11.7 | %           |   |   | 15,709 |         |  |      | 13.2 | %    
|Home equity                 |                        |             | 3,257        |         |       |      | 2.7  | %           |   |   | 4,611  |         |  |      | 3.9  | %    
|Installment loans and other |                        |             | 275          |         |       |      | 0.2  | %           |   |   | 373    |         |  |      | 0.3  | %    
|Lease financing             |                        |             | 14,696       |         |       |      | 12.4 | %           |   |   | 9,985  |         |  |      | 8.4  | %    
|                            |                        |             |              |         |       |      |      |             |   |   |        |        
|                            | Total loans and leases |             | $            | 118,531 |       |      |      | 100.0       | % |   | $      | 119,365 |  |      |      | 100.0 | %
|                            |                        |             |              |         |       |      |      |             |   |   |        |        

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Allowance for Credit Losses  Summary
The following table summarizes changes in the allowance for credit losses
arising from additions to the allowance which have been charged to expense,
selected ratios, and the allocation of the allowance for credit losses.

|                                                                                   |  |                           |         |   |      |  |         |  
|---------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- |  | ------- | -
|                                                                                   |  | ($ in 000s)               |        
|                                                                                   |  | Amount as of December 31, |        
|                                                                                   |  |                           |        
|                                                                                   |  | 2002                      |         |   | 2001 | 
|                                                                                   |  |                           |         |   |      | 
|Loans and leases outstanding                                                       |  |                           | 117,960 |   |      |  | 106,090 |  
|Total loans and leases at year end                                                 |  |                           | 118,531 |   |      |  | 119,365 |  
|                                                                                   |  |                           |         |   |      |  |         |  
|Allowance for credit losses at beginning of period                                 |  |                           | 1,802   |   |      |  | 1,887   |  
|Provision charged to expense                                                       |  |                           | 701     |   |      |  | 877     |  
|Loan and lease charge-offs during the period                                       |  |                           | 560     |   |      |  | 964     |  
|Loan and lease recoveries during the period                                        |  |                           | 70      |   |      |  | 2       |  
|Allowance for credit losses at end of year                                         |  |                           | 2,013   |   |      |  | 1,802   |  
|                                                                                   |  |                           |         |   |      |  |         |  
|Ratio of net charge-offs during the period to
average loans and leases outstanding |  |                           | 0.42    | % |      |  | 0.91    | %
|Allowance for credit losses as a percentage
of loans and leases at period end      |  |                           | 1.70    | % |      |  | 1.51    | %
|                                                                                   |  |                           |         |   |      |  |         |  
|Specific allowance for impaired loans and leases                                   |  |                           | 98      |   |      |  | 170     |  
|Unallocated allowance                                                              |  |                           | 1,915   |   |      |  | 1,632   |  
|Total allowance for credit losses                                                  |  |                           | 2,013   |   |      |  | 1,802   |  

Nonaccrual, Past Due and Restricted Loans and Leases
The following table summarizes the Banks non-performing loans and leases for
the respective years ending December 31.

|                                                     |                                                                                                     |  |                           |     |  |      |       |       |      |  |     |     | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------- |  | ------------------------- | --- |  | ---- | ----- | ----- | ---- |  | --- | --- | 
|                                                     |                                                                                                     |  | ($ in 000s)               |    
|                                                     |                                                                                                     |  | Amount as of December 31, |    
|                                                     |                                                                                                     |  |                           |    
|                                                     |                                                                                                     |  | 2002                      |     |  | 2001 |       |       | 2000 | 
|                                                     |                                                                                                     |  |                           |     |  |      |       |       |      | 
|Nonaccrual, Past Due and Restricted Loans and Leases |                                                                                                     |  |                           |     |  |      |       |       |      |  |     |    
|                                                     |                                                                                                     |  |                           |     |  |      |       |       |      |  |     |     | 
|                                                     | Loans accounted for on a nonaccrual basis                                                           |  |                           | 903 |  |      |       | 1,077 |      |  |     | 438 | 
|                                                     |                                                                                                     |  |                           |     |  |      |       |       |      |  |     |     | 
|                                                     | Accruing loans that are contractually
past due 90 days or more as to interest
or principle payments |  |                           | 592 |  |      |       | 419   |      |  |     | 263 | 
|                                                     |                                                                                                     |  |                           |     |  |      |       |       |     
|Total                                                |                                                                                                     |  | 1,495                     |     |  |      | 1,496 |       |      |  | 701 |    
|                                                     |                                                                                                     |  |                           |     |  |      |       |       |     

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Allowance for Credit Losses  Detail
The following table summarized the allowance for credit losses in the Banks
portfolio for the respective years ending December 31.

|                                                                                       |                                  |  |                           |     |  |      |         |     |      |  |        |     | 
|-------------------------------------------------------------------------------------- | -------------------------------- |  | ------------------------- | --- |  | ---- | ------- | --- | ---- |  | ------ | --- | 
|                                                                                       |                                  |  | ($ in 000s)               |    
|                                                                                       |                                  |  | Amount as of December 31, |    
|                                                                                       |                                  |  |                           |    
|                                                                                       |                                  |  | 2002                      |     |  | 2001 |         |     | 2000 | 
|                                                                                       |                                  |  |                           |     |  |      |         |     |      | 
|Total loans and leases at year end                                                     |                                  |  | 118,531                   |     |  |      | 119,365 |     |      |  | 93,250 |    
|                                                                                       |                                  |  |                           |     |  |      |         |     |      |  |        |     | 
|Allowance for credit losses at beginning of period                                     |                                  |  | 1,802                     |     |  |      | 1,887   |     |      |  | 1,987  |    
|                                                                                       |                                  |  |                           |     |  |      |         |     |      |  |        |     | 
|Loan and lease charge-offs during the period                                           |                                  |  |                           |     |  |      |         |     |      |  |        |    
|                                                                                       | Commercial & Financial           |  |                           | 476 |  |      |         | 765 |      |  |        | 156 | 
|                                                                                       | Real Estate  Mortgages          |  |                           | 84  |  |      |         | 193 |      |  |        |    | 
|                                                                                       | Installment Loans to Individuals |  |                           |    |  |      |         | 6   |      |  |        | 4   | 
|                                                                                       |                                  |  |                           |     |  |      |         |     |     
|Total charge-offs                                                                      |                                  |  | 560                       |     |  |      | 964     |     |      |  | 160    |    
|                                                                                       |                                  |  |                           |     |  |      |         |     |      |  |        |     | 
|Loan and lease recoveries during the period
Commercial & Financial                     |                                  |  | 69                        |     |  |      | 2       |     |      |  |       |    
|                                                                                       | Real Estate  Mortgages          |  |                           | 1   |  |      |         |    |      |  |        |    | 
|                                                                                       | Installment Loans to Individuals |  |                           |    |  |      |         |    |      |  |        |    | 
|                                                                                       |                                  |  |                           |     |  |      |         |     |     
|Total recoveries                                                                       |                                  |  | 70                        |     |  |      | 2       |     |      |  |       |    
|                                                                                       |                                  |  |                           |     |  |      |         |     |     
|Net charge-offs                                                                        |                                  |  | 490                       |     |  |      | 962     |     |      |  | 160    |    
|                                                                                       |                                  |  |                           |     |  |      |         |     |     
|Provision charged to expense                                                           |                                  |  | 701                       |     |  |      | 877     |     |      |  | 60     |    
|                                                                                       |                                  |  |                           |     |  |      |         |     |     
|Allowance for credit losses at end of period                                           |                                  |  | 2,013                     |     |  |      | 1,802   |     |      |  | 1,887  |    
|                                                                                       |                                  |  |                           |     |  |      |         |     |     
|Ratio of net charge-offs during the period to
loans and leases outstanding at year end |                                  |  | 0.41                      | %   |  |      | 0.81    | %   |      |  | 0.17   | %  

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, |        
|                                                    |                |        |                                 |        
|                                                    |                |        | 2002                            |         |          | 2001 |     
|                                                    |                |        |                                 |         |          |      |     
|                                                    |                |        | Average                         |         |          | Rate |      |        | Average |   |          | Rate    | 
|Type of Deposit                                     |                | Amount |                                 |         | Paid (%) |      |      | Amount |         |   | Paid (%) |        
|                                                    |                |        |                                 |         |          |      |      |        |         |   |          |        
|Noninterest bearing demand deposits                 |                | $      | 3,470                           |         |          |      | 0.00 |        |         | $ | 2,560    |         |  |  | 0.00 |     
|Interest bearing checking and
money market deposits |                |        | 29,227                          |         |          |      | 2.53 |        |         |   | 12,274   |         |  |  | 3.85 |     
|Savings deposits                                    |                |        | 158                             |         |          |      | 1.50 |        |         |   | 48       |         |  |  | 2.08 |     
|Time deposits                                       |                |        | 81,499                          |         |          |      | 4.53 |        |         |   | 92,004   |         |  |  | 6.01 |     
|                                                    |                |        |                                 |         |          |      |      |        |         |   |          |        
|                                                    | Total deposits |        | $                               | 114,354 |          |      |      | 3.88   |         |   | $        | 106,886 |  |  |      | 5.62 | 
|                                                    |                |        |                                 |         |          |      |      |        |         |   |          |        
|                                                    |                |        |                                 |         |          |      |      |        |         |   |          |         |  |  |      |      | 
|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,                       |  | 2002                              |         |   | 2001 |   |         | 2000 |  |   | 1999    |   |  | 1998 |        
|                                                       |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |        
|                                                       |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income before provision
for credit losses |  | $                                 | 6,304   |   |      | $ | 4,614   |      |  | $ | 4,083   |   |  | $    | 3,403   |   |  | $ | 2,440   |  
|Net income (loss)                                      |  | $                                 | 1,252   |   |      | $ | 110     |      |  | $ | 504     |   |  | $    | 475     |   |  | $ | (113    | )
|Net income (loss) per diluted
share of common stock    |  | $                                 | 0.84    |   |      | $ | 0.07    |      |  | $ | 0.34    |   |  | $    | 0.36    |   |  | $ | (0.09   | )
|                                                       |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|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                               |  | $                                 | 152,328 |   |      | $ | 143,529 |      |  | $ | 120,568 |   |  | $    | 108,887 |   |  | $ | 100,267 |  
|Total stockholders equity at year-end                 |  | $                                 | 14,057  |   |      | $ | 12,514  |      |  | $ | 12,323  |   |  | $    | 11,718  |   |  | $ | 10,041  |  
|Total average assets                                   |  | $                                 | 141,487 |   |      | $ | 126,101 |      |  | $ | 110,036 |   |  | $    | 102,935 |   |  | $ | 74,321  |  
|Total average stockholders equity                     |  | $                                 | 13,193  |   |      | $ | 12,659  |      |  | $ | 12,010  |   |  | $    | 10,566  |   |  | $ | 10,358  |  
|                                                       |  |                                   |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average total assets                         |  |                                   | 0.88    | % |      |   | 0.09    | %    |  |   | 0.46    | % |  |      | 0.46    | % |  |   | -0.15   | %
|Return on average stockholders equity                 |  |                                   | 9.49    | % |      |   | 0.87    | %    |  |   | 4.20    | % |  |      | 4.50    | % |  |   | -1.09   | %
|Average equity to average assets                       |  |                                   | 9.32    | % |      |   | 10.04   | %    |  |   | 10.91   | % |  |      | 10.26   | % |  |   | 13.94   | %

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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, 2002, the Company employed 40 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

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##### Table of Contents



for business in the Banks market areas. Many of these competitors have been
in business for many years, have
established customer bases, have substantially higher lending limits than the
Bank, are larger and will be able to offer certain services that the Bank does
not expect to provide in the foreseeable future, including trust services, and
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 Property.

The Bank leases a 3,000 square foot building at 21211 Haggerty Road, Novi,
Michigan 48375 originally for use as its main office and headquarters, and
served as such until December 1999. In 2001 the Novi location was designated a
branch office. The lease term was renewed until August 31, 2007 at an annual
rent of $63,105 for 2002-2003 increasing to a maximum of $69,115 in 2007. The
building was originally built in 1988 to be a bank branch and has one drive-up
window 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 Novi branch is available to Oakland and Wayne County
residents by using I-275, I-96, I-696, and Grand River Avenue.

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 the Bank occupied during
December 1999. The lease extends until June 30, 2014. Additional costs for
furniture, equipment and leasehold improvements for the new headquarters were
approximately $400,000. The annual rent, net of rental income, is
approximately $220,000.

The Bank opened its third branch in January 2000 with 1,200 square feet of
office space on the first floor of the new headquarters building. The lease
extends until June 30, 2014, at an annual rent of $28,000. The branch has 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.

All of the Banks facilities are in good physical condition and, in
managements opinion, the properties are adequately covered by insurance.




Item 3. Legal Proceedings.

None




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

Not applicable.

8



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##### Table of Contents






PART II




Item 5. Market for Common Equity and Related Stockholder Matters.

The Companys common stock is traded in the over-the-counter market and
quotations are reported on the OTC Bulletin Board under the symbol MHBC.
There were approximately 71 holders of record as of December 31, 2002.
Included among the 71 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 have been no cash
dividends paid nor has the Company paid any common stock dividends since 1998.

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 the 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 2002 and 2001. These quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission, and may
not represent actual transactions.

|     |  |             |  |            |              | 
|---- |  | ----------- |  | ---------- | ------------ | 
|     |  |             |  | High / Low |             
|     |  |             |  |            |             
|2002 |  | 4th Quarter |  | $          | 8.00 / $6.75 | 
|     |  | 3rd Quarter |  | $          | 6.65 / $6.50 | 
|     |  | 2nd Quarter |  | $          | 6.65 / $5.70 | 
|     |  | 1st Quarter |  | $          | 5.75 / $5.30 | 
|     |  |             |  |            |              | 
|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 | 

EQUITY COMPENSATION PLAN INFORMATION

|                                                       |  |                                                                                              |  |                                                                              |  |                                                                                                                                           |  |  | 
|------------------------------------------------------ |  | -------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  |  | 
|                                                       |  | Number of securities tobe issued
upon exerciseof
outstanding options,warrants,
and rights(a) |  | Weighted-averageexercise
price ofoutstanding options,warrants, and rights(b) |  | Number of
securities remainingavailable for future issuance underequity compensation plan
(excludingsecurities reflected in column(a))(c) | 
|                                                       |  |                                                                                              |  |                                                                              |  |                                                                                                                                           | 
|Equity compensation plans
approved by shareholders     |  | 99,000 shares                                                                                |  | $5.00/share                                                                  |  | 11,000 shares                                                                                                                            
|                                                      
|Equity compensation plans not approved by
shareholders |  | None                                                                                         |  | N/A                                                                          |  | None                                                                                                                                     
|Total                                                  |  | 99,000 shares                                                                                |  | $5.00/share                                                                  |  | 11,000 shares                                                                                                                            

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Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion addresses material factors affecting the financial
condition and results of the Company. This discussion should be read in
conjunction with the audited financial statements, footnotes and supplemental
financial data presented elsewhere in this report.

The Company was in the development stage during 1996 and the first two months
and nine days of 1997. The Company completed an initial public offering of
common stock during February and March 1997. On March 10, 1997, the Bank
opened for business. As of December 31, 2002, the Bank has been operational
almost 70 months and has completed its fifth full fiscal year of operations.

Results of Operations

Year 2002 Compared to Year 2001
The Company earned $1,252,000 in net profits for 2002, a $1,142,000 improvement
over 2001 which was primarily the result of a reduction in the Banks cost of
funds which improved the net interest margin. Also, the non-interest income
increased $596,000 over 2001 due to gains on sale of loans and leases due
primarily to the robust refinance market for residential mortgages. Other
expenses increased by $753,000 primarily due to increases in commissions, loan
and lease expenses. Professional fees also increased $192,000 over 2001 due to
increases in legal fees relating primarily to loans and leases and management
fees for MHB Leasing, Inc., the Banks wholly-owned subsidiary formed in 2001.
Provision for federal income taxes applicable to operating income increased
$567,000. Quarterly net profits for 2002 were $225,000, $305,000, for the
first and second quarters respectively, and $309,000, and $413,000 for the
third, and fourth quarters, respectively. Quarterly net results for 2001 were
$130,000 and $103,000 for the first and second quarters respectively, and net
losses of $18,000 and $105,000 for the third and fourth quarters respectively.

