##### 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 March 31, 2011
 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
    
    04-3627031(State or other jurisdiction
    
    (I.R.S. employerof incorporation or organization)
    
    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  March 31, 2011Condensed Consolidated Statements of Income   Three Months Ended March 31, 2011
    
    
    2Condensed Consolidated Statements of Cash Flows  Three Months Ended March 31, 2011
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4-17Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17-23Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4  Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    24Item 1A
 Risk Factors
    
    
    24Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3  Defaults Upon Senior Securities
    
    
    24Item 4  [Reserved]
    
    
    24Item 5  Other Information
    
    
    24Item 6  Exhibits
    
    
    24SIGNATURES
    
    
    25CERTIFICATIONS
    
    
    27-29EX-31.1EX-31.2EX-32




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. CONDENSED FINANCIAL STATEMENTS
 
 Condensed Consolidated Balance Sheets
 (Unaudited)March 31,
    
    
    December 31,2011
    
    
    2010(Dollars in thousands,except per share data)AssetsCash and due from banks
    
    $
    18,164
    
    
    $
    7,065Federal Home Loan Bank overnight time and
other interest bearing deposits
    
    
    32,257
    
    
    
    34,909Total cash and cash equivalents
    
    
    50,421
    
    
    
    41,974Securities  Available for sale
    
    
    10,645
    
    
    
    11,466Securities  Held to maturity
    
    
    10
    
    
    
    10Other securities
    
    
    3,865
    
    
    
    3,865Loans held for sale
    
    
    291
    
    
    
    693Loans, net
    
    
    174,554
    
    
    
    182,768Foreclosed assets, net
    
    
    3,737
    
    
    
    2,972Premises and equipment
    
    
    4,048
    
    
    
    4,122Core deposit intangible
    
    
    354
    
    
    
    390Other assets
    
    
    7,899
    
    
    
    8,608Total assets
    
    $
    255,824
    
    
    $
    256,868Liabilities and Stockholders EquityLiabilitiesDeposits:Non-interest bearing
    
    $
    25,447
    
    
    $
    15,394Interest bearing
    
    
    185,273
    
    
    
    190,634Total deposits
    
    
    210,720
    
    
    
    206,028Federal Home Loan Bank advances
    
    
    30,350
    
    
    
    36,350Accrued expenses and other liabilities
    
    
    2,603
    
    
    
    2,472Total liabilities
    
    
    243,673
    
    
    
    244,850Stockholders 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 March 31, 2011
    
    
    6,753
    
    
    
    6,750Common stock  $0.01 par value, 20,000,000 shares authorized, 2,049,485
shares issued and outstanding at March 31, 2011 and December 31, 2010
    
    
    20
    
    
    
    20Additional paid-in capital
    
    
    21,149
    
    
    
    21,146Retained earnings
    
    
    (15,481
    )
    
    
    (15,591
    )Accumulated other comprehensive income
    
    
    271
    
    
    
    257Unearned compensation
    
    
    (561
    )
    
    
    (564
    )Total stockholders equity
    
    
    12,151
    
    
    
    12,018Total liabilities and stockholders equity
    
    $
    255,824
    
    
    $
    256,868




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##### Table of Contents



Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2011
    
    
    2010(Dollars in thousands, except per share data)Interest IncomeLoans, including fees
    
    $
    2,689
    
    
    $
    3,336Investment securities
    
    
    118
    
    
    
    151Federal funds sold and overnight deposits
    
    
    1
    
    
    
    1Total interest income
    
    
    2,808
    
    
    
    3,488Interest ExpenseDeposits
    
    
    684
    
    
    
    964Federal Home Loan Bank advances
    
    
    349
    
    
    
    494Total interest expense
    
    
    1,033
    
    
    
    1,458Net Interest Income
    
    
    1,775
    
    
    
    2,030Provision for Loan Losses
    
    
    260
    
    
    
    1,845Net Interest Income After Provision for Loan Losses
    
    
    1,515
    
    
    
    185Non-interest IncomeFees and service charges
    
    
    447
    
    
    
    546Loan servicing fees
    
    
    108
    
    
    
    117Net gain on sale of loans
    
    
    158
    
    
    
    199Net gain (loss) on sale of securities
    
    
    
    
    
    
    37Other income
    
    
    333
    
    
    
    173Total non-interest income
    
    
    1,046
    
    
    
    1,072Non-interest ExpenseSalaries and employee benefits
    
    
    1,071
    
    
    
    1,106Occupancy and equipment
    
    
    242
    
    
    
    241Data processing
    
    
    213
    
    
    
    209Amortization of mortgage servicing rights
    
    
    96
    
    
    
    88Professional services
    
    
    157
    
    
    
    150Amortization of core deposit intangible
    
    
    35
    
    
    
    35NOW account processing
    
    
    50
    
    
    
    51ATM/Debit card processing
    
    
    59
    
    
    
    57Foreclosed property expense
    
    
    88
    
    
    
    206Other general and administrative
    
    
    352
    
    
    
