##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2010 or
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act
 For the transition period from  to
 Commission file number: 000-49814
 MONARCH COMMUNITY BANCORP, INC.
 (Exact name of registrant as specified in its charter)
 Maryland(State or other jurisdiction 
of incorporation or organization)
    
    04-3627031(I.R.S. employer
identification no.)
 (Address of principal executive offices)
 (Registrants telephone number)
  þ o
  o o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



Monarch Community Bancorp, Inc.
  PART I  FINANCIAL INFORMATIONItem 1   Condensed Financial Statements:Condensed Consolidated Balance Sheets  September 30, 2010 and
December 31, 2009
    
    
    3Condensed Consolidated Statements of Income  Three and Nine Months
Ended September 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine Months Ended
September 30, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6 - 12Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13 - 20Item 3   Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4T Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1   Legal Proceedings
    
    
    22Item 1A   Risk Factors
    
    
    22Item 2   Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3   Defaults Upon Senior Securities
    
    
    22Item 4   [Reserved]
    
    
    22Item 5   Other Information
    
    
    22Item 6   Exhibits
    
    
    22SIGNATURES
    
    
    23CERTIFICATIONS
    
    
    25 - 27EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1.
    
    CONDENSED FINANCIAL STATEMENTS
 
 Condensed Consolidated Balance Sheets
 (Unaudited)September 30,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands,except per share data)AssetsCash and due from banks
    
    $
    25,214
    
    
    $
    12,631Federal Home Loan Bank overnight time and
other interest bearing deposits
    
    
    3,018
    
    
    
    10,723Total cash and cash equivalents
    
    
    28,232
    
    
    
    23,354Securities - Available for sale
    
    
    12,040
    
    
    
    16,063Securities - Held to maturity
    
    
    10
    
    
    
    23Other securities
    
    
    4,237
    
    
    
    4,237Loans held for sale
    
    
    607
    
    
    
    809Loans, net
    
    
    197,368
    
    
    
    220,875Foreclosed assets, net
    
    
    2,560
    
    
    
    2,839Premises and equipment
    
    
    4,207
    
    
    
    4,467Core deposit intangible
    
    
    425
    
    
    
    532Other assets
    
    
    9,732
    
    
    
    10,005Total assets
    
    $
    259,418
    
    
    $
    283,204Liabilities and Stockholders EquityLiabilitiesDeposits:Non-interest bearing
    
    $
    13,975
    
    
    $
    14,422Interest bearing
    
    
    187,925
    
    
    
    198,946Total deposits
    
    
    201,900
    
    
    
    213,368Federal Home Loan Bank advances
    
    
    42,518
    
    
    
    44,518Accrued expenses and other liabilities
    
    
    2,507
    
    
    
    2,155Total liabilities
    
    
    246,925
    
    
    
    260,041Stockholders EquityPreferred stock-$.01 par value, 5,000,000 shares authorized, and 6,785
shares, fixed
rate cumulative perpetual preferred stock, series A, $1,000 per share
liquidation preference, issued and outstanding as of September 30, 2010
and December 31, 2009
    
    
    6,748
    
    
    
    6,739Common stock - $0.01 par value, 20,000,000 shares authorized, 2,044,606
shares issued and outstanding at September 30, 2010 and December 31, 2009
    
    
    20
    
    
    
    20Additional paid-in capital
    
    
    21,223
    
    
    
    21,216Retained earnings
    
    
    (15,190
    )
    
    
    (4,355
    )Accumulated other comprehensive income
    
    
    372
    
    
    
    223Unearned compensation
    
    
    (680
    )
    
    
    (680
    )Total stockholders equity
    
    
    12,493
    
    
    
    23,163Total liabilities and stockholders equity
    
    $
    259,418
    
    
    $
    283,204
  3




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##### Table of Contents



Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands, except per share data)Interest IncomeLoans, including fees
    
    $
    2,971
    
    
    $
    3,770
    
    
    $
    9,399
    
    
    $
    11,598Investment securities
    
    
    127
    
    
    
    199
    
    
    
    421
    
    
    
    479Federal funds sold and overnight deposits
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    4Total interest income
    
    
    3,099
    
    
    
    3,970
    
    
    
    9,822
    
    
    
    12,081Interest ExpenseDeposits
    
    
    787
    
    
    
    1,218
    
    
    
    2,638
    
    
    
    3,811Federal Home Loan Bank advances
    
    
    504
    
    
    