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.

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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 2002, 2001, and 2000. Total operating income is
net interest income after provision for credit losses plus other operating
income.

|                                    |                             |                        |                  |             |       |                                       |       |       |       |     |       |       |       |     |       | 
|----------------------------------- | --------------------------- | ---------------------- | ---------------- | ----------- | ----- | ------------------------------------- | ----- | ----- | ----- | --- | ----- | ----- | ----- | --- | ----- | 
|                                    |                             |                        |                  |             |       | ($ in 000s Except per Share Earnings) |      
|                                    |                             |                        |                  |             |       |                                       |      
|                                    |                             |                        |                  |             |       |                                       |      
|                                    |                             |                        |                  |             |       | 2002                                  |       |       | 2001  |     |       | 2000  |      
|                                    |                             |                        |                  |             |       |                                       |       |       |       |     |       |       |      
|Net Interest Income Before          |                             |                        |                  |             |       |                                       |       |       |       |     |       |      
|                                    | Provision for Credit Losses |                        |                  |             |       |                                       |       |       |       |     |       |      
|                                    |                             |                        |                  |             |       |                                       |       |       |       |     |      
|                                    |                             |                        |                  | 1st Quarter |       | $                                     | 1,495 |       |       | $   | 1,033 |       |       | $   | 980   | 
|                                    |                             |                        |                  | 2nd Quarter |       |                                       | 1,523 |       |       |     | 1,067 |       |       |     | 1,039 | 
|                                    |                             |                        |                  | 3rd Quarter |       |                                       | 1,579 |       |       |     | 1,163 |       |       |     | 1,000 | 
|                                    |                             |                        |                  | 4th Quarter |       |                                       | 1,707 |       |       |     | 1,351 |       |       |     | 1,064 | 
|                                    |                             |                        |                  |             |       |                                       |       |       |      
|                                    | Total Net Interest Income   |                        | $                | 6,304       |       |                                       | $     | 4,614 |       |     | $     | 4,083 |      
|                                    |                             |                        |                  |             |       |                                       |       |       |      
|Total Operating Income              |                             |                        |                  |             |       |                                       |       |       |       |     |       |      
|                                    |                             |                        |                  | 1st Quarter |       | $                                     | 1,525 |       |       | $   | 1,190 |       |       | $   | 1,006 | 
|                                    |                             |                        |                  | 2nd Quarter |       |                                       | 1,614 |       |       |     | 1,253 |       |       |     | 1,052 | 
|                                    |                             |                        |                  | 3rd Quarter |       |                                       | 1,778 |       |       |     | 1,072 |       |       |     | 1,027 | 
|                                    |                             |                        |                  | 4th Quarter |       |                                       | 2,109 |       |       |     | 1,050 |       |       |     | 1,115 | 
|                                    |                             |                        |                  |             |       |                                       |       |       |      
|                                    |                             | Total Operating Income |                  | $           | 7,026 |                                       |       | $     | 4,565 |     |       | $     | 4,200 |    
|                                    |                             |                        |                  |             |       |                                       |       |       |      
|Consolidated Net Income             |                             |                        |                  |             |       |                                       |       |       |       |     |       |      
|                                    |                             |                        |                  | 1st Quarter |       | $                                     | 225   |       |       | $   | 130   |       |       | $   | 130   | 
|                                    |                             |                        |                  | 2nd Quarter |       |                                       | 305   |       |       |     | 103   |       |       |     | 123   | 
|                                    |                             |                        |                  | 3rd Quarter |       |                                       | 309   |       |       |     | (18   | )     |       |     | 117   | 
|                                    |                             |                        |                  | 4th Quarter |       |                                       | 413   |       |       |     | (105  | )     |       |     | 134   | 
|                                    |                             |                        |                  |             |       |                                       |       |       |      
|                                    |                             |                        | Total Net Income |             | $     | 1,252                                 |       |       | $     | 110 |       |       | $     | 504 |      
|                                    |                             |                        |                  |             |       |                                       |       |       |      
|Net Earnings (Loss) per Share       |                             |                        |                  |             |       |                                       |       |       |       |     |       |      
|                                    |                             |                        |                  | 1st Quarter |       | $                                     | 0.21  |       |       | $   | 0.09  |       |       | $   | 0.09  | 
|                                    |                             |                        |                  | 2nd Quarter |       |                                       | 0.21  |       |       |     | 0.06  |       |       |     | 0.08  | 
|                                    |                             |                        |                  | 3rd Quarter |       |                                       | 0.15  |       |       |     | (0.01 | )     |       |     | 0.08  | 
|                                    |                             |                        |                  | 4th Quarter |       |                                       | 0.27  |       |       |     | (0.07 | )     |       |     | 0.09  | 
|                                    |                             |                        |                  |             |       |                                       |       |       |      
|Total Net Earnings (Loss) per Share |                             | $                      | 0.84             |             |       | $                                     | 0.07  |       |       | $   | 0.34  |      
|                                    |                             |                        |                  |             |       |                                       |       |       |      

Return on Average Equity and Average Assets
For 2002, the return on average equity was 9.49% compared to 0.87% for 2001 and
4.20% for 2000. The return for average assets for 2002 was 0.88%, compared to
0.09% for 2001 and 0.46% for 2000. 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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Balance Sheet Comparisons at Year End2002 Compared to 2001
The Companys total assets at December 31, 2002 were $152,328,000 compared to
$143,529,000 at the end of 2001, an increase of $8,799,000 or 6%. Gross loans
and leases decreased by $834,000 or 0.7% to $118,531,000 at the end of 2002.
Deposits increased by $8,990,000 or 8% to a 2002 year-end balance of
$120,242,000. Federal Home Loan Bank borrowings were $12,500,000 and federal
funds purchased were $4,000,000 at 2002 year end. Federal Home Loan Bank
borrowings were $13,500,000 and federal funds purchased were $5,000,000 at 2001
year end. Cash and cash equivalents were $10,986,000 at the end of 2002, an
increase of $4,254,000 from 2001 year end.

As of December 31, 2002, the Bank had reserves for possible credit losses of
1.70% of gross loans and leases outstanding. During 2001, management provided
an additional $283,000 in reserves for a national retail credit who declared
bankruptcy in 2002, with an outstanding balance of $613,000 as of February 1,
2003. While currently performing satisfactorily, deterioration in its
financial condition has occurred which, in managements opinion, warranted 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, have been taken into account by management
while reviewing the adequacy of credit loss reserves. As a result, management
has provided an additional $211,000 in reserves during 2002. Management
believes that the resulting $2,013,000 credit reserve at year-end 2002 is
adequate relative to the overall quality of the loan and lease portfolio.

At 2002 year end, specific allowances of $98,000 were allocated for impaired
loans and leases classified by management of $708,000. At the end of 2001,
specific allowances of $170,000 were allocated for impaired loans and leases
classified by management of $840,000. During 2002, there were $490,000 in net
charge-offs. In 2001, there were $962,000 in net charge-offs. In 2000, there
were $160,000 in net charge-offs. In 1999, there were $901,000 in net charge
offs. There were no charge-offs during 1998 or 1997.

The Banks loan and lease portfolio at the end of 2002 and 2001 by category and
as a percentage of total loans and leases outstanding is summarized below.

|                                 |                                        |                        |        |              |         |  |      |             |       |        |        |        |         |   |      |      |       |   |         |       |      |   |       |      |      |  
|-------------------------------- | -------------------------------------- | ---------------------- | ------ | ------------ | ------- |  | ---- | ----------- | ----- | ------ | ------ | ------ | ------- | - | ---- | ---- | ----- | - | ------- | ----- | ---- | - | ----- | ---- | ---- | -
|                                 |                                        |                        |        | ($ in 000s)  |         |  |      |             |       |        |        |        |        
|                                 |                                        |                        |        | December 31, |         |  |      |             |       |        |        |        |        
|                                 |                                        |                        |        |              |         |  |      |             |      
|                                 |                                        |                        |        | 2002         |         |  | 2001 |             |       |        |        |        |         |   |      |     
|                                 |                                        |                        |        |              |         |  |      |             |       | Change |       
|                                 |                                        |                        |        |              |         |  |      | % of        |       |        |        |        |         |   | % of |      |       |   |        
|Type of Loan or Lease            |                                        | Outstanding            |        |              | Total   |  |      | Outstanding |       |        | Total  |        |         | $ |      |      | %     |  
|                                 |                                        |                        |        |              |         |  |      |             |       |        |        |        |         |   |      |      |       |  
|Commercial loans discounted      |                                        | $                      | 32,461 |              |         |  | 27.3 | %           |       | $      | 44,780 |        |         |   | 37.6 | %    |       |   | (12,319 | )     |      |   | -27.5 | %   
|                                 |                                        |                        |        |              |         |  |      |             |       |        |        |        |         |   |      |      |       |   |         |       |      |   |       |      |      |  
|Commercial Relationship Lending: |                                        |                        |        |              |         |  |      |             |       |        |        |        |         |   |      |      |       |   |         |       |      |   |       |     
|Commercial loans direct          |                                        |                        | 3,258  |              |         |  | 2.7  | %           |       |        | 2,844  |        |         |   | 2.4  | %    |       |   | 414     |       |      |   | 14.6  | %   
|Commercial lines of credit       |                                        |                        | 14,467 |              |         |  | 12.2 | %           |       |        | 13,465 |        |         |   | 11.3 | %    |       |   | 1,002   |       |      |   | 7.4   | %   
|Commercialconstruction          |                                        |                        | 6,738  |              |         |  | 5.7  | %           |       |        | 4,203  |        |         |   | 3.5  | %    |       |   | 2,535   |       |      |   | 60.3  | %   
|Commercial real estate           |                                        |                        | 25,520 |              |         |  | 21.5 | %           |       |        | 19,525 |        |         |   | 16.4 | %    |       |   | 5,995   |       |      |   | 30.7  | %   
|                                 |                                        |                        |        |              |         |  |      |             |       |        |        |        |         |   |      |      |       |  
|                                 | Total Commercial Relationship Lending: |                        |        | 49,983       |         |  |      | 42.1        | %     |        |        | 40,037 |         |   |      | 33.6 | %     |   |         | 9,946 |      |   |       | 24.8 | %   
|                                 |                                        |                        |        |              |         |  |      |             |       |        |        |        |         |   |      |      |       |   |         |       |      |   |       |      |      |  
|Real estateconstruction         |                                        |                        | 4,036  |              |         |  | 3.4  | %           |       |        | 3,870  |        |         |   | 3.2  | %    |       |   | 166     |       |      |   | 4.3   | %   
|Real estatemortgage             |                                        |                        | 13,823 |              |         |  | 11.7 | %           |       |        | 15,709 |        |         |   | 13.2 | %    |       |   | (1,886  | )     |      |   | -12.0 | %   
|Home equity                      |                                        |                        | 3,257  |              |         |  | 2.7  | %           |       |        | 4,611  |        |         |   | 3.9  | %    |       |   | (1,354  | )     |      |   | -29.4 | %   
|Installment loans and other      |                                        |                        | 275    |              |         |  | 0.2  | %           |       |        | 373    |        |         |   | 0.3  | %    |       |   | (98     | )     |      |   | -26.3 | %   
|Lease financing                  |                                        |                        | 14,696 |              |         |  | 12.4 | %           |       |        | 9,985  |        |         |   | 8.4  | %    |       |   | 4,711   |       |      |   | 47.2  | %   
|                                 |                                        |                        |        |              |         |  |      |             |       |        |        |        |         |   |      |      |       |  
|                                 |                                        | Total loans and leases |        | $            | 118,531 |  |      |             | 100.0 | %      |        | $      | 119,365 |   |      |      | 100.0 | % |         | $     | (834 | ) |       |      | -0.7 | %
|                                 |                                        |                        |        |              |         |  |      |             |       |        |        |        |         |   |      |      |       |  

Loans and leases were funded primarily by deposits consisting mostly of time
deposits which represented 63% of total deposits at 2002 year end compared to
80% of total deposits at 2001 year end. Additional loan and lease information
can be found elsewhere in this report in the Notes to Consolidated Financial
Statements.

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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, 2002,
2001, and 2000. Net interest income for 2002 increased $1,690,000 or 37% to
$6,304,000. Net interest income for 2001 increased $531,000 or 13% to
$4,614,000 compared to $4,083,000 for 2000.