    350Total non-interest expense
    
    
    2,363
    
    
    
    2,493Income (Loss)  Before income taxes
    
    
    198
    
    
    
    (1,236
    )Income Taxes
    
    
    
    
    
    
    Net Income (Loss)
    
    $
    198
    
    
    $
    (1,236
    )Dividends and amortization of discount on preferred stock
    
    $
    88
    
    
    $
    88Net Income (loss) available to common stock
    
    $
    110
    
    
    $
    (1,324
    )Earnings(Loss) Per ShareBasic
    
    $
    0.06
    
    
    $
    (0.67
    )Diluted
    
    $
    0.06
    
    
    $
    (0.67
    )
  2




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Three Months EndedMarch, 312011
    
    
    2010(Dollars in thousands)Cash Flows From Operating ActivitiesNet Income (Loss)
    
    $
    198
    
    
    $
    (1,236
    )Adjustments to reconcile net income (loss) to net cash from operating activitiesDepreciation and amortization
    
    
    258
    
    
    
    271Provision for loan losses
    
    
    260
    
    
    
    1,845Stock option expense
    
    
    
    
    
    
    2Gain on sale of foreclosed assets
    
    
    (278
    )
    
    
    (116
    )Mortgage loans originated for sale
    
    
    (5,935
    )
    
    
    (6,116
    )Proceeds from sale of mortgage loans
    
    
    6,338
    
    
    
    6,383Gain on sale of mortgage loans
    
    
    (158
    )
    
    
    (199
    )(Gain) Loss on sale of available for sale securities
    
    
    
    
    
    
    (37
    )Earned Stock Compensation
    
    
    15
    
    
    
    Net change in:Deferred loan fees
    
    
    (34
    )
    
    
    28Accrued interest receivable
    
    
    220
    
    
    
    (37
    )Other assets
    
    
    394
    
    
    
    77Accrued expenses and other liabilities
    
    
    35
    
    
    
    58Net cash provided by (used in) operating activities
    
    
    1,313
    
    
    
    923Cash Flows From Investing ActivitiesActivity in available-for-sale securities:Purchases
    
    
    
    
    
    
    (3,716
    )Proceeds from maturities of securities
    
    
    824
    
    
    
    1,863Proceeds from sale of securities
    
    
    
    
    
    
    1,066Loan originations and principal collections, net
    
    
    6,890
    
    
    
    2,269Proceeds from sale of foreclosed assets
    
    
    763
    
    
    
    1,026Purchase of premises and equipment
    
    
    (35
    )
    
    
    (54
    )Net cash provided by investing activities
    
    
    8,442
    
    
    
    2,454Cash Flows From Financing ActivitiesNet increase in deposits
    
    
    4,692
    
    
    
    5,045Repayment of FHLB advances
    
    
    (6,000
    )
    
    
    Net cash provided by financing activities
    
    
    (1,308
    )
    
    
    5,045Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    8,447
    
    
    
    8,422Cash and Cash Equivalents Beginning
    
    
    41,974
    
    
    
    23,354Cash and Cash Equivalents End
    
    $
    50,421
    
    
    $
    31,776Supplemental Cash Flow Information:Cash paid for:Interest
    
    
    1,069
    
    
    
    1,475Income taxes
    
    
    
    
    
    
    Noncash investing activities:Loans transferred to foreclosed assets
    
    
    1,255
    
    
    
    308
  3




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MONARCH COMMUNITY BANCORP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 ORGANIZATION
   BASIS OF PRESENTATION
     ALLOWANCE FOR LOAN LOSSES
    4




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RECLASSIFICATIONS
  SECURITIES
  Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketMarch 31, 2011
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-sale securities:U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U.S. government agency obligations
    
    
    1,114
    
    
    
    72
    
    
    
    
    
    
    
    1,186Mortgage-backed securities
    
    
    3,580
    
    
    
    125
    
    
    
    
    
    
    
    3,705Obligations of states and
political subdivisions
    
    
    5,539
    
    
    
    215
    
    
    
    
    
    
    
    5,754Total available-for-sale securities
    
    $
    10,233
    
    
    $
    412
    
    
    $
    
    
    
    $
    10,645Held-to-maturity securities:Municipal securities
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    10
 Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketDecember 31, 2010
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-sale securities:U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U.S. government agency obligations
    
    
    1,619
    
    
    
    63
    
    
    
    
    
    
    
    1,682Mortgage-backed securities
    
    
    3,914
    
    
    
    110
    
    
    
    
    
    
    
    4,024Obligations of states and
political subdivisions
    
    
    5,543
    
    
    
    217
    
    
    
    
    
    
    
    5,760Total available-for-sale securities
    
    $
    11,076
    
    
    $
    390
    
    
    $
    
    
    
    $
    11,466Held-to-maturity securities:Municipal securities
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    10
  5




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.
 March 31, 2011Held to Maturity Securities
    
    
    Available for Sale SecuritiesAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value(Dollars in Thousands)Due in one year or less
    