    582
    
    
    
    1,496
    
    
    
    1,882Total interest expense
    
    
    1,291
    
    
    
    1,800
    
    
    
    4,134
    
    
    
    5,693Net Interest Income
    
    
    1,808
    
    
    
    2,170
    
    
    
    5,688
    
    
    
    6,388Provision for Loan Losses
    
    
    2,724
    
    
    
    1,250
    
    
    
    11,609
    
    
    
    5,413Net Interest Income After Provision for Loan Losses
    
    
    (916
    )
    
    
    920
    
    
    
    (5,921
    )
    
    
    975Non-interest IncomeFees and service charges
    
    
    439
    
    
    
    579
    
    
    
    1,548
    
    
    
    1,643Loan servicing fees
    
    
    119
    
    
    
    116
    
    
    
    358
    
    
    
    333Net gain on sale of loans
    
    
    236
    
    
    
    370
    
    
    
    585
    
    
    
    1,828Net gain (loss) on sale of securities
    
    
    39
    
    
    
    
    
    
    
    76
    
    
    
    2Other income
    
    
    47
    
    
    
    27
    
    
    
    240
    
    
    
    127Total non-interest income
    
    
    880
    
    
    
    1,092
    
    
    
    2,807
    
    
    
    3,933Non-interest ExpenseSalaries and employee benefits
    
    
    1,074
    
    
    
    1,190
    
    
    
    3,279
    
    
    
    3,468Occupancy and equipment
    
    
    235
    
    
    
    286
    
    
    
    700
    
    
    
    797Data processing
    
    
    198
    
    
    
    93
    
    
    
    605
    
    
    
    501Amortization of mortgage servicing rights
    
    
    113
    
    
    
    110
    
    
    
    281
    
    
    
    446Professional services
    
    
    207
    
    
    
    152
    
    
    
    603
    
    
    
    404Amortization of core deposit intangible
    
    
    35
    
    
    
    35
    
    
    
    106
    
    
    
    113NOW account processing
    
    
    53
    
    
    
    39
    
    
    
    158
    
    
    
    119ATM/Debit card processing
    
    
    64
    
    
    
    57
    
    
    
    181
    
    
    
    175Foreclosed property expense
    
    
    63
    
    
    
    144
    
    
    
    328
    
    
    
    253Other general and administrative
    
    
    440
    
    
    
    379
    
    
    
    1,215
    
    
    
    1,296Total non-interest expense
    
    
    2,482
    
    
    
    2,485
    
    
    
    7,456
    
    
    
    7,572Loss - Before income taxes
    
    
    (2,518
    )
    
    
    (473
    )
    
    
    (10,570
    )
    
    
    (2,664
    )Income Taxes
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    (669
    )Net Loss
    
    $
    (2,518
    )
    
    $
    (352
    )
    
    $
    (10,570
    )
    
    $
    (1,995
    )Dividends and amortization of discount on preferred stock
    
    $
    90
    
    
    $
    88
    
    
    $
    266
    
    
    $
    227Net Income (loss) available to common stock
    
    $
    (2,608
    )
    
    $
    (440
    )
    
    $
    (10,836
    )
    
    $
    (2,222
    )Loss Per ShareBasic
    
    $
    (1.32
    )
    
    $
    (0.22
    )
    
    $
    (5.48
    )
    
    $
    (1.13
    )Diluted
    
    $
    (1.32
    )
    
    $
    (0.22
    )
    
    $
    (5.48
    )
    
    $
    (1.13
    )
  4




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##### Table of Contents



Nine Months EndedSeptember, 302010
    
    
    2009(Dollars in thousands)Cash Flows From Operating ActivitiesNet Loss
    
    $
    (10,570
    )
    
    $
    (1,995
    )Adjustments to reconcile net loss to net cash from operating activitiesDepreciation and amortization
    
    
    827
    
    
    
    1,006Provision for loan losses
    
    
    11,609
    
    
    
    5,413Stock option expense
    
    
    7
    
    
    
    48Gain (loss) on sale of foreclosed assets
    
    
    (105
    )
    
    
    47Mortgage loans originated for sale
    
    
    (17,972
    )
    
    
    (80,110
    )Proceeds from sale of mortgage loans
    
    
    18,174
    
    
    
    82,011Gain on sale of mortgage loans
    
    
    (585
    )
    