|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         |  |      |      |      | 
|----------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------ | ----- | ------- | ------- | - | -------- | ------ | ------ | ------- | ------ | ---- | ------- | ------- | ----- | -------- | ------- | - | ----- | ----- | ------- |  | ---- | ---- | ---- | 
|Consolidated Average Balance Sheets                         |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         |  |      |     
|and Analysis of Net Interest Income                         |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         |  |      |     
|(Taxable Equivalent Basis)                                  |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         |  |      |     
|For the Years Ended December 31,                            |                                                        | 2002                                       |       |         | 2001    |  
|($ in 000s)                                                 |                                                        |                                            |       |         |         |  
|                                                            |                                                        |                                            |       |         |         |   |          |        |        | Average |        |      |         |         |       |          |         |   |       |       | Average | 
|                                                            |                                                        |                                            |       | Average |         |   |          |        |        |         | Yield/ |      |         | Average |       |          |         |   |       |       | Yield/  | 
|                                                            |                                                        |                                            |       | Balance |         |   | Interest |        |        | Rate    |        |      | Balance |         |       | Interest |         |   | Rate  |      
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |  
|Assets                                                      |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         |  |      |     
|                                                            | Interest bearing balances in other banks               |                                            | $     | 187     |         |   | $        | 3      |        |         |        | 1.60 | %       |         | $     | 2,189    |         |   | $     | 96    |         |  |      | 4.39 | %   
|                                                            | Federal funds sold                                     |                                            |       | 937     |         |   |          | 15     |        |         |        | 1.60 |         |         |       | 2,194    |         |   |       | 109   |         |  |      | 4.97 |     
|                                                            | Investment securities                                  |                                            |       | 18,247  |         |   |          | 914    |        |         |        | 5.01 |         |         |       | 13,113   |         |   |       | 788   |         |  |      | 6.01 |     
|                                                            | Loans and leases, net                                  |                                            |       | 117,960 |         |   |          | 10,099 |        |         |        | 8.56 |         |         |       | 106,090  |         |   |       | 9,768 |         |  |      | 9.21 |     
|                                                            | Loans held for sale                                    |                                            |       | 2,108   |         |   |          | 137    |        |         |        | 6.50 |         |         |       | 1,091    |         |   |       | 92    |         |  |      | 8.43 |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |  
|                                                            |                                                        | Total earning assets                       |       |         | 139,439 |   |          |        | 11,168 |         |        |      | 8.01    |         |       |          | 124,677 |   |       |       | 10,853  |  |      |      | 8.70 | 
|                                                            | Cash and due from banks                                |                                            |       | 1,575   |         |   |          |        |        |         |        |      |         |         |       | 1,054    |         |   |       |       |         |  |      |      |     
|                                                            | Allowance for credit losses                            |                                            |       | (1,791  | )       |   |          |        |        |         |        |      |         |         |       | (1,773   | )       |   |       |       |         |  |      |      |     
|                                                            | Operating lease equipment, net                         |                                            |       |        |         |   |          |        |        |         |        |      |         |         |       |         |         |   |       |       |         |  |      |      |     
|                                                            | Other assets                                           |                                            |       | 2,264   |         |   |          |        |        |         |        |      |         |         |       | 2,143    |         |   |       |       |         |  |      |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|                                                            |                                                        | Total assets                               |       | $       | 141,487 |   |          |        |        |         |        |      |         |         |       | $        | 126,101 |   |       |       |         |  |      |      |      | 
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Liabilities and Stockholders Equity                        |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         |  |      |     
|                                                            | Interest on checking and
Money market deposit accounts |                                            | $     | 29,227  |         |   | $        | 738    |        |         |        | 2.53 | %       |         | $     | 12,274   |         |   | $     | 473   |         |  |      | 3.85 | %   
|                                                            | Savings deposits                                       |                                            |       | 158     |         |   |          | 2      |        |         |        | 1.27 |         |         |       | 48       |         |   |       | 1     |         |  |      | 2.08 |     
|                                                            | Other time deposits less than $100,000                 |                                            |       | 32,326  |         |   |          | 1,415  |        |         |        | 4.38 |         |         |       | 49,694   |         |   |       | 2,952 |         |  |      | 5.94 |     
|                                                            | Time deposits $100,000 and greater                     |                                            |       | 49,173  |         |   |          | 2,285  |        |         |        | 4.65 |         |         |       | 42,310   |         |   |       | 2,581 |         |  |      | 6.10 |     
|                                                            | Borrowed funds                                         |                                            |       | 13,032  |         |   |          | 424    |        |         |        | 3.25 |         |         |       | 5,769    |         |   |       | 232   |         |  |      | 4.02 |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |  
|                                                            |                                                        | Total interest bearing liabilities         |       |         | 123,916 |   |          |        | 4,864  |         |        |      | 3.93    |         |       |          | 110,095 |   |       |       | 6,239   |  |      |      | 5.67 | 
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |      
|                                                            | Other deposits, non-interest bearing                   |                                            |       | 3,470   |         |   |          |        |        |         |        |      |         |         |       | 2,560    |         |   |       |       |         |  |      |      |     
|                                                            | Other liabilities                                      |                                            |       | 908     |         |   |          |        |        |         |        |      |         |         |       | 787      |         |   |       |       |         |  |      |      |     
|                                                            | Stockholders equity                                   |                                            |       | 13,193  |         |   |          |        |        |         |        |      |         |         |       | 12,659   |         |   |       |       |         |  |      |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|                                                            |                                                        | Total liabilities and stockholders equity |       | $       | 141,487 |   |          |        |        |         |        |      |         |         |       | $        | 126,101 |   |       |       |         |  |      |      |      | 
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Net interest income                                         |                                                        |                                            |       |         |         | $ | 6,304    |        |        |         |        |      |         |         |       |          |         | $ | 4,614 |       |         |  |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Net interest rate spread                                    |                                                        |                                            |       |         |         |   |          |        |        |         | 4.08   | %    |         |         |       |          |         |   |       |       |         |  | 3.03 | %   
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Cost of earning assets                                      |                                                        |                                            |       |         |         |   |          |        |        |         | 3.49   | %    |         |         |       |          |         |   |       |       |         |  | 5.00 | %   
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Net interest margin                                         |                                                        |                                            |       |         |         |   |          |        |        |         | 4.52   | %    |         |         |       |          |         |   |       |       |         |  | 3.70 | %   
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Net interest-earning assets to
interest-bearing liabilities |                                                        |                                            | 113   | %       |         |   |          |        |        |         |        |      |         |         | 113   | %        |         |   |       |       |         |  |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Net income after taxes                                      |                                                        | $                                          | 1,252 |         |         |   |          |        |        |         |        |      |         | $       | 110   |          |         |   |       |       |         |  |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Return on equity                                            |                                                        |                                            | 9.49  | %       |         |   |          |        |        |         |        |      |         |         | 0.87  | %        |         |   |       |       |         |  |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Return on assets                                            |                                                        |                                            | 0.88  | %       |         |   |          |        |        |         |        |      |         |         | 0.09  | %        |         |   |       |       |         |  |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Dividend payout ratio                                       |                                                        |                                            |      | %       |         |   |          |        |        |         |        |      |         |         |      | %        |         |   |       |       |         |  |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 
|Equity to assets ratio                                      |                                                        |                                            | 9.32  | %       |         |   |          |        |        |         |        |      |         |         | 10.04 | %        |         |   |       |       |         |  |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |        |        |         |        |      |         |         |       |          |         |   |       |       |         | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |        |      |      | 
|----------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------ | ----- | ------- | ------- | - | -------- | ----- | ----- | ------- | ------ | ---- | ---- | 
|Consolidated Average Balance Sheets                         |                                                        |                                            |       |         |         |   |          |       |       |         |        |     
|and Analysis of Net Interest Income                         |                                                        |                                            |       |         |         |   |          |       |       |         |        |     
|(Taxable Equivalent Basis)                                  |                                                        |                                            |       |         |         |   |          |       |       |         |        |     
|For the Years Ended December 31,                            |                                                        | 2000                                       |      
|($ in 000s)                                                 |                                                        |                                            |      
|                                                            |                                                        |                                            |       |         |         |   |          |       |       | Average |       
|                                                            |                                                        |                                            |       | Average |         |   |          |       |       |         | Yield/ |     
|                                                            |                                                        |                                            |       | Balance |         |   | Interest |       |       | Rate    |       
|                                                            |                                                        |                                            |       |         |         |   |          |       |      
|Assets                                                      |                                                        |                                            |       |         |         |   |          |       |       |         |        |     
|                                                            | Interest bearing balances in other banks               |                                            | $     | 3,398   |         |   | $        | 211   |       |         |        | 6.21 | %   
|                                                            | Federal funds sold                                     |                                            |       | 6,556   |         |   |          | 408   |       |         |        | 6.22 |     
|                                                            | Investment securities                                  |                                            |       | 13,243  |         |   |          | 866   |       |         |        | 6.54 |     
|                                                            | Loans and leases, net                                  |                                            |       | 85,789  |         |   |          | 8,310 |       |         |        | 9.69 |     
|                                                            | Loans held for sale                                    |                                            |       |        |         |   |          |       |       |         |        |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |      
|                                                            |                                                        | Total earning assets                       |       |         | 108,986 |   |          |       | 9,795 |         |        |      | 8.99 | 
|                                                            | Cash and due from banks                                |                                            |       | 945     |         |   |          |       |       |         |        |      |     
|                                                            | Allowance for credit losses                            |                                            |       | (1,988  | )       |   |          |       |       |         |        |      |     
|                                                            | Operating lease equipment, net                         |                                            |       |        |         |   |          |       |       |         |        |      |     
|                                                            | Other assets                                           |                                            |       | 2,093   |         |   |          |       |       |         |        |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|                                                            |                                                        | Total assets                               |       | $       | 110,036 |   |          |       |       |         |        |      |      | 
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Liabilities and Stockholders Equity                        |                                                        |                                            |       |         |         |   |          |       |       |         |        |     
|                                                            | Interest on checking and
Money market deposit accounts |                                            | $     | 9,084   |         |   | $        | 416   |       |         |        | 4.58 | %   
|                                                            | Savings deposits                                       |                                            |       | 19      |         |   |          | 1     |       |         |        | 5.26 |     
|                                                            | Other time deposits less than $100,000                 |                                            |       | 57,831  |         |   |          | 3,487 |       |         |        | 6.03 |     
|                                                            | Time deposits $100,000 and greater                     |                                            |       | 28,420  |         |   |          | 1,808 |       |         |        | 6.36 |     
|                                                            | Borrowed funds                                         |                                            |       | 4       |         |   |          |      |       |         |        |     |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |      
|                                                            |                                                        | Total interest bearing liabilities         |       |         | 95,358  |   |          |       | 5,712 |         |        |      | 5.99 | 
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |        
|                                                            | Other deposits, non-interest bearing                   |                                            |       | 1,858   |         |   |          |       |       |         |        |      |     
|                                                            | Other liabilities                                      |                                            |       | 810     |         |   |          |       |       |         |        |      |     
|                                                            | Stockholders equity                                   |                                            |       | 12,010  |         |   |          |       |       |         |        |      |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|                                                            |                                                        | Total liabilities and stockholders equity |       | $       | 110,036 |   |          |       |       |         |        |      |      | 
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Net interest income                                         |                                                        |                                            |       |         |         | $ | 4,083    |       |       |         |        |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Net interest rate spread                                    |                                                        |                                            |       |         |         |   |          |       |       |         | 3.00   | %   
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Cost of earning assets                                      |                                                        |                                            |       |         |         |   |          |       |       |         | 5.24   | %   
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Net interest margin                                         |                                                        |                                            |       |         |         |   |          |       |       |         | 3.75   | %   
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Net interest-earning assets to
interest-bearing liabilities |                                                        |                                            | 114   | %       |         |   |          |       |       |         |        |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Net income after taxes                                      |                                                        | $                                          | 504   |         |         |   |          |       |       |         |        |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Return on equity                                            |                                                        |                                            | 4.20  | %       |         |   |          |       |       |         |        |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Return on assets                                            |                                                        |                                            | 0.46  | %       |         |   |          |       |       |         |        |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Dividend payout ratio                                       |                                                        |                                            |      | %       |         |   |          |       |       |         |        |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       
|Equity to assets ratio                                      |                                                        |                                            | 10.91 | %       |         |   |          |       |       |         |        |     
|                                                            |                                                        |                                            |       |         |         |   |          |       |       |         |       

13



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##### Table of Contents



The 4.52% net interest margin for 2002 is a 0.82% or 82 basis points (bps)
increase from 2001. While the yield on earning assets went down 69 bps in
2002, 8.01% compared to 8.70%, due to a change in mix of earning assets and a
lower rate environment, the cost of earning assets also went down 151 bps,
3.49% in 2002 compared to 5.00% in 2001. The 151 bps reduction is primarily
the result of (1) certificates of deposits being repriced during 2002 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 $22,263,000 or 101%,
$44,253,000 compared to $21,990,000 at year-end 2002 and 2001, respectively.

The 3.70% net interest margin for 2001 is a 5 bps decrease from the 3.75% net
interest margin for 2000. While the yield on earning assets went down 29 bps
in 2001, 8.70% compared to 8.99%, the cost of earning assets also went down 24
bps to 5.00% in 2001 compared to 5.24% in 2000 primarily due to a lower costs
of time deposits in 2001 compared to 2000. The ratio of net interest-bearing
assets to interest-bearing liabilities was 113%, 113%, and 114% for 2002, 2001,
and 2000, respectively.

The net interest spread for 2002 of 4.08% increased 105 bps over the 3.03%
spread for 2001. The average yield on earning assets of 8.01% decreased 69 bps
from 2001 primarily due to the change in mix of earning assets and a lower rate
environment. The 3.93% cost of interest-bearing liabilities for 2002 decreased
174 bps from 5.67% in 2001 due primarily to higher costing time deposits being
repriced at lower rates in 2002 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 2002 year end by $22,262,000 or 101%.

The net interest spread for 2001 of 3.03% increased 3 bps over the 3.0% spread
for 2000. The 2001 average yield on earning assets of 8.70% decreased 29 bps
from 2000 primarily due to the change in mix of earning assets and higher
yields. The 5.67% cost of interest-bearing liabilities for 2001 decreased 32
bps from 5.99% in 2000 due primarily to lower costing time deposits in 2001.
The cost of interest-bearing liabilities for 2001 and 2000 reflect lower market
rates being paid on time deposits.

14



---



##### Table of Contents



An analysis of the Companys changes in net interest income is presented in the
next table. The $1,690,000 net interest income increase in 2002 resulted
primarily from a $1,004,000 increase in volume of average balances. There was
a positive rate variance of $658,000 and a positive mix variance of $28,000 that
contributed to the increase to net interest income. 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 funds provided, and there was
a $288,000 due to a change in mix. Loan and lease fee income included in loan
and lease interest income was $638,000, $625,000, and $501,000 for 2002, 2001,
and 2000, respectively. Average balances of nonaccrual loans and leases for
2002 were $736,000 which reduced 2002 net interest income by approximately
$63,000. Nonaccrual loans and leases reduced net interest income in 2001 by
$73,000 and was insignificant for 2000.

|                                        |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |      |       |   |   |      |      |   |   |       |       | 
|--------------------------------------- | ------------------------------------------------------ | ----------------------------- | - | ---------- | --------------------- |  | ---------- | ---- | ------ | --- | - | ---- | ----- | - | - | ------ | ------ | - | ---------- | ----- | ----- | --- | - | ---- | ----- | - | - | ---- | ---- | - | - | ----- | ----- | 
|Analysis of Net Interest Income Changes |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |      |       |   |   |      |      |   |   |      
|(Taxable Equivalent Basis)              |                                                        | 2002 Compared to 2001         |   |            | 2001 Compared to 2000 | 
|($ in 000s)                             |                                                        |                               |   |            |                       | 
|                                        |                                                        |                               |   | Volume &   |                       |  | Volume &   |     
|                                        |                                                        |                               |   | Yield/Rate |                       |  | Yield/Rate |     
|                                        |                                                        |                               |   | Volume     |                       |  | Yield/Rate |      |        | Mix |   |      | Total |   |   | Volume |        |   | Yield/Rate |       |       | Mix |   |      | Total |  
|                                        |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |     
|Increase (Decrease) in Interest Income  |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |      |       |   |   |      |      |   |   |      
|                                        | Interest bearing balances in other banks               |                               | $ | (88        | )                     |  | $          | (61  | )      |     | $ | 56   |       |   | $ | (93    | )      |   | $          | (75   | )     |     | $ | (62  | )     |   | $ | 22   |      |   | $ | (115  | )    
|                                        | Federal funds sold                                     |                               |   | (62        | )                     |  |            | (74  | )      |     |   | 42   |       |   |   | (94    | )      |   |            | (271  | )     |     |   | (82  | )     |   |   | 54   |      |   |   | (299  | )    
|                                        | Taxable investment securities                          |                               |   | 309        |                       |  |            | (131 | )      |     |   | (52  | )     |   |   | 126    |        |   |            | (9    | )     |     |   | (70  | )     |   |   | 1    |      |   |   | (78   | )    
|                                        | Loans and leases, net                                  |                               |   | 1,093      |                       |  |            | (611 | )      |     |   | (68  | )     |   |   | 414    |        |   |            | 1,966 |       |     |   | (411 | )     |   |   | (97  | )    |   |   | 1,458 |      
|                                        | Loans held for sale                                    |                               |   | 85         |                       |  |            | (64  | )      |     |   | (59  | )     |   |   | (38    | )      |   |            |      |       |     |   |     |       |   |   | 92   |      |   |   | 92    |      
|                                        |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |     
|                                        |                                                        | Total interest income change  |   |            | 1,337                 |  |            |      | (941   | )   |   |      | (81   | ) |   |        | 315    |   |            |       | 1,611 |     |   |      | (625  | ) |   |      | 72   |   |   |       | 1,058 | 
|Increase (Decrease) in Interest Expense |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |      |       |   |   |      |      |   |   |      
|                                        | Interest on checking and
Money market deposit accounts |                               |   | 653        |                       |  |            | (163 | )      |     |   | (225 | )     |   |   | 265    |        |   |            | 146   |       |     |   | (66  | )     |   |   | (23  | )    |   |   | 57    |      
|                                        | Savings deposits                                       |                               |   | 2          |                       |  |            |     |        |     |   | (1   | )     |   |   | 1      |        |   |            | 1     |       |     |   |     |       |   |   | (1   | )    |   |   |      |      
|                                        | Other time deposits less than $100,000                 |                               |   | (1,032     | )                     |  |            | (777 | )      |     |   | 272  |       |   |   | (1,537 | )      |   |            | (491  | )     |     |   | (52  | )     |   |   | 8    |      |   |   | (535  | )    
|                                        | Time deposits $100,000 and greater                     |                               |   | 418        |                       |  |            | (615 | )      |     |   | (99  | )     |   |   | (296   | )      |   |            | 883   |       |     |   | (74  | )     |   |   | (36  | )    |   |   | 773   |      
|                                        | Borrowed funds                                         |                               |   | 292        |                       |  |            | (44  | )      |     |   | (56  | )     |   |   | 192    |        |   |            | 396   |       |     |   |     |       |   |   | (164 | )    |   |   | 232   |      
|                                        |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |     
|                                        |                                                        | Total interest expense change |   |            | 333                   |  |            |      | (1,599 | )   |   |      | (109  | ) |   |        | (1,375 | ) |            |       | 935   |     |   |      | (192  | ) |   |      | (216 | ) |   |       | 527   | 
|                                        |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |     
|                                        |                                                        | Net interest income change    |   | $          | 1,004                 |  |            | $    | 58     |     |   | $    | 28    |   |   | $      | 1,690  |   |            | $     | 676   |     |   | $    | (433  | ) |   | $    | 288  |   |   | $     | 531   | 
|                                        |                                                        |                               |   |            |                       |  |            |      |        |     |   |      |       |   |   |        |        |   |            |       |       |     |   |     



A time deposit maturity analysis as of December 31, 2002 is presented in the following table.

