Michigan Heritage Bancorp (MHBC) 10QSB 2003 Q3 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-QSB

x Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the period ended

SEPTEMBER 30, 2003

or

o Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from         to         

Commission file number: 333-17317

MICHIGAN HERITAGE BANCORP, INC.
(Exact name of small business issuer as specified in its charter)

Michigan	38-3318018
(State or other jurisdiction	(I.R.S. employer
of incorporation or organization)	identification no.)

28300 Orchard Lake Road, Suite 200, Farmington Hills, MI 48334
(Address of principal executive offices)

248-538-2525
(Issuer’s telephone number, including area code)

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   

At 11/12/03 there were 1,488,764 shares of Common Stock of the issuer issued and outstanding.

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

TABLE OF CONTENTS

302 Certification of Chief Financial Officer

302 Certification of Chief Executive Officer

906 Certification of Chief Financial Officer

906 Certification of Chief Executive Officer

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
(Unaudited)				(000s omitted)
				September 30, 2003			December 31, 2002
ASSETS
Cash and due from banks, noninterest bearing				$	1,549		$	1,031
Interest bearing deposits with banks					80			58
Federal funds sold					2,354			9,897
	Cash and cash equivalents				3,983			10,986
Securities available for sale					25,519			17,913
Federal Reserve Bank stock and other stock					1,162			1,137
	Total investments				26,681			19,050
Gross Loans and Leases					105,248			118,531
	Less: Net deferred fees				(62	)		(87	)
			Allowance for credit losses		(1,869	)		(2,013	)
		Net loans and leases			103,317			116,431
Loans held for sale					445			3,136
			Total earning assets		132,877			148,572
Leasehold improvements, net					197			208
Furniture & equipment, net					406			380
	Total fixed assets				603			588
Interest receivable					775			713
Other real-estate and assets owned					769			400
Other assets					770			1,024
	Total other assets				2,314			2,137
			Total assets	$	137,343		$	152,328
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total deposits				$	112,319		$	120,242
Other borrowed funds					8,450			16,700
Other liabilities					1,727			1,329
	Total liabilities				122,496			138,271
Stockholders’ Equity
	Preferred stock—no par value; 500,000 shares authorized, none issued and outstanding				—			—
	Common stock—no par value; 4,500,000 shares authorized, issued and outstanding—1,488,764 shares in 2003 and 2002				13,730			13,730
	Accumulated earnings (deficit)				798			(109	)
	Accumulated other comprehensive income				319			436
		Total stockholders’ equity			14,847			14,057
			Total liabilities and stockholders’ equity	$	137,343		$	152,328
Total loan loss reserve ratio					1.78	%		1.70	%
Total loan to asset ratio					77	%		78	%

1

Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
Three and Nine Month Periods Ended
September 30, 2003 and September 30, 2002
(Unaudited)				(000s omitted except per share data)
				Three Months Ended September 30,				Nine Months Ended September 30,
				2003		2002		2003		2002
OPERATING INCOME:
Interest income				$	2,344	$	2,815	$	7,441	$	8,373
Interest expense					883		1,236		2,984		3,776
	Net interest income before provision for credit losses				1,461		1,579		4,457		4,597
Less: provision for credit losses					—		181		18		441
	Net interest income after provision for credit losses				1,461		1,398		4,439		4,156
Gain on sale of securities held available for sale					3		—		23		—
Gain on sale of loans and other assets					290		308		984		627
Other income					40		72		108		134
	Total other operating income				333		380		1,115		761
		Total operating income			1,794		1,778		5,554		4,917
OTHER OPERATING EXPENSES:
Salaries and employee benefits					763		708		2,300		1,951
Occupancy expense					129		108		378		315
Equipment expense					57		61		174		184
Data processing expense					35		32		103		96
Insurance expense					16		13		46		36
Advertising/promotion expense					60		59		175		154
Office supplies and printing expense					12		11		35		33
Professional fees					104		150		379		400
FDIC assessment					5		5		15		15
Lien, recording, and other loan fees, net					76		91		262		189
Michigan single business tax					18		15		55		75
Other expense					79		72		303		240
	Total other operating expense				1,354		1,325		4,225		3,688
		Net operating income			440		453		1,329		1,229
Provision for federal income taxes					138		144		421		390
			Net income	$	302	$	309	$	908	$	839
Per Common Share Data
Basic earnings per share				$	0.20	$	0.21	$	0.61	$	0.56
Diluted earnings per share				$	0.20	$	0.20	$	0.59	$	0.56

