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Monarch Community Bancorp 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
e10vq
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 June 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   04-3627031
(State or other jurisdiction   (I.R.S. employer
of incorporation or organization)   identification no.)
375 North Willowbrook Road, Coldwater, MI 49036
(Address of principal executive offices)
517-278-4566
(Registrant’s telephone number)
Indicate by check mark whether the registrant (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 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: þ     No: o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o  Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes: o     No: þ
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: At July 30, 2010, there were 2,044,606 shares of the issuer’s Common Stock outstanding.
 
 

 


 

Monarch Community Bancorp, Inc.
Index
         
       
       
    1  
    2  
    3  
    4 - 10  
    10 - 19  
    20  
    20  
       
    21  
    21  
    21  
    21  
    21  
    21  
    21  
    22  
CERTIFICATIONS
       
 EX-31.1
 EX-31.2
 EX-32

 


Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. CONDENSED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
                 
    (Unaudited)        
    June 30,     December 31,  
    2010     2009  
    (Dollars in thousands,  
    except per share data)  
 
               
Assets
               
Cash and due from banks
  $ 12,174     $ 12,631  
Federal Home Loan Bank overnight time and other interest bearing deposits
    7,097       10,723  
 
           
Total cash and cash equivalents
    19,271       23,354  
Securities — Available for sale
    16,538       16,063  
Securities — Held to maturity
    10       23  
Other securities
    4,237       4,237  
Loans held for sale
    755       809  
Loans, net
    204,324       220,875  
Foreclosed assets, net
    3,659       2,839  
Premises and equipment
    4,309       4,467  
Core deposit intangible
    462       532  
Other assets
    10,018       10,005  
 
           
 
               
Total assets
  $ 263,583     $ 283,204  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities
               
Deposits:
               
Non-interest bearing
  $ 15,836     $ 14,422  
Interest bearing
    185,649       198,946  
 
           
Total deposits
    201,485       213,368  
Federal Home Loan Bank advances
    44,518       44,518  
Accrued expenses and other liabilities
    2,527       2,155  
 
           
 
               
Total liabilities
    248,530       260,041  
 
               
Stockholders’ Equity
               
Preferred 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 June 30, 2010
    6,745       6,739  
Common stock — $0.01 par value, 20,000,000 shares authorized, 2,044,606 shares issued and outstanding at June 30, 2010 and December 31, 2009
    20       20  
Additional paid-in capital
    21,221       21,216  
Accumulated deficit
    (12,583 )     (4,355 )
Accumulated other comprehensive income
    330       223  
Unearned compensation
    (680 )     (680 )
 
           
 
               
Total stockholders’ equity
    15,053       23,163  
 
           
Total liabilities and stockholders’ equity
  $ 263,583     $ 283,204  
 
           
See accompanying notes to condensed consolidated financial statements.

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Condensed Consolidated Statements of Income (Unaudited)
                                 
    Three Months     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    June 30,     June 30,     June 30,     June 30,  
    2010     2009     2010     2009  
(Dollars in thousands, except per share data)  
Interest Income
                               
Loans, including fees
  $ 3,092     $ 3,873     $ 6,428     $ 7,827  
Investment securities
    143       162       294       280  
Federal funds sold and overnight deposits
          1       1       3  
 
                       
Total interest income
    3,235       4,036       6,723       8,110  
 
                               
Interest Expense
                               
Deposits
    886       1,274       1,851       2,593  
Federal Home Loan Bank advances
    499       643       992       1,302  
 
                       
Total interest expense
    1,385       1,917       2,843       3,895  
 
                       
 
                               
Net Interest Income
    1,850       2,119       3,880       4,215  
 
                               
Provision for Loan Losses
    7,040       3,441       8,884       4,163  
 
                       
Net Interest Income After Provision for Loan Losses
    (5,190 )     (1,322 )     (5,004 )     52  
 
                               
Non-interest Income
                               
Fees and service charges
    563       549       1,108       1,064  
Loan servicing fees
    122       111       239       217  
Net gain on sale of loans
    149       748       349       1,457  
Net gain (loss) on sale of securities
          2       37       2  
Other income
    20       58       193       102  
 
                       
Total non-interest income
    854       1,468       1,926       2,842  
 
                               
Non-interest Expense
                               
Salaries and employee benefits
    1,099       1,129       2,205       2,278  
Occupancy and equipment
    224       239       465       511  
Data processing
    199       200       407       407  
Amortization of mortgage servicing rights
    81       136       169       335  
Professional services
    245       123       396       252  
Amortization of core deposit intangible
    35       35       71       78  
NOW account processing
    53       40       104       79  
ATM/Debit card processing
    60       57       117       118  
Foreclosed property expense
    59       77       265       110  
Other general and administrative
    425       540       775       917  
 
                       
Total non-interest expense
    2,480       2,576       4,974       5,085  
 
                       
 
                               
Loss — Before income taxes
    (6,816 )     (2,430 )     (8,052 )     (2,191 )
Income Taxes
          (607 )           (547 )
 
                       
Net Loss
  $ (6,816 )   $ (1,823 )   $ (8,052 )   $ (1,644 )
 
                       
 
                               
Dividends and amortization of discount on preferred stock
  $ 88     $ 87     $ 176     $ 138  
Net Income (loss) available to common stock
  $ (6,904 )   $ (1,910 )   $ (8,228 )   $ (1,782 )
 
                       
Loss Per Share
                               
Basic
  $ (3.49 )   $ (0.97 )   $ (4.16 )   $ (0.91 )
 
                       
Diluted
  $ (3.49 )   $ (0.97 )   $ (4.16 )   $ (0.91 )
 
                       
See accompanying notes to condensed consolidated financial statements.