|                        |               |                |          |         |                 |       |        |                     |   |      |        |       |  |        |        |      |   |      |        |       |  |        |        |      |   |      |      |  
|----------------------- | ------------- | -------------- | -------- | ------- | --------------- | ----- | ------ | ------------------- | - | ---- | ------ | ----- |  | ------ | ------ | ---- | - | ---- | ------ | ----- |  | ------ | ------ | ---- | - | ---- | ---- | -
|Time Deposit            |               | Under $100,000 |          |         | $100,000 & Over |       |        | Total Time Deposits |  
|Maturity Analysis       |               |                |          |         |                 |       |        |                     |  
|As of December 31, 2002 |               | Amount         |          |         | %               |       |        | Amount              |   |      | %      |       |  | Amount |        |      | % |     
|                        |               |                |          |         |                 |       |        |                     |   |      |        |       |  |        |        |      |   |     
|                        |               | Maturing in:   |          |         |                 |       |        |                     |   |      |        |       |  |        |        |      |   |      |        |       |  |        |        |      |   |     
|                        | 3 mos or less |                | $        | 4,512   |                 |       |        | 3.32                | % |      | $      | 2,365 |  |        |        | 3.88 | % |      | $      | 6,877 |  |        |        | 3.51 | %
|                        |               |                |          | 4-6 mos |                 |       | 4,788  |                     |   |      | 3.86   | %     |  |        | 2,217  |      |   |      | 3.95   | %     |  |        | 7,005  |      |   |      | 3.89 | %
|                        |               |                | 7-12 mos |         |                 | 7,356 |        |                     |   | 3.46 | %      |       |  | 11,013 |        |      |   | 3.66 | %      |       |  | 18,369 |        |      |   | 3.58 | %   
|Greater than 12 mos     |               |                | 8,925    |         |                 |       | 4.71   | %                   |   |      | 34,813 |       |  |        | 4.10   | %    |   |      | 43,738 |       |  |        | 4.12   | %   
|                        |               |                |          |         |                 |       |        |                     |   |      |        |       |  |        |        |      |   |     
|                        |               |                |          | TOTAL   |                 | $     | 25,581 |                     |   |      | 3.76   | %     |  | $      | 50,408 |      |   |      | 3.99   | %     |  | $      | 75,989 |      |   |      | 3.91 | %
|                        |               |                |          |         |                 |       |        |                     |   |      |        |       |  |        |        |      |   |     

15



---



##### Table of Contents



The following table summarizes on a consolidated basis, investments as of
December 31, 2002 and 2001. The carrying value of securities increased by
$4,186,000 or 31% ($17,913,000 for year-end 2002 compared to $13,727,000 for
year-end 2001) and the overall yield at year end decreased 77 bps (4.95% for
2002 compared to 5.72% for 2001). This decrease was primarily due to
reinvesting maturing securities and adding additional volume during 2002 at
lower yields. Additionally, the Bank had $362,100 of Federal Reserve Bank
stock and $775,000 of Federal Home Loan Bank stock outstanding at December 31,
2002.

Maturities of Securities
December 31, 2002 and December 31, 2001
At Market Value and Taxable Equivalent Basis
($ in 000s)



|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       |  |  |      |      |  |  |   |   | 
|---------------------------------- | ----------------------------------------- | -------- | - | ------------ | ----- |  |  | ---- | ---- |  | ---------- | ------ | - |  | ----- | ----- | ------ | ----------- |  | ---- | ---- | ------ |  | - | ----- |  | - | ----- | ----- |  |  | ---- | ---- |  |  | - | - | 
|                                   |                                           |          |   | Maturity     |       |  |  |      |      |  | 1 - 5 Year |        |   |  |       |       |        | 6 - 10 Year |  |      |      |        | 
|                                   |                                           |          |   | Under 1 Year |       |  |  |      |      |  | Maturity   |        |   |  |       |       |        | Maturity    |  |      |      |        | 
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        | 
|December 31, 2002                  |                                           | Amount   |   |              | Yield |  |  |      |      |  |            | Amount |   |  | Yield |       |        |             |  |      |      | Amount |  |   | Yield |  |   |       |       | 
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       | 
|Securities Available for Sale (a): |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       |  |  |      |      |  |  |  
|                                   | U.S. Treasury                             |          | $ |             |       |  |  |     |      |  |            | %      |   |  | $     | 1,556 |        |             |  | 3.28 |      |        |  | % |       |  | $ |      |       |  |  |     |      |  |  | % |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   | U.S. Government agencies
and corporations |          |   | 507          |       |  |  | 2.70 |      |  |            |        |   |  |       | 2,895 |        |             |  | 4.11 |      |        |  |   |       |  |   |      |       |  |  |     |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   | States and political
subdivisions         |          |   | 285          |       |  |  | 5.53 |      |  |            |        |   |  |       | 3,836 |        |             |  | 5.91 |      |        |  |   |       |  |   | 1,292 |       |  |  | 6.47 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   | Other bonds, notes and
debentures         |          |   | 756          |       |  |  | 4.82 |      |  |            |        |   |  |       | 3,453 |        |             |  | 5.17 |      |        |  |   |       |  |   |      |       |  |  |     |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   |                                           | Subtotal |   |              | 1,548 |  |  |      | 4.26 |  |            |        |   |  |       |       | 11,740 |             |  |      | 4.90 |        |  |   |       |  |   |       | 1,292 |  |  |      | 6.47 |  |  |   |   | 
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   | Mortgage backed
securities (b)            |          |   |             |       |  |  |     |      |  |            |        |   |  |       |      |        |             |  |     |      |        |  |   |       |  |   |      |       |  |  |     |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   |                                           | Total    |   | $            | 1,548 |  |  |      | 4.26 |  |            |        | % |  |       | $     | 11,740 |             |  |      | 4.90 |        |  |   | %     |  |   | $     | 1,292 |  |  |      | 6.47 |  |  |   | % | 
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |        |             |  |      |      |        |  |   |       |  |   |       |       | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |      |      |  |  |   |   | 
|---------------------------------- | ----------------------------------------- | -------- | - | ------------ | ----- |  |  | - | - |  | ----- | ------ | - |  | ----- | ----- | ------ |  |  | ---- | ---- |  |  | - | - | 
|                                   |                                           |          |   | Over 10 Year |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |      |     
|                                   |                                           |          |   | Maturity     |       |  |  |   |   |  | Total |        |   |  |       |      
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |      
|December 31, 2002                  |                                           | Amount   |   |              | Yield |  |  |   |   |  |       | Amount |   |  | Yield |       |        |  |  |     
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|Securities Available for Sale (a): |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |      |      |  |  |  
|                                   | U.S. Treasury                             |          | $ |             |       |  |  |  |   |  |       | %      |   |  | $     | 1,556 |        |  |  | 3.28 |      |  |  | % |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   | U.S. Government agencies
and corporations |          |   |             |       |  |  |  |   |  |       |        |   |  |       | 3,402 |        |  |  | 3.90 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   | States and political
subdivisions         |          |   |             |       |  |  |  |   |  |       |        |   |  |       | 5,413 |        |  |  | 6.02 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   | Other bonds, notes and
debentures         |          |   |             |       |  |  |  |   |  |       |        |   |  |       | 4,209 |        |  |  | 5.10 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   |                                           | Subtotal |   |              |      |  |  |   |  |  |       |        |   |  |       |       | 14,580 |  |  |      | 4.97 |  |  |   |   | 
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   | Mortgage backed
securities (b)            |          |   |             |       |  |  |  |   |  |       |        |   |  |       | 3,333 |        |  |  | 4.88 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   |                                           | Total    |   | $            |      |  |  |   |  |  |       |        | % |  |       | $     | 17,913 |  |  |      | 4.95 |  |  |   | % | 
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     



|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       |  |  |      |      |  |  |   |   | 
|---------------------------------- | ----------------------------------------- | -------- | - | ------------ | ----- |  |  | ---- | ---- |  | ---------- | ------ | - |  | ----- | ----- | ----- | ----------- |  | ---- | ---- | ------ |  | - | ----- |  | - | ----- | ----- |  |  | ---- | ---- |  |  | - | - | 
|                                   |                                           |          |   | Maturity     |       |  |  |      |      |  | 1 - 5 Year |        |   |  |       |       |       | 6 - 10 Year |  |      |      |        | 
|                                   |                                           |          |   | Under 1 Year |       |  |  |      |      |  | Maturity   |        |   |  |       |       |       | Maturity    |  |      |      |        | 
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        | 
|December 31, 2001                  |                                           | Amount   |   |              | Yield |  |  |      |      |  |            | Amount |   |  | Yield |       |       |             |  |      |      | Amount |  |   | Yield |  |   |       |       | 
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       | 
|Securities Available for Sale (a): |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       |  |  |      |      |  |  |  
|                                   | U.S. Treasury                             |          | $ | 503          |       |  |  | 6.23 |      |  |            | %      |   |  | $     | 528   |       |             |  | 3.42 |      |        |  | % |       |  | $ |      |       |  |  |     |      |  |  | % |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   | U.S. Government agencies
and corporations |          |   | 1,779        |       |  |  | 5.79 |      |  |            |        |   |  |       | 511   |       |             |  | 4.90 |      |        |  |   |       |  |   |      |       |  |  |     |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   | States and political
subdivisions         |          |   |             |       |  |  |     |      |  |            |        |   |  |       | 3,136 |       |             |  | 5.77 |      |        |  |   |       |  |   | 1,811 |       |  |  | 6.38 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   | Other bonds, notes and
debentures         |          |   | 519          |       |  |  | 7.18 |      |  |            |        |   |  |       | 2,864 |       |             |  | 5.56 |      |        |  |   |       |  |   |      |       |  |  |     |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   |                                           | Subtotal |   |              | 2,801 |  |  |      | 6.13 |  |            |        |   |  |       |       | 7,039 |             |  |      | 5.44 |        |  |   |       |  |   |       | 1,811 |  |  |      | 6.38 |  |  |   |   | 
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   | Mortgage backed
securities (b)            |          |   |             |       |  |  |     |      |  |            |        |   |  |       |      |       |             |  |     |      |        |  |   |       |  |   |      |       |  |  |     |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       | 
|                                   |                                           | Total    |   | $            | 2,801 |  |  |      | 6.13 |  |            |        | % |  |       | $     | 7,039 |             |  |      | 5.44 |        |  |   | %     |  |   | $     | 1,811 |  |  |      | 6.38 |  |  |   | % | 
|                                   |                                           |          |   |              |       |  |  |      |      |  |            |        |   |  |       |       |       |             |  |      |      |        |  |   |       |  |   |       |       | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |      |      |  |  |   |   | 
|---------------------------------- | ----------------------------------------- | -------- | - | ------------ | ----- |  |  | - | - |  | ----- | ------ | - |  | ----- | ----- | ------ |  |  | ---- | ---- |  |  | - | - | 
|                                   |                                           |          |   | Over 10 Year |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |      |     
|                                   |                                           |          |   | Maturity     |       |  |  |   |   |  | Total |        |   |  |       |      
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |      
|December 31, 2001                  |                                           | Amount   |   |              | Yield |  |  |   |   |  |       | Amount |   |  | Yield |       |        |  |  |     
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|Securities Available for Sale (a): |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |      |      |  |  |  
|                                   | U.S. Treasury                             |          | $ |             |       |  |  |  |   |  |       | %      |   |  | $     | 1,031 |        |  |  | 4.79 |      |  |  | % |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   | U.S. Government agencies
and corporations |          |   |             |       |  |  |  |   |  |       |        |   |  |       | 2,290 |        |  |  | 5.59 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   | States and political
subdivisions         |          |   |             |       |  |  |  |   |  |       |        |   |  |       | 4,947 |        |  |  | 5.99 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   | Other bonds, notes and
debentures         |          |   |             |       |  |  |  |   |  |       |        |   |  |       | 3,383 |        |  |  | 5.81 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   |                                           | Subtotal |   |              |      |  |  |   |  |  |       |        |   |  |       |       | 11,651 |  |  |      | 5.75 |  |  |   |   | 
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   | Mortgage backed
securities (b)            |          |   |             |       |  |  |  |   |  |       |        |   |  |       | 2,076 |        |  |  | 5.55 |      |  |  |   |  
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     
|                                   |                                           | Total    |   | $            |      |  |  |   |  |  |       |        | % |  |       | $     | 13,727 |  |  |      | 5.72 |  |  |   | % | 
|                                   |                                           |          |   |              |       |  |  |   |   |  |       |        |   |  |       |       |        |  |  |     



|(a) |  | There were no securities Held to Maturity as of December 31, 2002 and 2001. 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.

16



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##### Table of Contents



Other Income Analysis
For the year 2002, other income increased by $596,000 to $1,424,000 resulting
mostly from additional gains on loans and leases sold in 2002, of which
$1,281,000 was from the Banks mortgage division. Other remaining income was
$143,000.

Other Expense Analysis
In 2002, other expenses increased by $753,000 to $5,192,000. Salaries and
employee benefits increased by $218,000 to $2,752,000 due to increases in
mortgage commission expense. Occupancy expense decreased by $30,000 to
$393,000 due primarily to relocating the mortgage division to our Novi
location. Data processing expense increased by $22,000 mostly due to increases
in volume and software enhancements. Advertising/promotion expense increased
by $56,000 to $209,000 due to the Banks efforts to increase its core deposits.
Professional fees went up by $192,000 due to increases in legal fees relating
primarily to loans and leases and management fees for MHB Leasing, Inc., the
Banks wholly-owned subsidiary formed in 2001. Other loan and lease expense
increased by $101,000 mostly due to the increased volume in mortgage loans
originated and sold into the secondary market. Other expenses increased by a
net $197,000 due to ATM processing fees, membership fees, and other
miscellaneous expenses. Federal income taxes increased by $567,000 reflecting
the Banks increase in net operating income.

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 primarily to
increases in commission and employee insurance expense and 4 net additional
employees added in 2001. Occupancy expense increased by $17,000 to $423,000
due to additional overhead expenses relating to the new mortgage division.
Other expenses increased by a net $54,000 due to an increase in correspondent
bank fees, ATM processing fees, membership fees and other miscellaneous
expenses. Federal income taxes decreased by $217,000 due partially to a
reduction in net operating income.

Liquidity and Capital Resources

The Companys current cash projections indicate adequate cash balances as of
December 31, 2002. The Bank has credit facilities with national lending
institutions to add funding capacity through overnight borrowings. There is a
$3,000,000 line of credit with a bank that the Company has available to use as
additional resources of capital of which, $200,000 was outstanding at December
31, 2002. In total the Bank has $8,000,000 of Fed Funds available to purchase
in overnight rollover accounts with two outside banks of which, the Bank had
$4,000,000 outstanding at December 31, 2002. Fund 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 2002. As of December 31,
2002, the Bank had $10,986,000 in cash and cash equivalents, including
$9,897,000 in federal funds sold. In addition, investment securities with a
total market value of $17,913,000 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 9.50% and 9.00% at December 31, 2002 and 2001,
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.

17



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##### Table of Contents






Item 7. Financial Statements.

The consolidated financial statements of the Company and its subsidiary,
together with the report thereon of Plante & Moran, PLLC, included in this
report under this item are listed under Item 13 of this report. No
supplementary financial statement schedules are required to be filed with this
report.




Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

18



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##### 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 and
Related Stockholder Matters.

The information required by this Item is included in the Proxy Statement under
the caption Stock Ownership of Certain Beneficial Owners and Management and
is hereby incorporated herein by reference.




Item 12. Certain Relationships and Related Transactions.

The information required by this Item is included in the Proxy Statement under
the caption Related Party Transactions and is hereby incorporated herein by
reference.




Item 13. Exhibits, List and Reports on Form 8-K.

|    |  |                                                                                                                 |            | 
|--- |  | --------------------------------------------------------------------------------------------------------------- | ---------- | 
|(a) |  | The following financial statements and financial statement schedules are filed with this report:               
|   
|    |  |                                                                                                                 | PageNumber | 
|1.  |  | Financial Statements:                                                                                           |            | 
|    |  | Report of Independent Auditors                                                                                  | 21         | 
|    |  | Consolidated Balance Sheet at December 31, 2002 and 2001                                                        | 22         | 
|    |  | Consolidated Statement of Changes in Stockholders Equity for the
years ended December 31, 2002, 2001, and 2000 | 23         | 
|    |  | Consolidated Statement of Income for the years ended
December 31, 2002, 2001 and 2000                           | 24         | 
|    |  | Consolidated Statement of Cash Flows for the years ended
December 31, 2002, 2001, and 2000                      | 25         | 
|    |  | Notes to Consolidated Financial Statements                                                                      | 26         | 
|   
|2.  |  | Financial Statement Schedules: None                                                                             |            | 
|   
|(b) |  | Reports on Form 8-K.                                                                                            |            | 
|   
|    |  | No Current Reports on Form 8-K were filed during the quarter ended
December 31, 2003.                           |            | 

19



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##### 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)                                                                                                                                                                                
|           
|99.1        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                           
|           
|99.2        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                           



---




Item 14. Controls and Procedures.

Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be disclosed in the Companys periodic SEC
reports. There have been no significant changes in the Companys internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.

20



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##### Table of Contents



Plante Moran Letterhead

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, 2002 and 2001 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, 2002. 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, 2002 and 2001
and the consolidated results of their operations and their cash flows for each
year in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

|                                        |  |      
|--------------------------------------- |  | -----
|                                        |  | [SIG]
|                                       
|Auburn Hills, Michigan
February 5, 2003 |  |      

MRI LOGO

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Michigan Heritage Bancorp, Inc.

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

|                                              |                                                  |                                                                                          |         |                                            |         |             |         |        |         |   |         | 
|--------------------------------------------- | ------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------- | ------------------------------------------ | ------- | ----------- | ------- | ------ | ------- | - | ------- | 
|                                              |                                                  |                                                                                          |         |                                            |         | December 31 |        
|                                              |                                                  |                                                                                          |         |                                            |         |             |        
|                                              |                                                  |                                                                                          |         |                                            |         | 2002        |         |        | 2001    |  
|                                              |                                                  |                                                                                          |         |                                            |         |             |         |        |         |  
|Assets                                       
|Cash and Cash Equivalents                     |                                                  |                                                                                          |         |                                            |         |             |         |       
|                                              | Cash and due from banks                          |                                                                                          | $       | 1,031                                      |         |             | $       | 966    |        
|                                              | Interest-bearing deposits with other banks       |                                                                                          |         | 58                                         |         |             |         | 66     |        
|                                              | Federal funds sold                               |                                                                                          |         | 9,897                                      |         |             |         | 5,700  |        
|                                              |                                                  |                                                                                          |         |                                            |         |             |        
|                                              |                                                  |                                                                                          |         | Total cash and cash equivalents            |         |             | 10,986  |        |         |   | 6,732   | 
|Securities available for sale (Note 2)        |                                                  |                                                                                          | 17,913  |                                            |         |             | 13,727  |       
|Federal Reserve Bank Stock  At cost          |                                                  |                                                                                          | 362     |                                            |         |             | 330     |       
|Federal Home Loan Bank Stock  At cost        |                                                  |                                                                                          | 775     |                                            |         |             | 675     |       
|Loans and leases  Net (Note 3)               |                                                  |                                                                                          | 116,431 |                                            |         |             | 117,441 |       
|Loans held for sale                           |                                                  |                                                                                          | 3,136   |                                            |         |             | 1,589   |       
|Bank premises and equipment (Note 6)          |                                                  |                                                                                          | 588     |                                            |         |             | 730     |       
|Interest receivable and other assets (Note 9) |                                                  |                                                                                          | 2,137   |                                            |         |             | 2,305   |       
|                                              |                                                  |                                                                                          |         |                                            |         |             |        
|                                              |                                                  |                                                                                          |         | Total assets                               |         | $           | 152,328 |        |         | $ | 143,529 | 
|                                              |                                                  |                                                                                          |         |                                            |         |             |        
|Liabilities and Stockholders Equity         
|Liabilities                                   |                                                  |                                                                                          |         |                                            |         |             |         |       
|                                              | Deposits (Note 7):                               |                                                                                          |         |                                            |         |             |         |        |        
|                                              |                                                  | Interest-bearing                                                                         |         | $                                          | 114,998 |             |         | $      | 107,916 |  
|                                              |                                                  | Noninterest-bearing                                                                      |         |                                            | 5,244   |             |         |        | 3,336   |  
|                                              |                                                  |                                                                                          |         |                                            |         |             |        
|                                              |                                                  |                                                                                          |         | Total deposits                             |         |             | 120,242 |        |         |   | 111,252 | 
|                                              | Note payable  Bank (Note 8)                     |                                                                                          |         | 200                                        |         |             |         |       |        
|                                              | Short-term borrowings                            |                                                                                          |         | 4,000                                      |         |             |         | 5,000  |        
|                                              | FHLB advances (Note 9)                           |                                                                                          |         | 12,500                                     |         |             |         | 13,500 |        
|                                              | Interest payable and other liabilities (Note 10) |                                                                                          |         | 1,329                                      |         |             |         | 1,263  |        
|                                              |                                                  |                                                                                          |         |                                            |         |             |        
|                                              |                                                  |                                                                                          |         | Total liabilities                          |         |             | 138,271 |        |         |   | 131,015 | 
|Stockholders Equity                          |                                                  |                                                                                          |         |                                            |         |             |         |       
|                                              | Common stock  No par value :                    |                                                                                          |         |                                            |         |             |         |        |        
|                                              |                                                  | Authorized - 4,500,000 shares
Issued and outstanding - 1,488,764 shares in 2002 and 2001 |         |                                            | 13,730  |             |         |        | 13,730  |  
|                                              | Accumulated deficit                              |                                                                                          |         | (109                                       | )       |             |         | (1,361 | )      
|                                              | Accumulated other comprehensive income           |                                                                                          |         | 436                                        |         |             |         | 145    |        
|                                              |                                                  |                                                                                          |         |                                            |         |             |        
|                                              |                                                  |                                                                                          |         | Total stockholders equity                 |         |             | 14,057  |        |         |   | 12,514  | 
|                                              |                                                  |                                                                                          |         |                                            |         |             |        
|                                              |                                                  |                                                                                          |         | Total liabilities and stockholders equity |         | $           | 152,328 |        |         | $ | 143,529 | 
|                                              |                                                  |                                                                                          |         |                                            |         |             |        

plante moran

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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- January 1, 2000   |                                                                                           |                            | 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 |      
|Comprehensive income:      |                                                                                           |                            |           |             |  |   |         |   |  |             |        |       |               |   |       |               |  |       |        |      
|                           | Net income                                                                                |                            |           |            |  |   |         |  |  |             |        | 1,252 |               |   |       |              |  |       |        | 1,252 |      
|                           | Change in net unrealized gain
on securities available for
sale, net of tax effect of $150 |                            |           |            |  |   |         |  |  |             |        |      |               |   |       | 291           |  |       |        | 291   |      
|                           |                                                                                           |                            |           |             |  |   |         |   |  |             |        |       |               |   |      
|                           |                                                                                           | Total comprehensive income |           |             |  |   |         |   |  |             |        |       |               |   |       |               |  |       |        |       | 1,543 | 
|                           |                                                                                           |                            |           |             |  |   |         |   |  |             |        |       |               |   |      
|Balance- December 31, 2002 |                                                                                           |                            | 1,488,764 |             |  | $ | 13,730  |   |  | $           | (109   | )     |               | $ | 436   |               |  | $     | 14,057 |      
|                           |                                                                                           |                            |           |             |  |   |         |   |  |             |        |       |               |   |      



23



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Michigan Heritage Bancorp, Inc.

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

|                                                    |                                                 |                          |       |                        |        |   |       |       |        |      |       |       |       | 
|--------------------------------------------------- | ----------------------------------------------- | ------------------------ | ----- | ---------------------- | ------ | - | ----- | ----- | ------ | ---- | ----- | ----- | ----- | 
|                                                    |                                                 |                          |       | Year Ended December 31 |       
|                                                    |                                                 |                          |       |                        |       
|                                                    |                                                 |                          |       | 2002                   |        |   | 2001  |       |        | 2000 |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |      |      
|Interest Income                                     |                                                 |                          |       |                        |        |   |       |       |        |      |       |      
|                                                    | Interest and fees on loans and leases           |                          | $     | 9,376                  |        |   | $     | 9,407 |        |      | $     | 8,203 |      
|                                                    | Interest and dividends on investments  Taxable |                          |       | 826                    |        |   |       | 712   |        |      |       | 839   |      
|                                                    | Interest on tax-exempt securities               |                          |       | 88                     |        |   |       | 76    |        |      |       | 27    |      
|                                                    | Interest on federal funds sold                  |                          |       | 15                     |        |   |       | 109   |        |      |       | 408   |      
|                                                    | Interest on deposits with other banks           |                          |       | 3                      |        |   |       | 96    |        |      |       | 211   |      
|                                                    | Interest on direct financing leases             |                          |       | 860                    |        |   |       | 453   |        |      |       | 107   |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|                                                    |                                                 | Total interest income    |       |                        | 11,168 |   |       |       | 10,853 |      |       |       | 9,795 | 
|Interest Expense                                    |                                                 |                          |       |                        |        |   |       |       |        |      |       |      
|                                                    | Interest on deposits                            |                          |       | 4,440                  |        |   |       | 6,007 |        |      |       | 5,712 |      
|                                                    | Interest on borrowed funds                      |                          |       | 424                    |        |   |       | 232   |        |      |       |      |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|                                                    |                                                 | Total interest expense   |       |                        | 4,864  |   |       |       | 6,239  |      |       |       | 5,712 | 
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|Interest Income- Before provision for credit losses |                                                 |                          | 6,304 |                        |        |   | 4,614 |       |        |      | 4,083 |      
|Provision for Credit Losses(Note 4)                 |                                                 |                          | 701   |                        |        |   | 877   |       |        |      | 60    |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|Net Interest Income                                 |                                                 |                          | 5,603 |                        |        |   | 3,737 |       |        |      | 4,023 |      
|Noninterest Income                                  |                                                 |                          |       |                        |        |   |       |       |        |      |       |      
|                                                    | Service charges on deposit accounts             |                          |       | 138                    |        |   |       | 109   |        |      |       | 111   |      
|                                                    | Gain on sale of securities                      |                          |       |                       |        |   |       | 44    |        |      |       |      |      
|                                                    | Gain on sale of loans                           |                          |       | 1,281                  |        |   |       | 675   |        |      |       | 66    |      
|                                                    | Other                                           |                          |       | 5                      |        |   |       |      |        |      |       |      |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|                                                    |                                                 | Total noninterest income |       |                        | 1,424  |   |       |       | 828    |      |       |       | 177   | 
|Other Expenses                                      |                                                 |                          |       |                        |        |   |       |       |        |      |       |      
|                                                    | Salaries and employee benefits                  |                          |       | 2,752                  |        |   |       | 2,534 |        |      |       | 1,901 |      
|                                                    | Occupancy of bank premises (Note 12)            |                          |       | 393                    |        |   |       | 423   |        |      |       | 406   |      
|                                                    | Processing                                      |                          |       | 129                    |        |   |       | 107   |        |      |       | 89    |      
|                                                    | Advertising                                     |                          |       | 209                    |        |   |       | 153   |        |      |       | 172   |      
|                                                    | Equipment expense                               |                          |       | 245                    |        |   |       | 248   |        |      |       | 229   |      
|                                                    | Professional fees                               |                          |       | 562                    |        |   |       | 370   |        |      |       | 263   |      
|                                                    | Other loan and lease expenses                   |                          |       | 280                    |        |   |       | 179   |        |      |       | 32    |      
|                                                    | Other expenses                                  |                          |       | 622                    |        |   |       | 425   |        |      |       | 371   |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|                                                    |                                                 | Total other expenses     |       |                        | 5,192  |   |       |       | 4,439  |      |       |       | 3,463 | 
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|Income- Before income taxes                         |                                                 |                          | 1,835 |                        |        |   | 126   |       |        |      | 737   |      
|Income Tax Expense(Note 10)                         |                                                 |                          | 583   |                        |        |   | 16    |       |        |      | 233   |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|Net Income                                          |                                                 | $                        | 1,252 |                        |        | $ | 110   |       |        | $    | 504   |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|Basic Earnings per Share                            |                                                 | $                        | 0.84  |                        |        | $ | 0.07  |       |        | $    | 0.34  |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     
|Diluted Earnings per Share                          |                                                 | $                        | 0.83  |                        |        | $ | 0.07  |       |        | $    | 0.34  |      
|                                                    |                                                 |                          |       |                        |        |   |       |       |        |     

plante moran

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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 |       
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         |                        |       
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         | 2002                   |        |         | 2001    |        |         | 2000    |    
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |        |         |         |    
|Cash Flows from Operating Activities                                   |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |        |         |        
|                                                                       | Net income                                                                          |                                               | $                                                                     | 1,252                                               |         |                        | $      | 110     |         |        | $       | 504     |    
|                                                                       | Adjustments to reconcile net income to net cash from
operating activities:          |                                               |                                                                       |                                                     |         |                        |        |         |         |        |         |         |    
|                                                                       |                                                                                     | Depreciation and amortization                 |                                                                       |                                                     | 209     |                        |        |         | 241     |        |         |         | 234 |     
|                                                                       |                                                                                     | Provision for credit losses                   |                                                                       |                                                     | 701     |                        |        |         | 877     |        |         |         | 60  |     
|                                                                       |                                                                                     | Gain on sale of equipment                     |                                                                       |                                                     |        |                        |        |         | (4      | )      |         |         |    |     
|                                                                       |                                                                                     | Gain on sale of available-for-sale securities |                                                                       |                                                     |        |                        |        |         | (44     | )      |         |         |    |     
|                                                                       |                                                                                     | Proceeds from the sale of loans held for sale |                                                                       |                                                     | 62,374  |                        |        |         | 38,920  |        |         |         |    |     
|                                                                       |                                                                                     | Originations of loans held for sale           |                                                                       |                                                     | (63,921 | )                      |        |         | (40,509 | )      |         |         |    |     
|                                                                       |                                                                                     | Deferred income tax expense                   |                                                                       |                                                     | 340     |                        |        |         | 658     |        |         |         |    |     
|                                                                       |                                                                                     | Amortization and accretion of securities      |                                                                       |                                                     | 127     |                        |        |         | 9       |        |         |         | (82 | )   
|                                                                       |                                                                                     | Changes in assets and liabilities:            |                                                                       |                                                     |         |                        |        |         |         |        |         |         |     |     
|                                                                       |                                                                                     |                                               | Increase in accrued interest
receivable and other assets              |                                                     |         | (172                   | )      |         |         | (1,677 | )       |         |     | (327 | )      
|                                                                       |                                                                                     |                                               | Increase (decrease) in accrued interest payable
and other liabilities |                                                     |         | (84                    | )      |         |         | 178    |         |         |     | (130 | )      
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |       
|                                                                       |                                                                                     |                                               |                                                                       | Net cash provided by (used in) operating activities |         |                        | 826    |         |         |        | (1,241  | )       |     |      | 259     |  
|Cash Flows from Investing Activities                                   |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |        |         |        
|                                                                       | Proceeds from maturities of available-for-sale securities                           |                                               |                                                                       | 3,933                                               |         |                        |        | 6,426   |         |        |         | 7,340   |    
|                                                                       | Proceeds from sales of available-for-sale securities                                |                                               |                                                                       |                                                    |         |                        |        | 1,522   |         |        |         |        |    
|                                                                       | Purchase of available-for-sale securities                                           |                                               |                                                                       | (7,805                                              | )       |                        |        | (9,440  | )       |        |         | (10,476 | )  
|                                                                       | Purchase of Federal Home Loan Bank stock                                            |                                               |                                                                       | (100                                                | )       |                        |        | (581    | )       |        |         | (94     | )  
|                                                                       | Purchase of Federal Reserve Bank stock                                              |                                               |                                                                       | (32                                                 | )       |                        |        | (5      | )       |        |         | (31     | )  
|                                                                       | (Increase) decrease in loans and leases                                             |                                               |                                                                       | 309                                                 |         |                        |        | (25,068 | )       |        |         | (13,427 | )  
|                                                                       | Proceeds from sales of equipment                                                    |                                               |                                                                       |                                                    |         |                        |        | 11      |         |        |         |        |    
|                                                                       | Premises and equipment expenditures                                                 |                                               |                                                                       | (67                                                 | )       |                        |        | (136    | )       |        |         | (313    | )  
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |       
|                                                                       |                                                                                     |                                               |                                                                       | Net cash used in investing activities               |         |                        | (3,762 | )       |         |        | (27,271 | )       |     |      | (17,001 | )
|Cash Flows from Financing Activities                                   |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |        |         |        
|                                                                       | Net increase (decrease) in interest-bearing and noninterest-bearing
demand accounts |                                               |                                                                       | 22,263                                              |         |                        |        | 11,860  |         |        |         | (3,666  | )  
|                                                                       | Net increase (decrease) in time certificates                                        |                                               |                                                                       | (13,273                                             | )       |                        |        | (7,268  | )       |        |         | 14,372  |    
|                                                                       | Net proceeds from note payable  Bank                                               |                                               |                                                                       | 200                                                 |         |                        |        |        |         |        |         |        |    
|                                                                       | Proceeds from short-term borrowings                                                 |                                               |                                                                       | 243,334                                             |         |                        |        | 5,000   |         |        |         | 500     |    
|                                                                       | Payments on short-term borrowings                                                   |                                               |                                                                       | (244,334                                            | )       |                        |        | (500    | )       |        |         |        |    
|                                                                       | Proceeds from FHLB advances                                                         |                                               |                                                                       | 20,000                                              |         |                        |        | 13,500  |         |        |         |        |    
|                                                                       | Payments on FHLB advances                                                           |                                               |                                                                       | (21,000                                             | )       |                        |        |        |         |        |         |        |    
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |       
|                                                                       |                                                                                     |                                               |                                                                       | Net cash provided by financing activities           |         |                        | 7,190  |         |         |        | 22,592  |         |     |      | 11,206  |  
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |       
|Net Increase (Decrease) in Cash and Cash Equivalents                   |                                                                                     |                                               | 4,254                                                                 |                                                     |         |                        | (5,920 | )       |         |        | (5,536  | )      
|Cash and Cash Equivalents- Beginning of year                           |                                                                                     |                                               | 6,732                                                                 |                                                     |         |                        | 12,652 |         |         |        | 18,188  |        
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |       
|Cash and Cash Equivalents- End of year                                 |                                                                                     | $                                             | 10,986                                                                |                                                     |         | $                      | 6,732  |         |         | $      | 12,652  |        
|                                                                       |                                                                                     |                                               |                                                                       |                                                     |         |                        |        |         |         |       
|Supplemental Cash Flow and Noncash Information- Cash paid for
Interest |                                                                                     | $                                             | 4,670                                                                 |                                                     |         | $                      | 6,392  |         |         | $      | 5,445   |        
|                                                                       | Income taxes                                                                        |                                               |                                                                       |                                                    |         |                        |        | 85      |         |        |         | 203     |    