2

Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
Nine Month Periods Ended
September 30, 2003 and September 30, 2002
(Unaudited)		(000s omitted)
		Nine Months Ended September 30,
		2003			2002
Operating activities:
	Net income	$	908		$	839
	Adjustments to reconcile net income to net cash provided in operating activities		4,081			(1,500	)
	Net cash provided by (used in) operating activities		4,989			(661	)
Investing activities:
	Purchase of U.S. Treasury and agency securities		(2,500	)		(5,050	)
	Proceeds from sale, maturity or called U.S. Treasury and agency securities		500			1,750
	Purchase of other securities		(8,565	)		(1,250	)
	Proceeds from sale, maturity or called other securities		1,650			899
	Purchase of Federal Reserve Bank and other stock		(20	)		(132	)
	Purchase of leasehold improvements, furniture and equipment		(167	)		(68	)
	Net change in gross loans		13,283			(620	)
	Net cash provided by (used in) investing activities		4,181			(4,471	)
Financing activities:
	Net increase (decrease) in deposits		(7,923	)		12,370
	Net decrease in federal funds purchased		(3,550	)		(5,000	)
	Proceeds from other borrowed funds		—			200
	Repayment of other borrowed funds		(200	)		—
	Proceeds from Federal Home Loan Bank advances		4,500			—
	Repayments of Federal Home Loan Bank advances		(9,000	)		(7,000	)
	Net cash provided by (used in) financing activities		(16,173	)		570
Net decrease in cash and cash equivalents			(7,003	)		(4,562	)
Cash and cash equivalents at beginning of year			10,986			6,732
Cash and cash equivalents at end of period		$	3,983		$	2,170

3

Notes to Financial Statements

General:

Michigan Heritage Bancorp, Inc. (the “Company”) was incorporated in the State of Michigan on September 22, 1989. The Company was inactive from that time until its Articles of Incorporation were amended on November 6, 1996 into its current form. The Company is a bank holding company whose primary purpose is to own and operate Michigan Heritage Bank (the “Bank”) as the Bank’s sole stockholder. Organizational and other start-up costs were funded with loans from organizers. Proceeds from the Company’s initial public offering were primarily used to capitalize the Bank which is currently headquartered in Farmington Hills, Michigan. The Company completed an initial public offering of common stock during the first quarter of 1997, realizing a total of $10.9 million (after payment of underwriters’ commissions and offering expenses). During the fourth quarter of 1999, the Company completed a rights offering to existing shareholders raising $1.3 million in additional capital after payment of offering expenses. The consolidated financial statements of the Company include its only subsidiary, the Bank. All adjustments, which in the opinion of management are necessary in order to ensure that the interim financial statements are not misleading, have been included.

The Bank provides a focused core of banking services primarily for small-to-medium-size businesses, as well as to individuals. The Bank’s lending services include commercial loans, commercial real estate, equipment leasing, and residential mortgages. The mortgage division offers a wide range of products including variable and fixed rate mortgage loans, home equity lines of credit and other forms of consumer lending. The Bank’s wholly-owned leasing subsidiary, MHB Leasing, Inc., has expanded the Bank’s capabilities in equipment leasing by providing tax-oriented true leases and other structured lease products.

For commercial customers who seek additional deposit services, the Bank offers the convenience of a “Rapid Courier Service.” This service offers prearranged pick-up times for all business banking transactions. The Bank’s commercial checking accounts also offer “Sweep” capabilities with low or no fees.

Michigan Heritage Bank’s primary goal is to provide personal service with an experienced staff using state-of-the-art technology. The Bank offers convenient account access through a telephone banking service and launched internet banking for both commercial and consumer customers in the third quarter of 2003.

Michigan Heritage Bank is a state chartered, full-service, commercial bank, a member of both the Federal Reserve System and the Federal Home Loan Bank and its deposits are FDIC insured.

Basis of Presentation:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates and assumptions.

Critical Accounting Policy:

The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The Company’s significant accounting policies are described in the notes to the consolidated financial statements within the annual report. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and the Company considers these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.

The Company believes that the evaluation of the allowance for credit losses is a critical accounting policy that requires significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of the Company’s financial statements. 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, underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.