    
    (1,828
    )Gain on sale of available for sale securities
    
    
    (76
    )
    
    
    (2
    )Earned stock compensation
    
    
    
    
    
    
    60Net change in:Deferred loan fees
    
    
    72
    
    
    
    80Accrued interest receivable
    
    
    492
    
    
    
    (61
    )Other assets
    
    
    (501
    )
    
    
    (1,871
    )Accrued expenses and other liabilities
    
    
    188
    
    
    
    (956
    )Net cash provided by operating activities
    
    
    1,560
    
    
    
    1,842Cash Flows From Investing ActivitiesActivity in available-for-sale securities:Purchases
    
    
    (4,217
    )
    
    
    (17,816
    )Proceeds from maturities of securities
    
    
    3,620
    
    
    
    8,489Proceeds from sale of securities
    
    
    4,808
    
    
    
    Activity in held-to-maturity securities:Purchases
    
    
    
    
    
    
    Proceeds from maturities of securities
    
    
    13
    
    
    
    14Loan originations and principal collections, net
    
    
    10,773
    
    
    
    8,856Proceeds from sale of foreclosed assets
    
    
    2,030
    
    
    
    559Purchase of premises and equipment
    
    
    (65
    )
    
    
    (238
    )Net cash provided by (used in) investing activities
    
    
    16,962
    
    
    
    (136
    )Cash Flows From Financing ActivitiesNet increase in deposits
    
    
    (11,468
    )
    
    
    23,548Issuance of Preferred Stock
    
    
    
    
    
    
    6,734Issuance of Warrants
    
    
    
    
    
    
    56Cash Dividends-preferred stock
    
    
    
    
    
    
    (178
    )Cash Dividends-common stock
    
    
    (176
    )
    
    
    (511
    )Amortization of common stock warrants
    
    
    
    
    
    
    (7
    )Proceeds from FHLB advances
    
    
    (2,000
    )
    
    
    Repayment of FHLB advances
    
    
    
    
    
    
    (10,500
    )Repayment of Fed Funds purchased
    
    
    
    
    
    
    (1,000
    )Net cash provided by (used in) financing activities
    
    
    (13,644
    )
    
    
    18,142Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    4,878
    
    
    
    19,848Cash and Cash Equivalents- Beginning
    
    
    23,354
    
    
    
    6,272Cash and
Cash Equivalents -End
    
    $
    28,232
    
    
    $
    26,120Supplemental Cash Flow Information:Cash paid for:Interest
    
    
    4,186
    
    
    
    5,757Income taxes
    
    
    
    
    
    
    236Noncash investing activities:Loans transferred to foreclosed assets
    
    
    1,639
    
    
    
    2,717
  5




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##### Table of Contents



MONARCH COMMUNITY BANCORP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 ORGANIZATION
   BASIS OF PRESENTATION
     ALLOWANCE FOR LOAN LOSSES
    6




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##### Table of Contents



RECLASSIFICATIONS
  SECURITIES
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    EstimatedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueSeptember 30, 2010Available-for-sale securities:U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U.S. government agency obligations
    
    
    1,625
    
    
    
    97
    
    
    
    
    
    
    
    1,722Mortgage-backed securities
    
    
    4,304
    
    
    
    162
    
    
    
    
    
    
    
    4,466Obligations of states and
political subdivisions
    
    
    5,542
    
    
    
    310
    
    
    
    
    
    
    
    5,852Total available-for-sale securities
    
    $
    11,471
    
    
    $
    569
    
    
    $
    
    
    
    $
    12,040Held-to-maturity securities:Municipal securities
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    10
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    EstimatedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueDecember 31, 2009Available-for-sale securities:U.S. Treasury
    
    $
    1,055
    
    
    $
    16
    
    
    $
    
    
    
    $
    1,071U.S. government agency obligations
    
    
    3,155
    
    
    
    41
    
    
    
    
    
    
    
    3,196Mortgage-backed securities
    
    
    5,454
    
    
    
    82
    
    
    
    
    
    
    
    5,536Obligations of states and
political subdivisions
    
    
    6,061
    
    
    
    199
    
    
    
    
    
    
    
    6,260Total available-for-sale securities
    
    $
    15,725
    
    
    $
    338
    
    
    $
    
    
    
    $
    16,063Held-to-maturity securities:Municipal securities
    
    $
    23
    
    
    $
    
    
    
    $
    
    
    