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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

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 networks to communities in Wayne and Oakland counties. MHB
Leasing, Inc. originates leases to customers primarily in Michigan.
The Bank and leasing company have a lending concentration to
companies who operate hospitals.                                                                                                                                                                                                                                                                                      



| |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash Equivalents- Cash equivalents include cash on hand 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 is restricted
and carried at cost.                                                                                                   
|
| | Purchase premiums and discounts are recognized
in interest income using the interest method over the terms of the
securities. Declines in the fair value of available-for-sale
securities below their cost that are
deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are
recorded on the trade date and are determined using the specific
identification method.



26



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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

Note 1  Summary of Significant Accounting Policies (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Loans and Leases- The Corporation grants mortgage, commercial, and
consumer loans and leases to customers. Loans are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the
allowance for credit losses, and any deferred fees or costs on
originated loans and leases. Interest income is accrued on the
unpaid principal balance. Loan and lease origination fees, net of
certain direct origination costs, are deferred and recognized as an
adjustment to the related yield using the interest method.



| |                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accrual of interest on loans and leases is discontinued at the
time the loan or lease is 90 days delinquent unless the credit is
well-secured and in process of collection. In all cases, loans and
leases are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered doubtful.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lease Financing- The Bank uses the finance method of accounting for
direct lease contracts. Under this method of accounting, a
receivable is recorded for the present value of lease payments due
and estimated residual values. Lease income, represented by the
excess of the total contract receivable plus estimated equipment
residual value over the cost of the equipment, is recorded over the
term of the lease at a level rate of return on the unrecovered net
investment.                                    
|
| | Unguaranteed residual values are estimated at the
inception of the lease. If, subsequent to the date a lease is
entered into, the
Company determines that the unguaranteed residual will be less than
amounts originally estimated, a provision for write-downs in residual
will be accrued in the financial statements. No residual write-downs
were required in 2002 or 2001. To the extent the actual residual at
the termination of the lease is different from its carrying amount, a
gain or loss will be recorded.
|
| | Allowance for Credit Losses- The
allowance for credit losses is established as losses are estimated to
have occurred through a provision for credit losses charged to
earnings. Credit losses are charged against the allowance when
management believes the uncollectibility of a loan or lease balance
is confirmed. Subsequent recoveries, if any, are credited to the
allowance.                                                                                                                                     



27



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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

Note 1  Summary of Significant Accounting Policies (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The allowance for credit losses is evaluated on a regular basis by
management and is based upon managements periodic review of the
collectibility of the loans and leases in light of historical
experience, the nature and volume of the portfolio, adverse
situations that may affect the borrowers ability to repay, estimated
value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more
information becomes available.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Credit-related Financial Instruments- In the ordinary course of
business, the Corporation has entered into commitments to extend
credit, including commitments under home equity agreements,
commercial letters of credit, and standby letters of credit. Such
financial instruments are recorded when they are funded.



28



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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

Note 1  Summary of Significant Accounting Policies (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Premises and Equipment- Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation,
computed on the straight-line method, is charged to operations over
the useful lives of the properties. Leasehold improvements are
amortized over the terms of their respective leases or the estimated
useful lives of the improvements, whichever is shorter.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Foreclosed Assets- Assets acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair
value at the date of the foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount
or fair value less costs to sell. Revenue and expenses from
operations and changes in valuation allowance are included in net
expenses from foreclosed assets.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income Taxes- Deferred tax assets and liabilities are recognized for
temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be recovered or settled. Valuation
allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Short-term Borrowings- Short-term borrowings include federal funds
purchased by the Bank. Federal funds purchased generally mature in
one to four days.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock Compensation Plans- The Corporation 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.



29



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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

Note 1  Summary of Significant Accounting Policies (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Corporation applies APB Opinion 25 and related Interpretations in
accounting for the stock option plan. Accordingly, no compensation
cost has been recognized. Had compensation cost for the
Corporations stock option plan been determined based on the fair
value at the grant dates for awards under the plan consistent with
the method prescribed by FASB Statement No. 123, the Corporations
net income and earnings per share would have been adjusted to the pro
forma amounts indicated below:

|                     |                   |             |           |   |       |      |                        |   |      |      |  |   |      |      |  |  | 
|-------------------- | ----------------- | ----------- | --------- | - | ----- | ---- | ---------------------- | - | ---- | ---- |  | - | ---- | ---- |  |  | 
|                     |                   |             |           |   |       |      | Year Ended December 31 |  
|                     |                   |             |           |   |       |      |                        |  
|                     |                   |             |           |   |       |      | 2002                   |   |      | 2001 |  |   | 2000 |     
|                     |                   |             |           |   |       |      |                        |   |      |      |  |   |      |     
|Net income           |                   | As reported |           | $ | 1,252 |      |                        | $ | 110  |      |  | $ | 504  |     
|                     |                   | Pro forma   |           | $ | 1,267 |      |                        | $ | 279  |      |  | $ | 487  |     
|                    
|Earnings per share   |                   | As reported |           | $ | 0.84  |      |                        | $ | 0.07 |      |  | $ | 0.34 |     
|                     |                   | Pro forma   |           | $ | 0.85  |      |                        | $ | 0.19 |      |  | $ | 0.33 |     
|                    
|Earnings per share - |                   | As reported |           | $ | 0.83  |      |                        | $ | 0.07 |      |  | $ | 0.34 |     
|                     | Assuming dilution |             | Pro forma |   | $     | 0.84 |                        |   | $    | 0.19 |  |   | $    | 0.33 | 



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

|                              |  |      |     |  |      |  |       |      |  |  |     | 
|----------------------------- |  | ---- | --- |  | ---- |  | ----- | ---- |  |  | --- | 
|                              |  | 2002 |     |  | 2001 |  |       | 2000 | 
|                              |  |      |     |  |      |  |       |      | 
|Dividend yield                |  |      | N/A |  |      |  |      | %    |  |  | N/A | 
|Expected average life (years) |  |      | N/A |  |      |  | 8.00  |      |  |  | N/A | 
|Volatility                    |  |      | N/A |  |      |  | 30.37 | %    |  |  | N/A | 
|Risk-free interest rate       |  |      | N/A |  |      |  | 5.00  | %    |  |  | N/A | 



30



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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

Note 1  Summary of Significant Accounting Policies (Continued)



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

|                                  |  |      |           |  |      |   |           |      |  |   |           | 
|--------------------------------- |  | ---- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                                  |  | 2002 |           |  | 2001 |   |           | 2000 | 
|                                  |  |      |           |  |      |   |           |      | 
|Average common shares outstanding |  | $    | 1,488,764 |  |      | $ | 1,488,764 |      |  | $ | 1,488,764 | 
|Dilutive impact of stock options  |  |      | 22,375    |  |      |   | 5,564     |      |  |   |          | 
|                                  |  |      |           |  |      |   |           |      | 
|Diluted common shares outstanding |  | $    | 1,511,139 |  |      | $ | 1,494,328 |      |  | $ | 1,488,764 | 
|                                  |  |      |           |  |      |   |           |      | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2002 and 2001 is
comprised solely of unrealized gains on available-for-sale securities, net
of related income taxes.                                                                                                                                                                                                               
|
| | Recent Accounting Pronouncements- Financial Accounting Standards Board
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
clarifies the requirements of Statement of Accounting Standards No. 5,
Accounting for Contingencies,relating to the guarantors accounting for
and disclosure of certain types of guarantees. The disclosure provisions
of the Interpretation are effective for financial statements ending after
December 15, 2002. However, the provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002. The initial adoption of this standard did not
have an impact on the financial conditions or results of operations.



31



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##### Table of Contents



Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

Note 1  Summary of Significant Accounting Policies (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Statement of Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure(SFAS 148), effective for
fiscal years ending after December 31, 2002, amends FASB Statement
No. 123, Accounting for Stock-Based Compensation.SFAS 148 provides
alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee
compensation as well as require more frequent disclosures in
financial statements about the effects of stock-based compensation.
The adoption of SFAS 148 will not have a material affect on the
Corporations financial statements.

Note 2  Securities



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

|                               |                                                                                       |       |   |           |        |  |            |       |     |            |       |    |        |           |   |       |        | 
|------------------------------ | ------------------------------------------------------------------------------------- | ----- | - | --------- | ------ |  | ---------- | ----- | --- | ---------- | ----- | -- | ------ | --------- | - | ----- | ------ | 
|                               |                                                                                       |       |   | 2002      |       
|                               |                                                                                       |       |   |           |       
|                               |                                                                                       |       |   |           |        |  |            | 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 |       | $ | 4,825     |        |  | $          | 133   |     |            | $     |   |        |           | $ | 4,958 |       
|                               | Municipal notes                                                                       |       |   | 5,082     |        |  |            | 333   |     |            |       | 2  |        |           |   | 5,413 |       
|                               | Corporate bonds                                                                       |       |   | 4,106     |        |  |            | 104   |     |            |       | 1  |        |           |   | 4,209 |       
|                               | Mortgage-backed securities                                                            |       |   | 3,239     |        |  |            | 94    |     |            |       |   |        |           |   | 3,333 |       
|                               |                                                                                       |       |   |           |        |  |            |       |     |            |       |    |       
|                               |                                                                                       | Total |   | $         | 17,252 |  |            | $     | 664 |            |       | $  | 3      |           |   | $     | 17,913 | 
|                               |                                                                                       |       |   |           |        |  |            |       |     |            |       |    |       
|                              
|                               |                                                                                       |       |   | 2001      |       
|                               |                                                                                       |       |   |           |       
|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 | 
|                               |                                                                                       |       |   |           |        |  |            |       |     |            |       |    |       

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

Note 2  Securities (Continued)



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The amortized cost and estimated market value of securities at
December 31, 2002, 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                |          | $ | 1,535              |        |  | $            | 1,548  |       
|Due after one year through five years  |          |   | 11,255             |        |  |              | 11,741 |       
|Due after five years through ten years |          |   | 1,225              |        |  |              | 1,290  |       
|Due after ten years                    |          |   |                   |        |  |              |       |       
|                                       |          |   |                    |        |  |             
|                                       | Subtotal |   |                    | 14,015 |  |              |        | 14,579 | 
|Mortgage-backed securities             |          |   | 3,237              |        |  |              | 3,334  |       
|                                       |          |   |                    |        |  |             
|                                       | Total    |   | $                  | 17,252 |  |              | $      | 17,913 | 
|                                       |          |   |                    |        |  |             



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Securities having a carrying value and fair value of $3,901,000 were
pledged at December 31, 2002 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 2000 and 2001. 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, 2002 and 2001 amounted to $29,000
and $210,000, respectively. During the year ended December 31, 2000,
total principal additions were $30,000 and principal payments were
$211,000.



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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements
December 31, 2002 and 2001

Note 3  Loans and Leases (Continued)



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

|                                 |                                       |          |         |        |         |   |         |        |         | 
|-------------------------------- | ------------------------------------- | -------- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                 |                                       |          |         | 2002   |         |   | 2001    |       
|                                 |                                       |          |         |        |         |   |         |       
|Commercial loans                 |                                       | $        | 82,444  |        |         | $ | 84,817  |       
|Direct financing leases (Note 5) |                                       |          | 14,696  |        |         |   | 9,985   |       
|Residential real estate          |                                       |          | 17,860  |        |         |   | 19,579  |       
|Installment                      |                                       |          | 274     |        |         |   | 373     |       
|Home equity                      |                                       |          | 3,257   |        |         |   | 4,611   |       
|                                 |                                       |          |         |        |         |  
|                                 |                                       | Subtotal |         |        | 118,531 |   |         |        | 119,365 | 
|Less:                            |                                       |          |         |        |         |   |         |       
|                                 | Net deferred fees                     |          |         | (87    | )       |   |         | (122   | )      
|                                 | Allowances for credit losses (Note 4) |          |         | (2,013 | )       |   |         | (1,802 | )      
|                                 |                                       |          |         |        |         |  
|Loans and leases  Net           |                                       | $        | 116,431 |        |         | $ | 117,441 |       
|                                 |                                       |          |         |        |         |  



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Final loan and lease maturities and rate sensitivity of the loan and lease
portfolio at December 31, 2002 are as follows:

|                                            |       |   |          |        |  |            |        |        |            |   |       |       |  |   |        |         | 
|------------------------------------------- | ----- | - | -------- | ------ |  | ---------- | ------ | ------ | ---------- | - | ----- | ----- |  | - | ------ | ------- | 
|                                            |       |   | Within   |        |  | One to     |        |        | After Five |   |       |       |  |  
|                                            |       |   | One Year |        |  | Five Years |        |        | Years      |   |       | Total | 
|                                            |       |   |          |        |  |            |        |        |            |   |       |       | 
|Commercial                                  |       | $ | 41,755   |        |  | $          | 40,689 |        |            | $ |      |       |  | $ | 82,444 |        
|Direct financing leases                     |       |   | 3,846    |        |  |            | 10,286 |        |            |   | 564   |       |  |   | 14,696 |        
|Real estate                                 |       |   | 9,233    |        |  |            | 5,950  |        |            |   | 2,677 |       |  |   | 17,860 |        
|Installment                                 |       |   | 92       |        |  |            | 182    |        |            |   |      |       |  |   | 274    |        
|Home equity                                 |       |   | 2,866    |        |  |            | 294    |        |            |   | 97    |       |  |   | 3,257  |        
|                                            |       |   |          |        |  |            |        |        |            |   |       |      
|                                            | Total |   | $        | 57,792 |  |            | $      | 57,401 |            |   | $     | 3,338 |  |   | $      | 118,531 | 
|                                            |       |   |          |        |  |            |        |        |            |   |       |      
|Loans and leases at fixed interest rates    |       | $ | 24,425   |        |  | $          | 49,219 |        |            | $ | 3,269 |       |  | $ | 76,913 |        
|Loans and leases at variable interest rates |       |   | 33,367   |        |  |            | 8,182  |        |            |   | 69    |       |  |   | 41,618 |        
|                                            |       |   |          |        |  |            |        |        |            |   |       |      
|                                            | Total |   | $        | 57,792 |  |            | $      | 57,401 |            |   | $     | 3,338 |  |   | $      | 118,531 | 
|                                            |       |   |          |        |  |            |        |        |            |   |       |      



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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 4  Allowance for Possible Credit Losses



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

|                                       |  |      |       |   |      |   |       |  
|-------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                       |  | 2002 |       |   | 2001 |  
|                                       |  |      |       |   |      |  
|Balance- Beginning of year             |  | $    | 1,802 |   |      | $ | 1,887 |  
|Provision charged to operations        |  |      | 701   |   |      |   | 877   |  
|Credit losses                          |  |      | (560  | ) |      |   | (964  | )
|Credit loss recoveries                 |  |      | 70    |   |      |   | 2     |  
|                                       |  |      |       |   |      |  
|Balance- End of year                   |  | $    | 2,013 |   |      | $ | 1,802 |  
|                                       |  |      |       |   |      |  
|As a percent of total loans and leases |  |      | 1.70  | % |      |   | 1.51  | %
|                                       |  |      |       |   |      |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The recorded investment in impaired loans and leases was $708,000 and
$840,000 at December 31, 2002 and 2001, respectively. The average recorded
investment in impaired loans and leases during 2002 was $736,000. The
average recorded investment in impaired loans and leases during 2001 was
$551,000. Included in the impaired loan and lease total were $708,000 and
$840,000 in 2002 and 2001, respectively, of impaired loans and leases for
which the specific allowance for possible credit losses was $136,000 and
$170,000 at December 31, 2002 and 2001, respectively.