4

Stock Compensation Plans:

The Company 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 Company’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 Company 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. The Company applies APB Opinion 25 and related Interpretations in accounting for the stock options plan. Accordingly, no compensation cost has been recognized. The Company has not elected to voluntarily expense options under SFAS 148. Had compensation cost for the Company’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 FAS Statement No. 123, the Company’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:

			(000s omitted except per share data)
			Three Months Ended September 30,				Nine Months Ended September 30,
			2003		2002		2003		2002
Net income		As reported	$	302	$	309	$	908	$	839
		Pro forma	$	302	$	309		908		839
Earnings per share		As reported	$	0.20	$	0.21	$	0.61	$	0.56
		Pro forma	$	0.20	$	0.21	$	0.61	$	0.56
Earnings per share —		As reported	$	0.20	$	0.21	$	0.61	$	0.56
	assuming dilution	Pro forma	$	0.20	$	0.20	$	0.59	$	0.56

Recent Accounting Pronouncements:

In April 2003 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149 which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition to conform to language used in FASB Interpretation No. 45and amends certain other existing pronouncements. This statement is effective for contracts entered into or modified after September 30, 2003. It is not expected that the provisions of Statement No. 149 will have a material impact on the financial position or results of operations of the Corporation.

In May 2003, the FASB issued SFAS No. 150, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. It is not expected that provisions of Statement No. 150 will have a material impact on the financial position or results of operations of the Corporation.

FASB issued Interpretation 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. It is not expected that provisions of Statement No. 45 will have a material impact on the financial position or results of operations of the Corporation.

5

PART I—FINANCIAL INFORMATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 or circumstances after the date of such statements.

Comparative Results for the Three Months Ended September 30, 2003 and September 30, 2002

The Company had a net profit of $302,000 for the quarter ending September 30, 2003 compared to a net profit of $309,000 for the same quarter last year. Although the economic climate is stable this year, the overall business climate is essentially flat in the metropolitan Detroit area. Net interest income before allowances for credit losses decreased $118,000 or 7.5%. The reduction in net income before provision was due to an overall reduction in rates offset by a greater reduction in interest expense. The $181,000 decrease in the provision for credit losses was related to the decline in the gross loan and lease portfolio along with an overall improvement in credit quality. Average earning assets decreased $8,738,000 or 6% over the third quarter of 2002 primarily due to payoffs and a flat economy. The net interest margin declined from 4.46% in the third quarter of 2002 to 4.25% in the third quarter of 2003. As a combined result, net interest income after provision for credit losses increased $63,000 or 4.5% to $1,461,000.

Other operating income declined $47,000 or 12.4% to $333,000 primarily due to a reduction in fees.

Other operating expense increased $29,000 or 2.2% to $1,354,000. Salaries and employee benefits increased $55,000 or 7.8% to $763,000 due to the addition of lending and support staff in the fourth quarter of 2002 and first quarter of 2003. Occupancy expense increased $21,000 or 19.4% to $129,000 due to an increase in the operating expenses associated with the headquarters facility and branch located in the Farmington Hills, Michigan offices. Professional fees decreased $46,000 or 30.7% to $104,000, primarily due to decreases in legal expenses for collection and contractual fees paid for the management and origination of lease transactions. Lien, recording and other loan fees declined $15,000 or16.5% to $76,000.

The resulting profit before federal income tax was $440,000 for the third quarter 2003 compared to a profit before federal income tax of $453,000 for the same period last year. Federal income tax was $138,000 for the third quarter of 2003 compared to $144,000 for the same period last year.

Net income per weighted average share was $0.20 for the quarter ended September 30, 2003 compared to net income per share of $0.21 for the same period last year. On a diluted basis, net income per share was $0.20 for the quarter compared to a net income of $0.20 for the same quarter last year.

Comparative Results for the Nine Months Ended September 30, 2003 and September 30, 2002

Net income for the nine months ended September 30, 2003 was $908,000 compared to $839,000 for the same period last year. Net interest income before allowances for credit losses decreased $140,000 or 3.1% to $4,457,000 primarily due to a $8,738,000 or 6% decline in average earning assets and a $792,000 reduction in interest expense. This resulted in a change in the net interest margin from 4.46% in the third quarter of 2002 to 4.25% in the third quarter of 2003. As a combined result, net interest income after provision for credit losses increased $283,000 or 6.9% to $4,439,000. The $423,000 decrease in the provision for credit losses was related to the relatively low level of loan net charge offs coupled with an overall increase in the credit quality of the loans and leases portfolio.