    $
    23
  7




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##### Table of Contents



.
 September 30, 2010Held to Maturity Securities
    
    
    Available for Sale SecuritiesAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value(Dollars in Thousands)Due in one year or less
    
    $
    10
    
    
    $
    10
    
    
    $
    783
    
    
    $
    800Due from one to five years
    
    
    
    
    
    
    
    
    
    
    5,303
    
    
    
    5,610Due from five to ten years
    
    
    
    
    
    
    
    
    
    
    5,385
    
    
    
    5,630Due after ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total securities
    
    $
    10
    
    
    $
    10
    
    
    $
    11,471
    
    
    $
    12,040
  Other-Than Temporary-Impairment
   8




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EARNINGS PER SHARE
  Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30, 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    September 30, 2009Basic loss per shareNumerator:Net Loss
    
    $
    (2,518
    )
    
    $
    (352
    )
    
    $
    (10,570
    )
    
    $
    (1,995
    )Dividends and amortization of
discount on preferred stock
    
    $
    90
    
    
    $
    88
    
    
    $
    266
    
    
    $
    227Net Loss available to common stock
    
    $
    (2,608
    )
    
    $
    (440
    )
    
    $
    (10,836
    )
    
    $
    (2,222
    )Denominator:Weighted average common shares outstanding
    
    
    2,045
    
    
    
    2,046
    
    
    
    2,045
    
    
    
    2,046Less: Average unallocated ESOP shares
    
    
    (65
    )
    
    
    (74
    )
    
    
    (65
    )
    
    
    (74
    )Less: Average non-vested RRP shares
    
    
    (1
    )
    
    
    (6
    )
    
    
    (2
    )
    
    
    (7
    )Weighted average common shares outstanding
for basic earnings (loss) per share
    
    
    1,979
    
    
    
    1,966
    
    
    
    1,978
    
    
    
    1,965Basic loss per share
    
    $
    (1.32
    )
    
    $
    (0.22
    )
    
    $
    (5.48
    )
    
    $
    (1.13
    )Diluted earnings per shareNumerator:Net Loss available to common stock
    
    $
    (2,608
    )
    
    $
    (440
    )
    
    $
    (10,836
    )
    
    $
    (2,222
    )Denominator:Weighted average common shares outstanding
for basic earnings per share
    
    
    1,979
    
    
    
    1,966
    
    
    
    1,978
    
    
    
    1,965Add: Dilutive effects of restricted stock,
stock options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares and dilutive
potential common shares outstanding
    
    
    1,979
    
    
    
    1,966
    
    
    
    1,978
    
    
    
    1,965Diluted loss per share
    
    $
    (1.32
    )
    
    $
    (0.22
    )
    
    $
    (5.48
    )
    
    $
    (1.13
    )
 RECENT ACCOUNTING PRONOUNCEMENTS
  9




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FAIR VALUE MEASUREMENTS
      Quoted Prices in Active
    
    
    Significant Other
    
    
    SignificantMarkets for Identical
    
    
    Observable Inputs
    
    
    Unobservable
    
    
    Balance atAssets (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)
    
    
    September 30, 2010Assets:September 30, 2010U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U.S. government agency obligations
    
    
    
    
    
    
    1,722
    
    
    
    
    
    
    
    1,722Mortgage-backed securities
    
    
    
    
    
    
    4,466
    
    
    
    
    
    
    
    4,466Obligations of states and
political subdivisions
    
    
    
    
    
    
    5,852
    
    
    
    
    
    
    
    5,852
 Quoted Prices in Active
    
    
    Significant Other
    
    
    SignificantMarkets for Identical
    
    
    Observable Inputs
    
    
    Unobservable
    
    
    Balance atAssets (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)
    
    
    December 31, 2009Assets:December 31, 2009U.S. Treasury
    
    $
    1,071
    
    
    $
    
    
    
    $
    
    
    
    $
    1,071U.S. government agency obligations
    
    
    
    
    
    
    3,196
    
    
    
    
    
    
    
    3,196Mortgage-backed securities
    
    
    
    
    
    
    5,536
    
    
    
    
    
    
    
    5,536Obligations of states and
political subdivisions
    
    
    
    
    
    
    6,260
    
    
    
    
    
    
    