Note 5  Direct Financing Leases



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

|                                                            |                                           |   |        |        |  |      |        |       | 
|----------------------------------------------------------- | ----------------------------------------- | - | ------ | ------ |  | ---- | ------ | ----- | 
|                                                            |                                           |   | 2002   |        |  | 2001 |       
|                                                            |                                           |   |        |        |  |      |       
|Minimum lease payments receivable                           |                                           | $ | 15,051 |        |  | $    | 9,515  |      
|Estimated residual values of leased
property (unguaranteed) |                                           |   | 2,148  |        |  |      | 2,670  |      
|Less unearned income                                        |                                           |   | (2,503 | )      |  |      | (2,200 | )    
|                                                            |                                           |   |        |        |  |     
|                                                            | Net investment in direct
financing leases |   | $      | 14,696 |  |      | $      | 9,985 | 
|                                                            |                                           |   |        |        |  |     

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements  December 31, 2002 and 2001

Note 5  Direct Financing Leases (Continued)



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | The following is a schedule by years of minimum future rentals on
direct financing leases as of December 31, 2002:

|           |      |       |     |       |        | 
|---------- | ---- | ----- | --- | ----- | ------ | 
|           | 2003 |       | $   | 4,518 |       
|           | 2004 |       |     | 3,953 |       
|           | 2005 |       |     | 2,992 |       
|           | 2006 |       |     | 1,999 |       
|           | 2007 |       |     | 1,332 |       
|Thereafter |      |       | 257 |      
|           |      |       |    
|           |      | Total |     | $     | 15,051 | 
|           |      |       |    

Note 6  Bank Premises and Equipment



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Bank premises and equipment at December 31, 2002 and 2001 consisted
of the following:

|                              |                     |   |       |       |  |      |       |       | 
|----------------------------- | ------------------- | - | ----- | ----- |  | ---- | ----- | ----- | 
|                              |                     |   | 2002  |       |  | 2001 |      
|                              |                     |   |       |       |  |      |      
|Buildings and improvements    |                     | $ | 385   |       |  | $    | 373   |      
|Furniture and equipment       |                     |   | 1,205 |       |  |      | 1,150 |      
|                              |                     |   |       |       |  |     
|                              | Total               |   |       | 1,590 |  |      |       | 1,523 | 
|Less accumulated depreciation |                     |   | 1,002 |       |  |      | 793   |      
|                              |                     |   |       |       |  |     
|                              | Net carrying amount |   | $     | 588   |  |      | $     | 730   | 
|                              |                     |   |       |       |  |     

Note 7  Deposits



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | The following is a summary of the distribution of deposits at
December 31, 2002 and 2001:

|                             |                     |                   |                        |        |        |         |       |        |        |         | 
|---------------------------- | ------------------- | ----------------- | ---------------------- | ------ | ------ | ------- | ----- | ------ | ------ | ------- | 
|                             |                     |                   |                        |        | 2002   |         |       | 2001   |       
|                             |                     |                   |                        |        |        |         |       |        |       
|Noninterest-bearing  Demand |                     | $                 | 5,244                  |        |        | $       | 3,336 |       
|                             |                     |                   |                        |        |        |        
|Interest-bearing:            |                     |                   |                        |        |        |         |       |       
|                             | NOW accounts        |                   | $                      | 10,249 |        |         | $     | 13,889 |       
|                             | Savings             |                   |                        | 158    |        |         |       | 116    |       
|                             | Money market demand |                   |                        | 28,602 |        |         |       | 4,649  |       
|                             | Time:               |                   |                        |        |        |         |       |        |       
|                             |                     | $100,000 and over |                        |        | 50,408 |         |       |        | 49,903 |        
|                             |                     | Under $100,000    |                        |        | 25,581 |         |       |        | 39,359 |        
|                             |                     |                   |                        |        |        |        
|                             |                     |                   | Total interest-bearing |        | $      | 114,998 |       |        | $      | 107,916 | 
|                             |                     |                   |                        |        |        |        

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 7  Deposits (Continued)



| |                                                                               
| | ------------------------------------------------------------------------------
| | The remaining maturities of time deposits at December 31, 2002 are as
follows:

|     |       |   |          |        |  |              |        |        | 
|---- | ----- | - | -------- | ------ |  | ------------ | ------ | ------ | 
|     |       |   | Under    |        |  | $100,000 and |       
|     |       |   | $100,000 |        |  | Over         |       
|     |       |   |          |        |  |              |       
|2003 |       | $ | 16,863   |        |  | $            | 15,595 |       
|2004 |       |   | 6,117    |        |  |              | 9,310  |       
|2005 |       |   | 1,300    |        |  |              | 14,839 |       
|2006 |       |   | 851      |        |  |              | 8,267  |       
|2007 |       |   | 450      |        |  |              | 2,397  |       
|     |       |   |          |        |  |             
|     | Total |   | $        | 25,581 |  |              | $      | 50,408 | 
|     |       |   |          |        |  |             

Note 8  Note Payable  Bank



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Corporation has a $3,000,000 line of credit with a bank that
expires in March 2004. Interest is charged at the prime rate (4.25
percent at December 31, 2002). The line is collateralized by the
stock of the Corporation. There was $200,000 outstanding on the line
of credit at December 31, 2002 and 2001.

Note 9  Federal Home Loan Bank Advances



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Advances from the Federal Home Loan Bank of Indianapolis,
collateralized by mortgage loans under a blanket collateral
agreement, consist of the following:

|            |                     |   |            |       |  |               |       |       |       |   |       |        | 
|----------- | ------------------- | - | ---------- | ----- |  | ------------- | ----- | ----- | ----- | - | ----- | ------ | 
|            |                     |   | 2002       |      
|            |                     |   |            |      
|            |                     |   | Fixed Rate |       |  | Floating Rate |       |       | Total |  
|            |                     |   |            |       |  |               |       |       |       |  
|Due in 2003 |                     | $ | 2,000      |       |  | $             | 6,000 |       |       | $ | 8,000 |       
|Due in 2004 |                     |   | 2,500      |       |  |               |      |       |       |   | 2,500 |       
|Due in 2005 |                     |   |           |       |  |               |      |       |       |   |      |       
|Due in 2006 |                     |   |           |       |  |               |      |       |       |   |      |       
|Due in 2007 |                     |   |           |       |  |               |      |       |       |   |      |       
|Thereafter  |                     |   | 2,000      |       |  |               |      |       |       |   | 2,000 |       
|            |                     |   |            |       |  |               |       |       |      
|            | Total FHLB advances |   | $          | 6,500 |  |               | $     | 6,000 |       |   | $     | 12,500 | 
|            |                     |   |            |       |  |               |       |       |      

PLANTE AND MORAN LETTERHEAD

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 9   Federal Home Loan Bank Advances (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2002, the interest rates on fixed rate advances
ranged from 3.51 percent to 5.22 percent. At December 31, 2002,
the weighted average interest rates on fixed-rate advances was 4.13
percent. At December 31, 2002, the interest rate on all variable
rate advances was 1.33 percent. The advances are subject to
prepayment penalties subject to the provisions and conditions of
the credit policy of the Federal Home Loan Bank.

Note 10  Income Taxes



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Michigan Heritage Bancorp, Inc. and its subsidiary file a
consolidated federal income tax return. The following is a summary
of the provision for income taxes for the years ended December 31:

|         |                        |   |      |     |  |      |      |    |      |   |     |     | 
|-------- | ---------------------- | - | ---- | --- |  | ---- | ---- | -- | ---- | - | --- | --- | 
|         |                        |   | 2002 |     |  | 2001 |      |    | 2000 |  
|         |                        |   |      |     |  |      |      |    |      |  
|Current  |                        | $ | 243  |     |  | $    | (642 | )  |      | $ | 233 |    
|Deferred |                        |   | 340  |     |  |      | 658  |    |      |   |    |    
|         |                        |   |      |     |  |      |      |    |     
|         | Net income tax expense |   | $    | 583 |  |      | $    | 16 |      |   | $   | 233 | 
|         |                        |   |      |     |  |      |      |    |     



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

|                             |                        |   |      |     |  |      |     |    |      |   |     |     | 
|---------------------------- | ---------------------- | - | ---- | --- |  | ---- | --- | -- | ---- | - | --- | --- | 
|                             |                        |   | 2002 |     |  | 2001 |     |    | 2000 |  
|                             |                        |   |      |     |  |      |     |    |      |  
|Income tax at statutory rate |                        | $ | 624  |     |  | $    | 43  |    |      | $ | 251 |    
|Tax-exempt interest          |                        |   | (30  | )   |  |      | (26 | )  |      |   | (9  | )  
|Other                        |                        |   | (11  | )   |  |      | (1  | )  |      |   | (9  | )  
|                             |                        |   |      |     |  |      |     |    |     
|                             | Net income tax expense |   | $    | 583 |  |      | $   | 16 |      |   | $   | 233 | 
|                             |                        |   |      |     |  |      |     |    |     

PLANTE AND MORAN LETTERHEAD

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 10  Income Taxes (Continued)



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

|                            |                            |   |      |     |  |      |     |     |      |   |     |   | 
|--------------------------- | -------------------------- | - | ---- | --- |  | ---- | --- | --- | ---- | - | --- | - | 
|                            |                            |   | 2002 |     |  | 2001 |     |     | 2000 |  
|                            |                            |   |      |     |  |      |     |     |      |  
|Provision for credit losses |                            | $ | (37  | )   |  | $    | 91  |     |      | $ | 15  |  
|Lease financing             |                            |   | 357  |     |  |      | 503 |     |      |   | 7   |  
|Depreciation                |                            |   | (1   | )   |  |      | (3  | )   |      |   | 9   |  
|Nonaccrual interest         |                            |   | (5   | )   |  |      | 17  |     |      |   | (33 | )
|Deferred loan fees          |                            |   | 14   |     |  |      | (44 | )   |      |   |    |  
|Original issue discount     |                            |   | 11   |     |  |      | 99  |     |      |   |    |  
|Other                       |                            |   | 1    |     |  |      | (5  | )   |      |   | 2   |  
|                            |                            |   |      |     |  |      |     |     |     
|                            | Total deferred tax expense |   | $    | 340 |  |      | $   | 658 |      |   | $   |  | 
|                            |                            |   |      |     |  |      |     |     |     



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

|                                            |                               |                                    |   |      |        |   |      |      |      |      |   |     |      |  
|------------------------------------------- | ----------------------------- | ---------------------------------- | - | ---- | ------ | - | ---- | ---- | ---- | ---- | - | --- | ---- | -
|                                            |                               |                                    |   | 2002 |        |   | 2001 |      |      | 2000 |  
|                                            |                               |                                    |   |      |        |   |      |      |      |      |  
|Deferred tax assets:                        |                               |                                    |   |      |        |   |      |      |      |      |   |    
|                                            | Provision for credit losses   |                                    | $ | 501  |        |   | $    | 464  |      |      | $ | 555 |     
|                                            | Nonaccrual interest           |                                    |   | 21   |        |   |      | 16   |      |      |   | 33  |     
|                                            | Deferred fees                 |                                    |   | 30   |        |   |      | 44   |      |      |   |    |     
|                                            | Other                         |                                    |   | 5    |        |   |      | 9    |      |      |   | 35  |     
|                                            |                               |                                    |   |      |        |   |      |      |      |     
|                                            |                               | Total deferred tax assets          |   |      | 557    |   |      |      | 533  |      |   |     | 623  |  
|Valuation allowance for deferred tax assets |                               |                                    |  |      |        |   |     |      |      |      |  |    
|Deferred tax liabilities:                   |                               |                                    |   |      |        |   |      |      |      |      |   |    
|                                            | Lease financing               |                                    |   | (951 | )      |   |      | (594 | )    |      |   | (91 | )   
|                                            | Unrealized gain on securities |                                    |   | (225 | )      |   |      | (75  | )    |      |   | (33 | )   
|                                            | Depreciation                  |                                    |   | (45  | )      |   |      | (46  | )    |      |   | (49 | )   
|                                            | Original issue discount       |                                    |   | (110 | )      |   |      | (99  | )    |      |   |    |     
|                                            | Other                         |                                    |   | (3   | )      |   |      | (6   | )    |      |   | (38 | )   
|                                            |                               |                                    |   |      |        |   |      |      |      |     
|                                            |                               | Total deferred tax liabilities     |   |      | (1,334 | ) |      |      | (820 | )    |   |     | (211 | )
|                                            |                               |                                    |   |      |        |   |      |      |      |     
|                                            |                               | Net deferred tax asset (liability) |   | $    | (777   | ) |      | $    | (287 | )    |   | $   | 412  |  
|                                            |                               |                                    |   |      |        |   |      |      |      |     

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 11  Related Party Transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included in professional fees are expenses related to services
performed by certain directors of approximately $138,000 and
$107,000 for the years ended December 31, 2001 and 2000,
respectively. Included in the computation of interest income and
gain on sale of loans and leases are amounts paid for broker and
transaction fees performed by a company owned by a certain
director. These fees approximated $194,000 for the year ended
December 31, 2002.