Total other operating income increased $354,000 or 7.2% to $1,115,000 primarily due to gains-on-sales of loans and leases. Other miscellaneous income decreased $26,000 or 19.4% to $108,000 primarily due to a decrease in fees.

Other operating expenses increased $537,000 or 14.6% to $4,225,000. Salaries and employee benefits increased $349,000 or 17.9% to $2,300,000 due to additional mortgage salaries commission expense and the addition of lending

6

and support staff in the fourth quarter of 2002 and first quarter of 2003. Occupancy expense increased $63,000 or 20.0% to $378,000 due to an increase in operating expenses associated with the headquarters facility and branch located in the Farmington Hills, Michigan offices. Lien, recording and other loan fees increased $73,000 or 38.6% to $262,000 due to increased volume in the mortgage origination area.

The resulting profit before federal income tax increased $100,000 or 8.1% to $1,329,000 compared to $1,229,000 for the same period last year. Federal income tax was $421,000 for the first nine months of 2003 compared to $390,000 for the same time period last year.

Net Income per weighted average share outstanding was $0.61 for the nine months ended September 30, 2003 compared to $0.56 per share for the same period last year. On a diluted basis, net income per share was also $0.59 for the nine month ended September 30, 2003 compared to $0.56 per share for the same period last year.

Balance Sheet Change—September 30, 2003 from December 31, 2002

Total assets decreased $14,985,000 or 9.8% to $137,343,000 from December 31, 2002 to September 30, 2003. Gross loans and leases for the same nine month period decreased $13,283,000 or 11.2% to $105,248,000 due to several factors: a stagnation in capital equipment purchases due to a weak economy, decline in loan demand, and to some extent, runoff due to lower rates offered by other institutions. Loans held for sale declined $2,691,000 or 85.8% to $445,000, primarily due to a steady increase in mortgage rates throughout the third quarter. Deposits decreased $7,923,000 or 6.6% to $112,319,000. Borrowed funds decreased $8,250,000 or 49.4% to $8,450,000 largely due to the pay-off of $4,500,000 in FHLB advances and $3,550,000 reduction in fed funds purchased. Cash and Cash equivalent decreased $7,003,000 or 63.7% to $3,983,000 primarily due to an increase in the bank’s investment portfolio which increased $7,631,000 or 40.06% to $26,681,000.

7

Loans and Leases and Allowances for Credit Losses

The categories of loans and leases outstanding at September 30, 2003 and December 31, 2002 in dollars and as a percentage of total loans are as follows:

		(000s omitted for dollars)
		September 30, 2003					December 31, 2002
				Pct of total					Pct of total
Loan & Leases Category		Amount		Loans & Leases			Amount		Loans & Leases
Commercial		$	71,365		67.8	%	$	75,726		63.9	%
Real estate-construction			9,156		8.7	%		10,774		9.1	%
Real estate-mortgage			10,699		10.2	%		17,079		14.4	%
Installment loans to individuals			198		0.2	%		255		0.2	%
Lease financing			13,830		13.1	%		14,697		12.4	%
	Total loans	$	105,248		100.0	%	$	118,531		100.0	%

The change in mix and size of the loan and lease portfolio from December 31, 2002 to September 30, 2003 has not increased the proportionate level of credit risk in the loan and lease portfolio. Due to the reduction in gross loans and leases only $18,000 was added to the provision for loan losses in the nine month period ended September 30 2003.

At September 30, 2003 there were approximately $2,705,000 in non-accruing loans. However, of this balance there is $2,334,000 of collateral in commercial real estate, with an approximate market value of $2,646,000. There were $3,072,615 in accruing loans past due between 30 and 59 days, $74,830 loans past due between 60 and 119 days and $37,922 past due 120 days or more. Of the $3,185,367 total delinquency, $2,848,317 was due to loans that had matured and whose renewal documents were in-process at September 30, 2003. Management fully expects that diligent servicing of the delinquent loans will minimize losses.

Total credit loss reserve at September 30, 2003 was $1,869,000 or 1.78% of total loans and leases, which include $441,000 in specific allowances. The following highlights the allocations for credit losses as of September 30, 2003.