    6,260
 10




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##### Table of Contents



Assets Measured at Fair Value on a Nonrecurring BasisBalance at
    
    
    Quoted Prices in Active
    
    
    Significant Other
    
    
    Significant
    
    
    Change in Fair Value for theSeptember
    
    
    Markets for Identical
    
    
    Observable Inputs
    
    
    Unobservable Inputs
    
    
    nine months ended30, 2010
    
    
    Assets (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    September 30, 2010Impaired Loans
accounted for under
FASB ASC 310
    
    $
    18,809
    
    
    $
    
    
    
    $
    
    
    
    $
    18,809
    
    
    $
    (6,539
    )Foreclosed Assets
    
    $
    2,560
    
    
    $
    
    
    
    $
    
    
    
    $
    2,560
    
    
    $
    (2,352
    )
 Assets Measured at Fair Value on a Nonrecurring BasisBalance at
    
    
    Quoted Prices in Active
    
    
    Significant Other
    
    
    Significant
    
    
    Change in Fair Value for theSeptember
    
    
    Markets for Identical
    
    
    Observable Inputs
    
    
    Unobservable Inputs
    
    
    nine months ended30, 2009
    
    
    Assets (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    September 30, 2009Impaired Loans
accounted for under
FASB ASC 310
    
    $
    9,455
    
    
    $
    
    
    
    $
    
    
    
    $
    9,455
    
    
    $
    (2,487
    )Foreclosed Assets
    
    $
    1,615
    
    
    $
    
    
    
    $
    
    
    
    $
    1,615
    
    
    $
    (953
    )
 Fair Value of Financial Instruments
   Securities
 Mortgage Loans Held for Sale
 Loans Receivable
 11




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##### Table of Contents



Deposit Liabilities
 Federal Home Loan Bank Advances
  September 30,
    
    
    December 31,2010
    
    
    2009Carrying Amount
    
    
    Fair Value
    
    
    Carrying Amount
    
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    28,232
    
    
    $
    28,232
    
    
    $
    23,354
    
    
    $
    23,354Securities  Held to maturity
    
    
    10
    
    
    
    10
    
    
    
    23
    
    
    
    23Securities  Available for sale
    
    
    12,040
    
    
    
    12,040
    
    
    
    16,063
    
    
    
    16,063Other securities
    
    
    4,237
    
    
    
    4,237
    
    
    
    4,237
    
    
    
    4,237Loans held for sale
    
    
    607
    
    
    
    619
    
    
    
    809
    
    
    
    827Net loans
    
    
    197,368
    
    
    
    200,565
    
    
    
    220,875
    
    
    
    230,866Accrued interest
and late charges receivable
    
    
    587
    
    
    
    587
    
    
    
    1,154
    
    
    
    1,154Liabilities:Deposits
    
    
    201,900
    
    
    
    200,948
    
    
    
    213,368
    
    
    
    214,581Federal Home Loan Bank
advances
    
    
    42,518
    
    
    
    45,062
    
    
    
    44,518
    
    
    
    48,260Accrued interest payable
    
    
    345
    
    
    
    345
    
    
    
    397
    
    
    
    397
 ALLOWANCE FOR LOAN LOSSES
   Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009Beginning Balance
    
    $
    9,783
    
    
    $
    5,550
    
    
    $
    5,783
    
    
    $
    2,719Loans Charged off
    
    
    (2,940
    )
    
    
    (880
    )
    
    
    (7,951
    )
    
    
    (2,347
    )Recoveries
    
    
    112
    
    
    
    66
    
    
    
    238
    
    
    
    201Provision for loan losses
    
    
    2,724
    
    
    
    1,250
    
    
    
    11,609
    
    
    
    5,413Ending Balance
    
    $
    9,679
    
    
    $
    5,986
    
    
    $
    9,679
    
    
    $
    5,986
  12




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  FORWARD-LOOKING STATEMENTS
   CRITICAL ACCOUNTING POLICIES
  Allowance for Loan Losses
 Foreclosed Assets .
 Income Taxes -
 13




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##### Table of Contents



OVERVIEW
   1.
    
    Hiring a new President & CEO.2.
    
    Hiring a new Chief Lending Officer.3.
    
    Implementing a Reduction-In-Staff program that decreased the Banks Full Time
Equivalent (FTE) by 21 and reduced expenses by approximately $825,000 on an annualized
basis.4.
    
    Appointing a Chief Risk Management Officer.5.
    
    Purchasing and implementing advanced credit analysis software and document tracking
system to enhance credit analysis and credit monitoring functions.6.
    