Note 12  Operating Lease



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Corporation has entered into lease commitments for office
buildings. Rental expense charged to operations was $345,000 and
$349,000 for the years ended December 31, 2002 and 2001,
respectively. The future minimum lease payments are as follows:

|     |  |   |     | 
|---- |  | - | --- | 
|2003 |  | $ | 371 | 
|2004 |  |   | 378 | 
|2005 |  |   | 417 | 
|2006 |  |   | 418 | 
|2007 |  |   | 433 | 

Note 13  Stock Option Plans



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Corporation has two stock option plans. Options may be granted
to certain directors and employees at not less than the market
price of the Corporations stock on the date of the grant. The
options granted before 2001 were cancelled effective March 2001.
The options granted in November 2001 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, 2002, 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, 2002 and 2001

Note 13  Stock Option Plans (Continued)



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

|                                                                                   |  |        |         |   |          |          |      |        |  |  |          |   |          |        |       |   |          |  |        |          |  |   |      | 
|---------------------------------------------------------------------------------- |  | ------ | ------- | - | -------- | -------- | ---- | ------ |  |  | -------- | - | -------- | ------ | ----- | - | -------- |  | ------ | -------- |  | - | ---- | 
|                                                                                   |  | 2002   |         |   | 2001     |          |      | 2000   | 
|                                                                                   |  |        |         |   |          |          |      |        | 
|                                                                                   |  |        |         |   |          | 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                                           |  |        | 108,600 |   |          | $        | 5.00 |        |  |  | 96,700   |   |          | $      | 9.14  |   |          |  | 96,700 |          |  | $ | 9.14 | 
|Options cancelled                                                                  |  |        |        |   |          |          |     |        |  |  | (96,700  | ) |          |        | (9.14 | ) |          |  |       |          |  |   |     | 
|Options granted                                                                    |  |        |        |   |          |          |     |        |  |  | 108,600  |   |          |        | 5.00  |   |          |  |       |          |  |   |     | 
|Options exercised                                                                  |  |        |        |   |          |          |     |        |  |  |         |   |          |        |      |   |          |  |       |          |  |   |     | 
|Options forfeited                                                                  |  |        | (9,600  | ) |          |          | 5.00 |        |  |  |         |   |          |        |      |   |          |  |       |          |  |   |     | 
|                                                                                   |  |        |         |   |          |          |      |        |  |  |          |   |          |        |       |   |          | 
|Options outstanding at end
of year                                                 |  |        | 99,000  |   |          |          | 5.00 |        |  |  | 108,600  |   |          |        | 5.00  |   |          |  | 96,700 |          |  |   | 9.14 | 
|Exercisable at end of year                                                         |  |        | 99,000  |   |          |          | 5.00 |        |  |  | 108,600  |   |          |        | 5.00  |   |          |  | 89,875 |          |  |   | 9.11 | 
|Weighted average estimated
fair value per share of options
granted during the year |  |        |         |   |          |          | N/A  |        |  |  |          |   |          | $      | 2.34  |   |          |  |        |          |  |   | N/A  | 



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2002, all options outstanding have exercise prices
of $5.00 per share and a weighted average remaining contractual
life of 8.9 years.

Note 14  Employee Benefit Plans



| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Bank has a 401(k) plan that is a defined contribution savings
plan for employees. Employer contributions are discretionary and
are determined annually by the Board of Directors. Employer
contributions were $24,000 and $22,000 for the years ended December
31, 2002 and 2001, respectively.

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 15  Financial Instruments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of a financial instrument is the current amount that
would be exchanged between willing parties, other than in a forced
liquidation. Fair value is best determined based upon quoted
market prices. However, in many instances, there are no quoted
market prices for the Corporations various financial instruments.
In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not
be realized in an immediate settlement of the instrument. SFAS 107
excludes 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, 2002 and 2001

Note 15  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 90 days approximate their fair values.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | FHLB Advances- The fair values of the Corporations long-term
borrowings are estimated using discounted cash flow analyses based
on the Corporations current incremental borrowing rates for
similar types of borrowing arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Accrued Interest- The carrying amounts of accrued interest
approximate fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The estimated fair values and related carrying or notional amounts
of the Corporations financial instruments are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|             |                       |  |          |         |  |            |   |         |          |  |   |            |  |  |   |         | 
|------------ | --------------------- |  | -------- | ------- |  | ---------- | - | ------- | -------- |  | - | ---------- |  |  | - | ------- | 
|             |                       |  | 2002     |         |  | 2001       |  
|             |                       |  |          |         |  |            |  
|             |                       |  | Carrying |         |  | Estimated  |   |         | Carrying |  |   | Estimated  | 
|             |                       |  | Amount   |         |  | Fair Value |   |         | Amount   |  |   | Fair Value | 
|Assets:      |                       |  |          |         |  |            |   |         |          |  |   |            |  |  |   |        
|             | Cash and equivalents  |  | $        | 10,986  |  |            | $ | 10,986  |          |  | $ | 6,732      |  |  | $ | 6,732   | 
|             | Securities            |  |          | 19,050  |  |            |   | 19,050  |          |  |   | 14,732     |  |  |   | 14,732  | 
|             | Loans and leases      |  |          | 116,431 |  |            |   | 118,151 |          |  |   | 117,441    |  |  |   | 119,614 | 
|             | Loans held for sale   |  |          | 3,136   |  |            |   | 3,136   |          |  |   | 1,589      |  |  |   | 1,589   | 
|             | Interest receivable   |  |          | 712     |  |            |   | 712     |          |  |   | 720        |  |  |   | 720     | 
|Liabilities: |                       |  |          |         |  |            |   |         |          |  |   |            |  |  |   |        
|             | Deposits              |  |          | 120,242 |  |            |   | 121,791 |          |  |   | 111,252    |  |  |   | 112,509 | 
|             | Note payable  Bank   |  |          | 200     |  |            |   | 200     |          |  |   |           |  |  |   |        | 
|             | Short-term borrowings |  |          | 4,000   |  |            |   | 4,000   |          |  |   | 5,000      |  |  |   | 5,000   | 
|             | FHLB advances         |  |          | 12,500  |  |            |   | 12,942  |          |  |   | 13,500     |  |  |   | 13,416  | 
|             | Interest payable      |  |          | 288     |  |            |   | 288     |          |  |   | 473        |  |  |   | 473     | 

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 16  Off-balance-sheet Activities



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

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 16  Off-balance-sheet Activities (Continued)



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the counterparty does not have the right and ability to redeem
the collateral or if the Corporation is permitted to sell or
repledge the collateral on short notice, the Corporation records
the collateral in its balance sheet at fair value with a
corresponding obligation to return it.
| | The Bank had loan and lease
origination commitments and unfunded commitments aggregating
$13,301,000 and $11,072,000 at December 31, 2002 and 2001,
respectively.                                                                                                                              

Note 17  Restrictions on Dividends, Loans, and Advances



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Banking regulations place certain restrictions on dividends paid
and loans or advances made by the Bank to the Corporation. The
total amount of dividends that may be paid at any date is generally
limited to the retained earnings of the Bank. However, dividends
paid by the Bank would be prohibited if the effect thereof would
cause the Banks capital to be reduced below applicable minimum
standards. At December 31, 2002, the Banks retained earnings
available for the payment of dividends totaled $2,489,000.
Accordingly, $11,645,000 of the Corporations investment in the
Bank was restricted at December 31, 2002.
|
| | Loans or advances made by the Bank to the Corporation are generally
limited to 10 percent of the Banks capital stock and surplus.
Accordingly, at December 31, 2002, Bank funds available for loans
or advances to the Corporation amounted to $1,207,000.                                                                                                                                                                                                                                                                                                                                                                             

Note 18  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,
2002, 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.

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 18  Regulatory Matters (Continued)



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Capital and risk-based capital and leverage ratios for the Bank are
shown below:

|                        |                                          |  |   |        |  |  |           |       |  | 
|----------------------- | ---------------------------------------- |  | - | ------ |  |  | --------- | ----- |  | 
|                        |                                          |  |   |        |  |  |           | Ratio | 
|                        |                                          |  |   | Amount |  |  | (Percent) |      
|                        |                                          |  |   |        |  |  |           |      
|December 31, 2002       |                                          |  |   |        |  |  |           |      
|                        |                                          |  |   |        |  |  |           |      
|Consolidated:           |                                          |  |   |        |  |  |           |      
|                        | Total capital (to risk-weighted assets)  |  | $ | 15,177 |  |  |           | 12.2  | 
|                        | Tier 1 capital (to risk-weighted assets) |  |   | 13,620 |  |  |           | 11.0  | 
|                        | Tier 1 capital (to average assets)       |  |   | 13,620 |  |  |           | 9.2   | 
|Michigan Heritage Bank: |                                          |  |   |        |  |  |           |      
|                        | Total capital (to risk-weighted assets)  |  |   | 15,254 |  |  |           | 12.3  | 
|                        | Tier 1 capital (to risk-weighted assets) |  |   | 13,698 |  |  |           | 11.1  | 
|                        | Tier 1 capital (to average assets)       |  |   | 13,698 |  |  |           | 9.5   | 
|December 31, 2002       |                                          |  |   |        |  |  |           |      
|                        |                                          |  |   |        |  |  |           |      
|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   | 

Note 19  Parent-only Financial Statements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following condensed financial information presents the
financial condition of Michigan Heritage Bancorp, Inc. (the
Parent) only, along with the results of its operations and its
cash flows. The Parent has recorded its investment in the Bank at
cost, less the undistributed income of the Bank since it was
formed. The Parent recognizes undistributed earnings of the Bank
as noninterest income (expense). The Parent-only financial
information should be read in conjunction with the Corporations
consolidated financial statements.

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 19  Parent-only Financial Statements (Continued)

The condensed balance sheet at December 31 is as follows:

|                                     |                                            |                                            |                                      |        |        |      |        |        |        |  |  | 
|------------------------------------ | ------------------------------------------ | ------------------------------------------ | ------------------------------------ | ------ | ------ | ---- | ------ | ------ | ------ |  |  | 
|                                     |                                            |                                            |                                      |        |        | 2002 |        |        | 2001   | 
|                                     |                                            |                                            |                                      |        |        |      |        |        |        | 
|                                     |                                            |                                            |                                      | Assets |        |      |        |        |        |  |  | 
|Cash and Cash Equivalents            |                                            |                                            |                                      |        |        |      |        |       
|                                     | Cash and deposits at subsidiary bank       |                                            | $                                    | 37     |        |      | $      | 32     |       
|                                     | Interest-bearing deposits with other banks |                                            |                                      | 13     |        |      |        | 13     |       
|                                     |                                            |                                            |                                      |        |        |     
|                                     |                                            | Total cash and cash equivalents            |                                      |        | 50     |      |        |        | 45     | 
|Investment in Subsidiary             |                                            |                                            | 14,134                               |        |        |      | 12,417 |       
|Interest Receivable and Other Assets |                                            |                                            | 93                                   |        |        |      | 52     |       
|                                     |                                            |                                            |                                      |        |        |     
|                                     |                                            | Total assets                               |                                      | $      | 14,277 |      |        | $      | 12,514 | 
|                                     |                                            |                                            |                                      |        |        |     
|                                     |                                            |                                            | Liabilities and Stockholders Equity |        |        |      |        |        |        |  | 
|Liabilities                          |                                            | $                                          | 220                                  |        |        | $    |       |       
|Stockholders Equity                 |                                            |                                            |                                      |        |        |      |        |       
|                                     | Common stock  No par value                |                                            |                                      | 13,730 |        |      |        | 13,730 |       
|                                     | Accumulated deficit                        |                                            |                                      | (109   | )      |      |        | (1,362 | )     
|                                     | Accumulated other comprehensive income     |                                            |                                      | 436    |        |      |        | 146    |       
|                                     |                                            |                                            |                                      |        |        |     
|                                     |                                            | Total stockholders equity                 |                                      |        | 14,057 |      |        |        | 12,514 | 
|                                     |                                            |                                            |                                      |        |        |     
|                                     |                                            | Total liabilities and stockholders equity |                                      | $      | 14,277 |      |        | $      | 12,514 | 
|                                     |                                            |                                            |                                      |        |        |     

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Michigan Heritage Bancorp, Inc.

Notes to Consolidated Financial Statements December 31, 2002 and 2001

Note 19  Parent-only Financial Statements (Continued)



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | The condensed statement of operations for the years ended December
31, 2002 and 2001 is as follows:

|                                                                                                    |                                                                            |                                |                                                     |       |        |    |        |     |      |     |  
|--------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------ | --------------------------------------------------- | ----- | ------ | -- | ------ | --- | ---- | --- | -
|                                                                                                    |                                                                            |                                |                                                     |       | 2002   |    | 2001   |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |    |        |    
|Operating Income- Interest on deposits
with other banks                                             |                                                                            | $                              |                                                    |       |        | $  | 36     |    
|Operating Expense                                                                                   |                                                                            |                                | 158                                                 |       |        |    | 36     |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |   
|Income- Before income taxes and equity in
undistributed income of subsidiary                        |                                                                            |                                | (158                                                | )     |        |    |       |    
|Income Tax Expense                                                                                  |                                                                            |                                | (54                                                 | )     |        |    |       |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |   
|Income- Before equity in undistributed income
of subsidiary                                         |                                                                            |                                | (104                                                | )     |        |    |       |    
|Equity in Undistributed Income of Subsidiary                                                        |                                                                            |                                | 1,356                                               |       |        |    | 110    |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |   
|Net Income                                                                                          |                                                                            | $                              | 1,252                                               |       |        | $  | 110    |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |   
|The condensed statement of cash flows
for the years ended December 31,
2002 and 2001 is as follows:
|                                                                                                    |                                                                            |                                |                                                     |       | 2002   |    | 2001   |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |    |        |    
|Cash Flows from Operating Activities                                                                |                                                                            |                                |                                                     |       |        |    |        |    
|                                                                                                    | Net income                                                                 |                                | $                                                   | 1,252 |        |    | $      | 110 |     
|                                                                                                    | Adjustments to reconcile net income to net
cash from operating activities: |                                |                                                     |       |        |    |        |     |     
|                                                                                                    |                                                                            | Equity in income of subsidiary |                                                     |       | (1,356 | )  |        |     | (110 | )  
|                                                                                                    |                                                                            | Increase in other assets       |                                                     |       | (41    | )  |        |     | (12  | )  
|                                                                                                    |                                                                            | Increase in other liabilities  |                                                     |       | 220    |    |        |     |     |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |   
|                                                                                                    |                                                                            |                                | Net cash provided by (used in)
operating activities |       |        | 75 |        |     |      | (12 | )
|Cash Flows from Investing Activities- Investment
in bank subsidiary                                 |                                                                            |                                | (70                                                 | )     |        |    | (1,000 | )  
|                                                                                                    |                                                                            |                                |                                                     |       |        |   
|Net Increase (Decrease) in Cash and Cash
Equivalents                                                |                                                                            |                                | 5                                                   |       |        |    | (1,012 | )  
|Cash and Cash Equivalents- Beginning of year                                                        |                                                                            |                                | 45                                                  |       |        |    | 1,057  |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |   
|Cash and Cash Equivalents- End of year                                                              |                                                                            | $                              | 50                                                  |       |        | $  | 45     |    
|                                                                                                    |                                                                            |                                |                                                     |       |        |   

PLANTE AND MORAN LETTERHEAD

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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 10, 2003.

| |                                                            
| | -----------------------------------------------------------
| | MICHIGAN HERITAGE BANCORP, INC.                            
|
|
| | By:  /s/  Anthony S. AlbaneseAnthony S. Albanese, President

In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities indicated on March 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/ Thomas Debolski

Thomas Debolski         |  | 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                                             

49



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##### Table of Contents



DATED: March 10, 2003

CERTIFICATIONS



| |                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | I, Anthony S. Albanese, certify that:                                                                                                                                                                                                                                                                                                                                                    
|
| | 1. I have reviewed this annual report on Form 10-KSB of Michigan Heritage
Bancorp, Inc.;                                                                                                                                                                                                                                                                                                 
|
| | 2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;                                                              
|
| | 3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;                                                                                 
|
| | 4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                             
|
| | (a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;                                                                                         
|
| | (b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                                                                                                           
|
| | (c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;                                                                                                                                                                                                                 
|
| | 5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):                                                                                                                                        
|
| | (a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and                                                                                       
|
| | (b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                                                                                                               
|
| | 6. The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |                |  |                                                                                                                  
|----- |  | -------------- |  | -----------------------------------------------------------------------------------------------------------------
|Date: |  | March 10, 2003 |  | /s/ Anthony S.
AlbaneseAnthony S. Albanese
President, Chief Operating Officer, and
Acting Chief Financial Officer

50



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | I, Richard Zamojski, certify that:                                                                                                                                                                                                                                                                                                                                                       
|
| | 1. I have reviewed this annual report on Form 10-KSB of Michigan Heritage
Bancorp, Inc.;                                                                                                                                                                                                                                                                                                 
|
| | 2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;                                                              
|
| | 3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;                                                                                 
|
| | 4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                             
|
| | (a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;                                                                                         
|
| | (b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                                                                                                           
|
| | (c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;                                                                                                                                                                                                                 
|
| | 5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):                                                                                                                                        
|
| | (a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and                                                                                       
|
| | (b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                                                                                                               
|
| | 6. The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                       |  |                                                                          
|---------------------- |  | -------------------------------------------------------------------------
|Date:   March 10,
2003 |  | /s/ Richard ZamojskiRichard Zamojski
Chairman and Chief Executive Officer

51



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##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                           
|            |  |                                                                                                                       
|11          |  | Computation of Earnings Per Share                                                                                     
|            |  |                                                                                                                       
|99.1        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|            |  |                                                                                                                       
|99.2        |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

52