    $
    10
    
    
    $
    10
    
    
    $
    400
    
    
    $
    408Due from one to five years
    
    
    
    
    
    
    
    
    
    
    5,392
    
    
    
    5,635Due from five to ten years
    
    
    
    
    
    
    
    
    
    
    861
    
    
    
    897Due after ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    10
    
    
    $
    10
    
    
    
    6,653
    
    
    
    6,940Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    3,580
    
    
    
    3,705Total available-for-sale securities
    
    
    
    
    
    
    
    
    
    $
    10,233
    
    
    $
    10,645
  Other-Than Temporary-Impairment
   6




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EARNINGS PER SHARE
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2011
    
    
    March 31, 2010Basic earnings per shareNumerator:Net income (loss)
    
    $
    198
    
    
    $
    (1,236
    )Dividends and amortization of discount on
preferred stock
    
    $
    88
    
    
    $
    88Net Income (Loss) available to common stock
    
    $
    110
    
    
    $
    (1,324
    )Denominator:Weighted average common shares outstanding
    
    
    2,050
    
    
    
    2,045Less: Average unallocated ESOP shares
    
    
    (56
    )
    
    
    (65
    )Less: Average non-vested RRP shares
    
    
    (1
    )
    
    
    (2
    )Weighted average common shares outstanding
for basic earnings (loss) per share
    
    
    1,993
    
    
    
    1,978Basic earnings (loss) per share
    
    $
    0.06
    
    
    $
    (0.67
    )Diluted earnings per shareNumerator:Net Income (Loss) available to common stock
    
    $
    110
    
    
    $
    (1,324
    )Denominator:Weighted average common shares outstanding
for basic earnings per share
    
    
    1,993
    
    
    
    1,978Add: Dilutive effects of restricted stock,
stock options and warrants
    
    
    
    
    
    
    Weighted average common shares and dilutive
potential common shares outstanding
    
    
    1,993
    
    
    
    1,978Diluted earnings (loss) per share
    
    $
    0.06
    
    
    $
    (0.67
    )
 RECENT ACCOUNTING PRONOUNCEMENTS
  7




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FAIR VALUE MEASUREMENTS
      SignificantQuoted Prices in Active
    
    
    Other
    
    
    SignificantMarkets for Identical
    
    
    Observable
    
    
    Unobservable
    
    
    Balance atAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    March 31, 2011Assets:March 31, 2011-Investment SecuritiesU.S. government agency obligations
    
    
    
    
    
    
    1,186
    
    
    
    
    
    
    
    1,186Mortgage-backed securities
    
    
    
    
    
    
    3,705
    
    
    
    
    
    
    
    3,705Obligations of states and
political subdivisions
    
    
    
    
    
    
    5,754
    
    
    
    
    
    
    
    5,754$
    
    
    
    $
    10,645
    
    
    $
    
    
    
    $
    10,645
 SignificantQuoted Prices in Active
    
    
    Other
    
    
    SignificantMarkets for Identical
    
    
    Observable
    
    
    Unobservable
    
    
    Balance atAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    December 31, 2010Assets:December 31, 2010-Investment SecuritiesU.S. government agency obligations
    
    
    
    
    
    
    1,682
    
    
    
    
    
    
    
    1,682Mortgage-backed securities
    
    
    
    
    
    
    4,024
    
    
    
    
    
    
    
    4,024Obligations of states and
political subdivisions
    
    
    
    
    
    
    5,760
    
    
    
    
    
    
    
    5,760$
    
    
    
    $
    11,466
    
    
    $
    
    
    
    $
    11,466
 8




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Assets Measured at Fair Value on a Nonrecurring BasisBalance at
    
    Quoted Prices in Active
    
    Significant Other
    
    SignificantMarch 31,
    
    Markets for Identical
    
    Observable Inputs
    
    Unobservable Inputs2011
    
    Assets (Level 1)
    
    (Level 2)
    
    (Level 3)Impaired Loans accounted for
under FASB ASC 310
    
    $
    10,508
    
    
    $
    
    
    
    $
    
    
    
    $
    10,508Foreclosed Assets
    
    $
    3,737
    
    
    $
    
    
    
    $
    
    
    
    $
    3,737
 Assets Measured at Fair Value on a Nonrecurring BasisBalance at
    
    Quoted Prices in Active
    
    Significant Other
    
    SignificantDecember 31,
    
    Markets for Identical
    
    Observable Inputs
    
    Unobservable Inputs2010
    
    Assets (Level 1)
    
    (Level 2)
    
    (Level 3)Impaired Loans accounted
for under FASB ASC 310
    
    $
    11,433
    
    
    $
    
    
    
    $
    
    
    
    $
    11,433Foreclosed Assets
    
    $
    2,972
    
    
    $
    
    
    
    $
    
    
    
    $
    2,972
 Fair Value of Financial Instruments
   Securities
 Mortgage Loans Held for Sale
 Loans Receivable
 9




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Deposit Liabilities
 Federal Home Loan Bank Advances
  March 31,
    