    Consolidating all lending, credit analysis and loan portfolio monitoring functions
into one physical facility with increased oversight and controls.7.
    
    The development and initial execution of plans to reduce classified assets and
concentrations of credit. This includes the completion of a loan review by an outside
consulting firm. The firm reviewed approximately 79% of the total loan portfolio and made
no recommendations for charge-offs or special reserves on the loans they reviewed. In
addition, they reviewed the methodology and adequacy of the Allowance for Loan and Lease
Losses and found them to be reasonable.8.
    
    The formation of an executive level committee to review the status of all substandard
and doubtful loans on a weekly basis and to review all special mention loans on at least a
monthly basis.9.
    
    The initiation of multiple dialogues with investment bankers regarding the raising of
additional capital. No substantive plans have been developed to date. The Bank continues
to evaluate options.10.
    
    The enhancement of loan policies and procedures.11.
    
    The evaluation of initiatives to enhance non-interest income for the bank
 FINANCIAL CONDITION
 Assets
  Securities
  14




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##### Table of Contents



Loans
  September 30, 2010
    
    
    December 31, 2009Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Real Estate Loans:One-to-four family
    
    $
    99,990
    
    
    
    48.2
    
    
    $
    108,354
    
    
    
    47.7Multi-family
    
    
    4,642
    
    
    
    2.2
    
    
    
    5,421
    
    
    
    2.2Commercial
    
    
    65,911
    
    
    
    31.8
    
    
    
    72,689
    
    
    
    32.0Construction or development
    
    
    8,668
    
    
    
    4.2
    
    
    
    9,528
    
    
    
    4.2Total real estate loans
    
    
    179,211
    
    
    
    86.4
    
    
    
    195,992
    
    
    
    86.3Other loans:Consumer loans:Home equity
    
    
    16,363
    
    
    
    7.9
    
    
    
    18,174
    
    
    
    8.0Other
    
    
    3,605
    
    
    
    2.0
    
    
    
    4,706
    
    
    
    2.1Total consumer loans
    
    
    19,968
    
    
    
    10.0
    
    
    
    22,880
    
    
    
    10.1Commercial Business Loans
    
    
    8,276
    
    
    
    4.0
    
    
    
    8,266
    
    
    
    3.5Total other loans
    
    
    28,244
    
    
    
    14.0
    
    
    
    31,146
    
    
    
    13.6Total Loans
    
    
    207,455
    
    
    
    100.0
    %
    
    
    227,138
    
    
    
    100.0
    %Allowance for loan losses
    
    
    9,678
    
    
    
    
    
    
    
    5,783Less: Net deferred loan fees
    
    
    409
    
    
    
    
    
    
    
    480Total Loans, net
    
    $
    197,368
    
    
    
    
    
    
    $
    220,875
    15




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##### Table of Contents



Deposits
   Federal Home Loan Bank Advances
  Equity
  RESULTS OF OPERATIONS
 Net Interest Income
     16




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##### Table of Contents



Nine Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate(dollars in thousands)
    
    
    (dollars in thousands)Fed Funds and overnight deposits
    
    $
    16,901
    
    
    $
    2
    
    
    
    0.02
    %
    
    $
    9,805
    
    
    $
    4
    
    
    
    0.05
    %Investment securities
    
    
    15,918
    
    
    
    364
    
    
    
    3.06
    
    
    
    16,485
    
    
    
    426
    
    
    
    3.46Other securities
    
    
    4,174
    
    
    
    57
    
    
    
    1.83
    
    
    
    4,174
    
    
    
    53
    
    
    
    1.70Loans receivable
    
    
    219,495
    
    
    
    9,399
    
    
    
    5.73
    
    
    
    244,355
    
    
    
    11,598
    
    
    
    6.35Total earning assets
    
    $
    256,488
    
    
    $
    9,822
    
    
    
    5.12
    
    
    $
    274,819
    
    
    $
    12,081
    
    
    
    5.88Demand and NOW Accounts
    
    $
    40,351
    
    
    $
    80
    
    
    
    0.27
    
    
    $
    33,297
    
    
    $
    68
    
    
    
    0.27Money market accounts
    
    
    52,377
    
    
    
    353
    
    
    
    0.90
    
    
    
    44,999
    
    
    
    610
    
    
    
    1.81Savings accounts
    
    
    21,153
    
    
    
    39
    
    
    
    0.25
    
    
    