		(000s omitted for dollars)
		Credit loss		Loan & Lease		Percent of credit
		allowance		amounts		loss allowance
		amount		outstanding		to loan & lease amounts
Domestic:
	Commercial	$	1,463	$	71,365		2.05	%
	Real estate-construction		92		9,156		1.00	%
	Real estate-mortgage		63		10,699		0.59	%
	Installment loans to individuals		2		198		1.01	%
	Lease financing		99		13,830		0.72	%
Foreign			—		—		—
Off-balance sheet items and unallocated			150		—		n/a
Total		$	1,869	$	105,248		1.78	%

In management’s opinion, the total loan loss reserve position is adequate relative to the overall quality of the loan portfolio.

8

Allowance for Credit Losses

The following table summarizes changes in the allowance for credit losses from additions to the allowance which have been changed to expense, selected ratios, and the allocation of the allowance for credit losses as of and for the nine month periods ended September 30:

		($ in 000s)
		2003			2002
Average loans and leases outstanding		$	108,301		$	117,141
Total loans and leases at period end			105,248			119,985
Allowance for credit losses at beginning of period			2,013			1,802
Loan and lease charge-offs during the period
	Commercial & Financial		186			459
	Real Estate — Mortgages		17			34
	Installment Loans to Individuals		—			—
Total charge-offs			203			493
Loan and lease recoveries during the period
	Commercial & Financial		33			47
	Real Estate — Mortgages		8			1
	Installment Loans to Individuals		—			—
Total recoveries			41			48
Net charge-offs			162			445
Provision charged to expense			18			441
Allowance for credit losses at end of period		$	1,869		$	1,798
Ratio of net charge-offs during the period to average loans and leases outstanding			0.15	%		0.38	%

Nonaccrual, Past Due and Restricted Loans and Leases

The following table summarizes the Banks non-performing loans and leases as of September 30.

		($ in 000s)
		2003		2002
Nonaccrual, Past Due and Restricted Loans and Leases
	Loans accounted for on a nonaccrual basis	$	2,705	$	486
	Accruing loans that are contractully past due 90 days or more as to interest or principle payments		104		291
Total		$	2,809	$	777

The increase in non-accrual loans resulted from three individual loans. When these impaired loans are analyzed on an individual basis, the Company believes the collateral is sufficient to cover the recorded loan amount.

9

Liquidity and Capital Resources

Michigan Heritage Bancorp’s current cash projections as of September 30, 2003 indicate adequate cash balances. The Company has additional line of credit facilities with national lending institutions to add funding capacity. The Company management has also established a network of banks that can be used to sell or participate a portion of the Company’s loan portfolio. These techniques allow the Company to service its business relationships and generate fee and servicing revenue.

The Company’s liquidity remained adequate during the nine-month period ended September 30, 2003. Michigan Heritage Bancorp had $3,983,000 in cash and cash equivalents as of September 30, 2003, including $80,000 in interest bearing deposits in other banks and $2,354,000 in federal funds sold. The Company has proven its ability to attract deposits and build a stable deposit base from which to fund loans. In addition, the Company is a member of the Federal Home Loan Bank of Indianapolis, and as of September 30, 2003, had $8,000,000 in notes payable to the Federal Home Loan Bank at a weighted average rate of 3.41%

During the first quarter of 2002 Michigan Heritage Bancorp obtained a $3,000,000 Capital Note loan from a large Midwestern financial institution. This facility provides additional financing that can be downstreamed to the Bank as capital. This capital will allow the Company to continue its growth while not diluting existing shareholders value. As of September 30, 2003 Michigan Heritage Bancorp has borrowed and repaid a total of $200,000 leaving $2,800,000 available for future use.

Michigan Heritage Bank is subject to various regulatory capital requirements. To be considered adequately-capitalized or well-capitalized, Michigan Heritage Bank must maintain a Tier 1 leverage capital ratio of 4.0% and 5.0%, respectively. The Bank’s Tier 1 leverage capital ratios were 10.19% and 9.51% at September 30, 2003 and December 31, 2002, respectively. Michigan Heritage Bank plans to remain well-capitalized on an ongoing basis.

Item 3. Controls and Procedures

As of the end of the period covered by 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 to cause the material information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. 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.

10

PART II—OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31	Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act
32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

No reports on Form 8-K have been filed during the quarter for which this report is filed.

[Signatures on next page]

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MICHIGAN HERITAGE BANCORP, INC.
	By:	/s/ Anthony S. Albanese Anthony S. Albanese President, Chief Operating Officer, and Acting Chief Financial Officer
	And:	/s/ Richard Zamojski Richard Zamojski Chairman and Chief Executive Officer
DATED: 11/12/03

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EXHIBIT INDEX

NO.	Description
31	Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act
32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

13