    December 31,2011
    
    2010Carrying Amount
    
    Fair Value
    
    Carrying Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    50,421
    
    
    $
    50,421
    
    
    $
    41,974
    
    
    $
    41,974Securities  Held to maturity
    
    
    10
    
    
    
    10
    
    
    
    10
    
    
    
    10Securities  Available for sale
    
    
    10,645
    
    
    
    10,645
    
    
    
    11,466
    
    
    
    11,466Other securities
    
    
    3,865
    
    
    
    3,865
    
    
    
    3,865
    
    
    
    3,865Loans held for sale
    
    
    291
    
    
    
    297
    
    
    
    693
    
    
    
    827Net loans
    
    
    174,554
    
    
    
    177,063
    
    
    
    182,768
    
    
    
    185,268Accrued interest
and late charges receivable
    
    
    519
    
    
    
    519
    
    
    
    264
    
    
    
    264Liabilities:Deposits
    
    
    210,720
    
    
    
    210,885
    
    
    
    206,028
    
    
    
    206,400Federal Home Loan Bank
advances
    
    
    30,350
    
    
    
    32,353
    
    
    
    36,350
    
    
    
    38,532Accrued interest payable
    
    
    306
    
    
    
    306
    
    
    
    341
    
    
    
    341
 LOANS
  March 31, 2011
    
    
    December 31, 2010Amount
    
    
    Amount(Dollars in thousands)Real Estate Loans:One-to-four family
    
    $
    89,150
    
    
    $
    93,294Multi-family
    
    
    4,579
    
    
    
    4,783Commercial
    
    
    61,367
    
    
    
    62,998Construction or development
    
    
    2,587
    
    
    
    3,873Total real estate loans
    
    
    157,683
    
    
    
    164,948Other loans:Consumer loans:Home equity
    
    
    13,720
    
    
    
    14,814Other
    
    
    3,122
    
    
    
    3,403Total consumer loans
    
    
    16,842
    
    
    
    18,217Commercial Business Loans
    
    
    7,169
    
    
    
    6,882Total other loans
    
    
    24,011
    
    
    
    25,099Total Loans
    
    
    181,694
    
    
    
    190,047
 10




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##### Table of Contents



Loans 9030-69
    
    
    60-89
    
    
    Days orDays Past
    
    
    Days Past
    
    
    More Past
    
    
    Total Past
    
    
    CurrentDue
    
    
    Due
    
    
    Due
    
    
    due Loans
    
    
    Loans
    
    
    Total LoansCommercial
    
    $
    225
    
    
    $
    
    
    
    $
    1,206
    
    
    $
    1,431
    
    
    $
    5,738
    
    
    $
    7,169Commercial Real Estate:Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    4,579
    
    
    
    4,579Commercial Real Estate  other
    
    
    177
    
    
    
    2,719
    
    
    
    3,744
    
    
    $
    6,640
    
    
    
    54,727
    
    
    
    61,367Consumer:Consumer  other
    
    
    227
    
    
    
    
    
    
    
    85
    
    
    $
    312
    
    
    
    16,278
    
    
    
    16,590Consumer  auto
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    252
    
    
    
    252Residential:Residential  prime
    
    
    1,301
    
    
    
    747
    
    
    
    1,400
    
    
    $
    3,448
    
    
    
    69,085
    
    
    
    72,533Residential  subprime
    
    
    74
    
    
    
    190
    
    
    
    288
    
    
    $
    552
    
    
    
    16,065
    
    
    
    16,617Construction:Construction  prime
    
    
    19
    
    
    
    
    
    
    
    
    
    
    $
    19
    
    
    
    2,058
    
    
    
    2,077Construction  subprime
    
    
    
    
    
    
    236
    
    
    
    
    
    
    $
    236
    
    
    
    
    
    
    
    510Total
    
    $
    2,023
    
    
    $
    3,892
    
    
    $
    6,723
    
    
    $
    12,638
    
    
    $
    168,782
    
    
    $
    181,694
   1.
    
    Zero (0) Unclassified. Any loan which has not been assigned a classification.2.
    
    One (1) Excellent. A well structured credit relationship to an established borrower. Loans
to entities with a strong financial condition and solid earnings history, characterized by:
 
    
    High liquidity, strong cash flow, low leverage.
    
    Unquestioned ability to meet all obligations when due.
    
    Experienced management, with management succession in place.
    
    Debt to worth ratio of 1:1 or less.
    
    Steady and above average earnings history.
    
    If loan is secured, collateral is of high quality and readily marketable.
    
    Readily accessible to capital markets and alternative financing.
    
    Industry is mature with favorable outlook.
    
    Loan structure within policy guidelines.
    
    Loan is performing as agreed.
    
    The probability of serious, rapid financial deterioration is extremely
small.
    
    Outstanding primary and secondary sources of repayment.
 11




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3.
    
    Two (2) Above Average Quality. Loans to borrowers with a sound financial condition and
positive trend in earnings supplemented by:
 
    
    Favorable liquidity and leverage and strong cash flow.
    