    19,011
    
    
    
    53
    
    
    
    0.37Certificates of deposit
    
    
    93,679
    
    
    
    2,166
    
    
    
    3.09
    
    
    
    105,314
    
    
    
    3,080
    
    
    
    3.91Fed Funds Purchased
    
    
    4
    
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    
    
    
    
    0.00Federal Home Loan Bank Advances
    
    
    44,510
    
    
    
    1,496
    
    
    
    4.49
    
    
    
    55,763
    
    
    
    1,882
    
    
    
    4.51Total interest bearing liabilities
    
    $
    252,074
    
    
    
    4,134
    
    
    
    2.19
    
    
    $
    258,384
    
    
    
    5,693
    
    
    
    2.95Net interest income
    
    
    
    
    
    $
    5,688
    
    
    
    
    
    
    
    
    
    
    $
    6,388Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.93
    %
    
    
    
    
    
    
    
    
    
    
    2.93
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    
    
    
    
    
    
    
    
    3.10
    %
 Provision for Loan Losses
    September 30, 2010
    
    
    December 31, 2009(In thousands)Non-performing loans
    
    $
    23,879
    
    
    $
    15,570Real estate in judgement
    
    
    1,659
    
    
    
    1,126Foreclosed and repossessed assets
    
    
    901
    
    
    
    1,713Total non-performing assets
    
    $
    26,439
    
    
    $
    18,409Non-performing loans to total loans
    
    
    11.50
    %
    
    
    6.85
    %Non-performing assets to total assets
    
    
    10.19
    %
    
    
    6.50
    %Allowance for loan losses to non-performing loans
    
    
    40.50
    %
    
    
    37.14
    %Allowance for loan losses to net loans receivable
    
    
    4.66
    %
    
    
    2.54
    %
 17




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##### Table of Contents



Non-interest Income
     Non-interest Expense
 
   Federal Income Tax Expense
 
 18




---



##### Table of Contents



LIQUIDITY
     
  19




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##### Table of Contents



CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS
  Payments Due by PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    AfterTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(Dollars in Thousands)Certificates of deposit
    
    $
    97,615
    
    
    $
    48,949
    
    
    $
    34,757
    
    
    $
    13,909
    
    
    $
    FHLB advances
    
    
    42,518
    
    
    
    22,168
    
    
    
    20,291
    
    
    
    59
    
    
    
    Total
    
    $
    140,133
    
    
    $
    71,117
    
    
    $
    55,048
    
    
    $
    13,968
    
    
    $
    
 Amount of commitment expiration per periodLess than
    
    
    1-3
    
    
    3-5
    
    
    AfterTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(Dollars in Thousands)Commitments to grant loans
    
    $
    14,792
    
    
    $
    14,792
    
    
    $
    
    
    
    $
    
    
    
    $
    Unfunded commitments under HELOCs
    
    
    12,501
    
    
    
    7,698
    
    
    
    1,631
    
    
    
    532
    
    
    
    2,640Unfunded commitments under Contruction loans
    
    
    1,086
    
    
    
    802
    
    
    
    60
    
    
    
    9
    
    
    
    215Unfunded commitments under Commercial LOCs
    
    
    1,456
    
    
    
    1,410
    
    
    
    46
    
    
    
    
    
    
    
    Letters of credit
    
    
    150
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    29,985
    
    
    $
    24,852
    
    
    $
    1,737
    
    
    $
    541
    
    
    $
    2,855
  CAPITAL RESOURCES
   RECENT DEVELOPMENTS
  20




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4T. CONTROLS AND PROCEDURES
   21




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##### Table of Contents



PART II-OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. [RESERVED]
 
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
  22




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##### Table of Contents



SIGNATURES
  MONARCH COMMUNITY BANCORP, INC.Date: November 15, 2010
    By:
    /s/ Richard J. DeVriesRichard J. DeVriesPresident and Chief Executive OfficerDate: November 15, 2010
    And:
    /s/ Rebecca S. CrabillRebecca S. CrabillSenior Vice President, Chief Financial Officer 23




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description of Exhibit10.1
    
    Written Agreement with the Federal Reserve Bank of Chicago (Incorporated by Reference
From Form 
8-K Filed September 27, 2010.)31.1
    
    Rule 13a-14(a) Certification of the Corporations President and Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of the Corporations Chief Financial Officer.32
    
    Section 1350 Certification.
 24