    Ability to meet all obligations when due.
    
    Management has successful track record.
    
    Debt to worth ratio of 1.5:1 or less.
    
    Steady and satisfactory earnings history.
    
    If loan is secured, collateral is of high quality and readily marketable.
    
    Access to alternative financing.
    
    Excellent prospects for continued growth.
    
    Industry outlook is favorable.
    
    Loan structure is within policy guidelines.
    
    Loan is performing to terms.
    
    Probability of serious financial deterioration is unlikely.
    
    Well defined primary and secondary source of repayment.
    
    If supported by a guaranty, the financial strength and liquidity of the
guarantor(s) are clearly evident.
 4.
    
    Three (3) Acceptable. Loans to entities with a satisfactory financial condition and
further characterized by:
 
    
    Working capital adequate to support operations.
    
    Cash flow sufficient to pay debts as scheduled.
    
    Management experience and depth appear favorable.
    
    Debt to worth ratio of 2.50:1 or less.
    
    Acceptable sales and steady earning history.
    
    Industry outlook is stable.
    
    Loan structure within policy guidelines.
    
    Loan performing according to terms.
    
    If loan is secured, collateral is acceptable and loan is fully protected.
 5.
    
    Four (4) Average. Loans to entities which are considered bankable risks, although some
signs of weaknesses are shown:
 
    
    Marginal liquidity and working capital.
    
    Short or unstable earnings history.
    
    Would include most start-up businesses.
    
    Would be enrolled in Small Business Administration or Michigan Strategic
Fund programs.
    
    Occasional instances of trade slowness or repayment delinquency  may have
been 10-30 days slow within the past 12 months.
    
    Management abilities are apparent yet unproven.
    
    Debt to worth ratio of 3.50 or less.
    
    Weakness in primary source of repayment with adequate secondary source of
repayment.
    
    If secured, loan is protected but collateral is marginal.
    
    Industry outlook is uncertain; may be cyclical or highly competitive.
    
    Loan structure generally in accordance with policy.
 12




---



##### Table of Contents



6.
    
    Five (5) Special Mention. Special Mention loans have potential weaknesses which may, if not
checked or corrected, weaken the asset or inadequately protect the Banks credit position at
some future date. Loans to entities that constitute an undue and unwarranted credit risk but
not to the point of justifying or classification of substandard. The credit risk may be
relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding
a specific loan. The following characteristics may apply:
 
    
    Downward trend in sales, profit levels and margins.
    
    Impaired working capital positions.
    
    Cash flow is strained in order to meet debt repayment.
    
    Loan delinquency (30-60 days) and overdrafts may occur.
    
    Management abilities are questionable.
    
    Highly leveraged, debt to worth ratio over 3.50:1.
    
    Industry conditions are weak.
    
    Inadequate or outdated financial information.
    
    Litigation pending against borrower.
    
    Loan may need to be restructured to improve collateral position and/or
reduce payment amount.
    
    Collateral / guaranty offers limited protection.
 7.
    
    Six (6) Substandard. A substandard loan is inadequately protected by the current sound worth
and repayment capacity of the borrower. Loans so classified must have a well-defined weakness
that jeopardizes the liquidation of the debt. There is a distinct possibility that the Bank
will implement collection procedures if the loan deficiencies are not corrected. The
following characteristics may apply:
 
    
    Sustained losses have severely eroded the equity and cash flow.
    
    Deteriorating liquidity.
    
    Serious management problems.
    
    Chronic trade slowness; may be placed on COD by vendors.
    
    Likelihood of bankruptcy.
    
    Inability to access other funding sources.
    
    Reliance on secondary source of repayment.
    
    Interest non-accrual may be warranted.
    
    Collateral provided is of little or no value.
    
    Repayment dependent upon the liquidation of non-current assets.
    
    Repayment may require litigation.
 8.
    
    Seven (7) Doubtful. A doubtful loan has all the weakness inherent in a substandard loan with
the added characteristic that collection and/or liquidation is pending. Loans or portions of
loans with one or more weaknesses which, on the basis of currently existing facts, conditions,
and values, makes ultimate collection of all principal highly questionable. The possibility of
loss is high and specific loan loss reserve allocations should be made or charge offs taken on
anticipated collateral shortfalls. However, the amount or the certainty of eventual loss may
not allow for a specific reserve or charge off because of specific pending factors. Pending
factors include proposed merger or acquisition, completion or liquidation in progress,
injection of new capital in progress, refinancing plans in progress, etc. Pending Factors
not resolved after six months must be disregarded. The following characteristics may apply:
 
    
    Normal operations are severely diminished or have ceased.
    
    Seriously impaired cash flow.
    
    Secondary source of repayment is inadequate.
    
    Survivability as a going concern is impossible.
    
    Placement on interest non-accrual
    
    Collection process has begun.
    
    Bankruptcy petition has been filed.
    
    Judgments have been filed.
    
    Portion of the loan balance has been charged-off.
 13




---



##### Table of Contents



9.
    
    Eight (8) Loss. Loans classified loss are considered uncollectible and of such little value
that their continuance as bankable asset is not warranted. This classification is for
charged-off loans but does not mean that the asset has absolutely no recovery or salvage
value. Further characterized by:
 
    
    Liquidation or reorganization under bankruptcy, with poor prospects of
collection.
    
    Fraudulently overstated assets and/or earnings.
    
    Collateral has marginal or no value.
    
    Debtor cannot be located.
  Commercial Real Estate
    
    
    Commercial Real EstateCommercial
    
    
    Multi-family
    
    
    Other2011
    
    
    2011
    
    
    20110-2
    
    
    
    
    
    
    36
    
    
    
    3,1983
    
    
    12
    
    
    
    209
    
    
    
    3,6874
    
    
    3,554
    
    
    
    130
    
    
    
    23,4825
    
    
    1,638
    
    
    
    3,584
    
    
    
    11,5036
    
    
    757
    
    
    
    454
    
    
    
    17,4407
    
    
    1,208
    
    
    
    166
    
    
    
    2,057Total
    
    $
    7,169
    
    
    $
    4,579
    
    
    $
    61,367
  Residential
- Prime
    
    

Residential
-       Subprime2011GradePass
    
    
    71,475
    
    
    
    16,297Substandard
    
    
    1,285
    
    
    
    93Total
    
    $
    72,760
    
    
    $
    16,390
 Consumer - Other
    
    
    Consumer - Auto2011Performing
    
    
    16,422
    
    
    
    252Nonperforming
    
    
    168
    
    
    
    Total
    
    $
    16,590
    
    
    $
    252
 Construction - Prime2011Performing
    
    
    2,587Nonperforming
    
    
    Total
    
    $
    2,587
 14




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##### Table of Contents



Unpaid
    
    
    
    
    
    
    AverageRecorded
    
    
    Principal
    
    
    Related
    
    
    Recorded
    
    
    InterestInvestment
    
    
    Balance
    
    
    Allowance
    
    
    Investment
    
    
    IncomeWith no related allowance recorded:Commercial
    
    $
    1,619
    
    
    $
    1,645
    
    
    $
    
    
    
    $
    1,648
    
    
    $
    Commercial Real Estate:Commercial
Real Estate  Multi-family
    
    
    620
    
    
    
    806
    
    
    
    
    
    
    
    793
    
    
    
    23Commercial Real Estate  other
    
    
    15,065
    
    
    
    21,303
    
    
    
    
    
    
    
    21,331
    
    
    
    399Consumer:Consumer  other
    
    
    449
    
    
    
    449
    
    
    
    
    
    
    
    454
    
    
    
    22Consumer  auto
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential:Residential  prime
    
    
    2,908
    
    
    
    3,506
    
    
    
    
    
    
    
    3,510
    
    
    
    137Residential  subprime
    
    
    4,827
    
    
    
    4,827
    
    
    
    
    
    
    
    4,744
    
    
    
    340With an allowance recorded:Commercial
    
    
    225
    
    
    
    225
    
    
    
    57
    
    
    
    225
    
    
    
    Commercial Real Estate:Commercial Real Estate  Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial Real Estate  other
    
    
    586
    
    
    
    610
    
    
    
    191
    
    
    
    611
    
    
    
    Consumer:Consumer  other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer  auto
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential:Residential  prime
    
    
    557
    
    
    
    710
    
    
    
    301
    
    
    
    714
    
    
    
    Residential  subprime
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCommercial
    
    $
    18,115
    
    
    $
    24,589
    
    
    $
    248
    
    
    $
    24,608
    
    
    $
    422Consumer
    
    $
    449
    
    
    $
    449
    
    
    $
    
    
    
    $
    454
    
    
    $
    22Residental
    
    $
    8,292
    
    
    $
    9,043
    
    
    $
    301
    
    
    $
    8,968
    
    
    $
    477
 15




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##### Table of Contents



Commercial
    
    $
    1,844Commercial real estate:Commercial Real Estate  multi-family
    
    
    166Commercial Real Estate  other
    
    
    7,482Consumer:Consumer  other
    
    
    85Consumer  auto
    
    
    Residential:Residential  prime
    
    
    2,488Residential  subprime
    
    
    288ConstructionConstruction  prime
    
    
    331Construction  subprime
    
    
    Total
    
    $
    12,684
 ALLOWANCE FOR LOAN LOSSES
   Three Months EndedMarch 312011
    
    
    2010Beginning Balance
    
    $
    6,850
    
    
    $
    5,783Loans Charged off
    
    
    (913
    )
    
    
    (1,436
    )Recoveries
    
    
    314
    
    
    
    76Provision for loan losses
    
    
    260
    
    
    
    1,845Ending Balance
    
    $
    6,511
    
    
    $
    6,268
  16




---



##### Table of Contents



ComercialReal Estate
    
    
    
    
    
    
    
    
    
    
    Residential -
    
    
    Residential -Commercial
    
    
    Other
    
    
    Multi Family
    
    
    Consumer
    
    
    Prime
    
    
    Subprime
    
    
    Construction
    
    
    TotalALLOWANCE FOR CREDIT LOSSES:Beginning Balance
    
    $
    71
    
    
    $
    1,790
    
    
    $
    474
    
    
    $
    503
    
    
    $
    3,495
    
    
    $
    458
    
    
    $
    59
    
    
    $
    6,850Charge-Offs
    
    
    (3
    )
    
    
    (18
    )
    
    
    (177
    )
    
    
    (100
    )
    
    
    (413
    )
    
    
    (189
    )
    
    
    (13
    )
    
    
    (913
    )Recoveries
    
    
    7
    
    
    
    228
    
    
    
    
    
    
    
    69
    
    
    
    4
    
    
    
    6
    
    
    
    
    
    
    
    314Provision
    
    
    55
    
    
    
    (396
    )
    
    
    (8
    )
    
    
    (93
    )
    
    
    508
    
    
    
    183
    
    
    
    11
    
    
    
    260Ending Balance
    
    
    130
    
    
    
    1,604
    
    
    
    289
    
    
    
    379
    
    
    
    3,594
    
    
    
    458
    
    
    
    57
    
    
    
    6,511Ending Balance: individually
evaluated for impairment
    
    
    57
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    549Ending Balance: collectively
evaluated for impairment
    
    
    73
    
    
    
    1,413
    
    
    
    289
    
    
    
    379
    
    
    
    3,293
    
    
    
    458
    
    
    
    57
    
    
    
    5,962Ending Balance: loans acquired
with deteriorated credit quality
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FINANCING RECEIVABLES:Ending Balance
    
    
    7,169
    
    
    
    61,367
    
    
    
    4,579
    
    
    
    16,842
    
    
    
    72,533
    
    
    
    16,617
    
    
    
    2,587
    
    
    
    181,694Ending Balance: individually
evaluated for impairment
    
    
    1,844
    
    
    
    15,320
    
    
    
    620
    
    
    
    449
    
    
    
    3,465
    
    
    
    4,827
    
    
    
    331
    
    
    
    26,856Ending Balance: collectively
evaluated for impairment
    
    
    5,325
    
    
    
    46,047
    
    
    
    3,959
    
    
    
    16,393
    
    
    
    69,068
    
    
    
    11,790
    
    
    
    2,256
    
    
    
    154,838Ending Balance: loans acquired
with deteriorated credit quality
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  FORWARD-LOOKING STATEMENTS
  17




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CRITICAL ACCOUNTING POLICIES
  Allowance for Loan Losses
 Foreclosed Assets .
 Income Taxes -
 OVERVIEW
     18




---



##### Table of Contents



FINANCIAL CONDITION
 Summary.
 Securities
  Loans
  March 31, 2011
    
    
    December 31, 2010Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Real Estate Loans:One-to-four family
    
    $
    89,150
    
    
    
    49.1
    
    
    $
    93,294
    
    
    
    49.1Multi-family
    
    
    4,579
    
    
    
    2.5
    
    
    
    4,783
    
    
    
    2.5Commercial
    
    
    61,367
    
    
    
    33.8
    
    
    
    62,998
    
    
    
    33.1Construction or development
    
    
    2,587
    
    
    
    1.4
    
    
    
    3,873
    
    
    
    2.0Total real estate loans
    
    
    157,683
    
    
    
    86.8
    
    
    
    164,948
    
    
    
    86.8Other loans:Consumer loans:Home equity
    
    
    13,720
    
    
    
    7.6
    
    
    
    14,814
    
    
    
    7.8Other
    
    
    3,122
    
    
    
    1.7
    
    
    
    3,403
    
    
    
    1.8Total consumer loans
    
    
    16,842
    
    
    
    9.3
    
    
    
    18,217
    
    
    
    9.6Commercial Business Loans
    
    
    7,169
    
    
    
    3.9
    
    
    
    6,882
    
    
    
    3.6Total other loans
    
    
    24,011
    
    
    
    13.2
    
    
    
    25,099
    
    
    
    13.2Total Loans
    
    
    181,694
    
    
    
    100.0
    %
    
    
    190,047
    
    
    
    100.0
    %Allowance for loan losses
    
    
    6,511
    
    
    
    
    
    
    
    6,850Less: Net deferred loan fees
    
    
    338
    
    
    
    
    
    
    
    429Total Loans, net
    
    $
    174,845
    
    
    
    
    
    
    $
    182,768
 19




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##### Table of Contents



Deposits
   Federal Home Loan Bank Advances
  Equity
  RESULTS OF OPERATIONS
 Net Interest Income
    20




---



##### Table of Contents



Three Months Ended March 31,
    
    
    Three Months Ended March 31,2011
    
    
    2010Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate(dollars in thousands)Fed Funds and overnight deposits
    
    $
    38,120
    
    
    
    1
    
    
    
    0.01
    %
    
    $
    17,771
    
    
    
    1
    
    
    
    0.02
    %Investment securities
    
    
    11,023
    
    
    
    97
    
    
    
    3.57
    
    
    
    16,692
    
    
    
    128
    
    
    
    3.11Other securities
    
    
    3,802
    
    
    
    21
    
    
    
    2.24
    
    
    
    4,174
    
    
    
    23
    
    
    
    2.23Loans receivable
    
    
    186,362
    
    
    $
    2,689
    
    
    
    5.85
    
    
    
    225,328
    
    
    $
    3,336
    
    
    
    6.00Total earning assets
    
    $
    239,307
    
    
    $
    2,808
    
    
    
    4.76
    
    
    $
    263,965
    
    
    $
    3,488
    
    
    
    5.36Demand and NOW Accounts
    
    $
    42,407
    
    
    $
    9
    
    
    
    0.09
    
    
    $
    37,688
    
    
    $
    30
    
    
    
    0.32Money market accounts
    
    
    40,139
    
    
    
    49
    
    
    
    0.50
    
    
    
    59,616
    
    
    
    157
    
    
    
    1.07Savings accounts
    
    
    21,081
    
    
    
    6
    
    
    
    0.12
    
    
    
    20,817
    
    
    
    16
    
    
    
    0.31Certificates of deposit
    
    
    101,519
    
    
    
    619
    
    
    
    2.47
    
    
    
    96,641
    
    
    
    761
    
    
    
    3.19Federal Home Loan Bank Advances
    
    
    32,716
    
    
    
    349
    
    
    
    4.33
    
    
    
    44,518
    
    
    
    493
    
    
    
    4.49Fed Funds Purchased
    
    
    
    
    
    
    
    
    
    
    0.00
    
    
    
    11
    
    
    
    
    
    
    
    0.00Total interest bearing liabilities
    
    $
    237,862
    
    
    
    1,032
    
    
    
    1.76
    
    
    $
    259,291
    
    
    
    1,457
    
    
    
    2.28Net interest income
    
    
    
    
    
    $
    1,776
    
    
    
    
    
    
    
    
    
    
    $
    2,031Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.00
    %
    
    
    
    
    
    
    
    
    
    
    3.08
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.97
    %
    
    
    
    
    
    
    
    
    
    
    3.08
    %
 Provision for Loan Losses
    March 31, 2011
    
    
    December 31, 2010Non-performing loans
    
    $
    12,684
    
    
    $
    14,075Real estate in judgement
    
    
    2,183
    
    
    
    1,430Foreclosed and repossessed assets
    
    
    1,554
    
    
    
    1,542Total non-performing assets
    
    $
    16,421
    
    
    $
    17,047Non-performing loans to total loans
    
    
    7.25
    %
    
    
    7.70
    %Non-performing assets to total assets
    
    
    6.42
    %
    
    
    6.64
    %Allowance for loan losses to non-performing loans
    
    
    51.30
    %
    
    
    48.70
    %Allowance for loan losses to net loans receivable
    
    
    3.71
    %
    
    
    3.75
    %
 21




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##### Table of Contents



Non-interest Income
  Non-interest Expense
 Federal Income Tax Expense
 LIQUIDITY
      22




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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
    
    $
    99,904
    
    
    $
    52,090
    
    
    $
    36,233
    
    
    $
    11,581
    
    
    $
    FHLB advances
    
    
    30,350
    
    
    
    13,175
    
    
    
    17,175
    
    
    
    
    
    
    
    Total
    
    $
    130,254
    
    
    $
    65,265
    
    
    $
    53,408
    
    
    $
    11,581
    
    
    $
    
 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
    
    $
    1,239
    
    
    $
    1,239
    
    
    $
    
    
    
    $
    
    
    
    $
    Unfunded commitments under HELOCs
    
    
    12,206
    
    
    
    2,301
    
    
    
    2,551
    
    
    
    2,016
    
    
    
    5,338Unfunded commitments under Contruction loans
    
    
    791
    
    
    
    742
    
    
    
    11
    
    
    
    9
    
    
    
    29Unfunded commitments underCommercial LOCs
    
    
    741
    
    
    
    660
    
    
    
    81
    
    
    
    
    
    
    
    Letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    14,977
    
    
    $
    4,942
    
    
    $
    2,643
    
    
    $
    2,025
    
    
    $
    5,367
  CAPITAL RESOURCES
   RECENT DEVELOPMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
  23




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   
 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
  24




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##### Table of Contents



SIGNATURES
  MONARCH COMMUNITY BANCORP, INC.Date: May 16, 2011
    
    By:
    
    /s/ Richard J. DeVriesRichard J. DeVriesPresident and Chief Executive OfficerDate: May 16, 2011
    
    And:
    
    /s/ Rebecca S. CrabillRebecca S. CrabillSenior Vice President, Chief Financial Officer
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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description of Exhibit31.1
    
    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.
 26