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Condensed Consolidated Statements of Cash Flows (Unaudited)
                 
    Six Months Ended  
    June, 30  
    2010     2009  
    (Dollars in thousands)  
Cash Flows From Operating Activities
               
Net Loss
  $ (8,052 )   $ (1,644 )
Adjustments to reconcile net income (loss) to net cash from operating activities
               
Depreciation and amortization
    542       693  
Provision for loan losses
    8,884       4,163  
Stock option expense
    5       4  
Gain (loss) on sale of foreclosed assets
    (105 )     24  
Mortgage loans originated for sale
    (10,868 )     (65,280 )
Proceeds from sale of mortgage loans
    10,923       66,370  
Gain on sale of mortgage loans
    (349 )     (1,458 )
Gain on sale of available for sale securities
    (37 )     (2 )
Earned stock compensation
          9  
Net change in:
               
Deferred loan fees
    49       62  
Accrued interest receivable
    (53 )     (50 )
Other assets
    (129 )     (1,980 )
Accrued expenses and other liabilities
    316       (416 )
 
           
Net cash provided by (used in) operating activities
    1,126       495  
Cash Flows From Investing Activities
               
Activity in available-for-sale securities:
               
Purchases
    (4,216 )     (17,814 )
Proceeds from maturities of securities
    2,288       6,141  
Proceeds from sale of securities
    1,566        
Activity in held-to-maturity securities:
               
Proceeds from maturities of securities
    13       14  
Loan originations and principal collections, net
    5,408       5,370  
Proceeds from sale of foreclosed assets
    1,850       508  
Purchase of premises and equipment
    (59 )     (133 )
 
           
Net cash provided by investing activities
    6,850       (5,914 )
Cash Flows From Financing Activities
               
Net increase in deposits
    (11,883 )     10,226  
Issuance of Preferred Stock
          6,734  
Issuance of Warrants
          56  
Dividends paid
    (176 )     (465 )
Repayment of FHLB advances
          (3,500 )
Repayment of Fed Funds purchased
          (1,000 )
 
           
Net cash provided by financing activities
    (12,059 )     12,051  
 
           
Net Increase (Decrease) in Cash and Cash Equivalents
    (4,083 )     6,632  
Cash and Cash Equivalents — Beginning
    23,354       6,272  
 
           
Cash and Cash Equivalents — End
  $ 19,271     $ 12,904  
 
           
 
               
Supplemental Cash Flow Information:
               
Cash paid for:
               
Interest
    2,886       3,932  
Income taxes
          215  
Noncash investing activities:
               
Loans transferred to foreclosed assets
    2,558       1,800  
See accompanying notes to condensed consolidated financial statements.

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MONARCH COMMUNITY BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Monarch Community Bancorp, Inc. (the “Corporation”) was incorporated in 2002 under Maryland law to hold all of the common stock of Monarch Community Bank (the “Bank”), formerly known as Branch County Federal Savings and Loan Association. The Bank converted to a stock savings institution effective August 29, 2002. In connection with the conversion, the Corporation sold 2,314,375 shares of its common stock in a subscription offering.
Monarch Community Bank provides a broad range of banking services to its primary market area of Branch, Calhoun and Hillsdale counties in Michigan. The Bank operates six full service offices. The Bank owns 100% of First Insurance Agency. First Insurance Agency is a licensed insurance agency established to allow for the receipt of fees on insurance services provided to the Bank’s customers. The Bank also owns a 24.98% interest in a limited partnership formed to construct and operate multi-family housing units.
BASIS OF PRESENTATION
The condensed consolidated financial statements of the Corporation include the accounts of Monarch Community Bank and First Insurance Agency. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements for interim periods are unaudited; however, in the opinion of the Corporation’s management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Corporation’s financial position and results of operations have been included.
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.
The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes required by generally accepted accounting principles in annual consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Corporation’s Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission.
The results of operations for the three and six month period ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year period.
ALLOWANCE FOR LOAN LOSSES
The appropriateness of the allowance for loan losses is reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in delinquencies, nonperforming loans and foreclosed assets expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that these conditions were believed to have had on the collectability of the loan. Senior management reviews these conditions at least quarterly.
To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of this condition may be reflected as a specific allowance applicable to this credit or portfolio segment.
The allowance for loan losses is based on estimates of losses inherent in the loan portfolio. Actual losses can vary significantly from the estimated amounts. Our methodology as described permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management’s judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.

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RECLASSIFICATIONS
Certain 2010 amounts have been reclassified to conform to the 2009 presentation.
SECURITIES
The amortized cost and fair value of securities at period-end were as follows (dollars in thousands):
                                 
            Gross     Gross        
            Unrealized     Unrealized     Estimated  
June 30, 2010   Amortized Cost     Gains     Losses     Market Value  
Available-for-sale securities:
                               
U.S. Treasury
  $ 3,184     $ 31     $     $ 3,215  
U.S. government agency obligations
    2,631       69             2,700  
Mortgage-backed securities
    4,673       171               4,844  
Obligations of states and political subdivisions
    5,550       229             5,779  
 
                       
Total available-for-sale securities
  $ 16,038     $ 500     $     $ 16,538  
 
                       
 
                               
Held-to-maturity securities:
                               
Municipal securities
  $ 10     $     $       10  
 
                       
                                 
            Gross     Gross        
            Unrealized     Unrealized     Estimated  
December 31, 2009   Amortized Cost     Gains     Losses     Market Value  
Available-for-sale securities:
                               
U.S. Treasury
  $ 1,055     $ 16     $     $ 1,071  
U.S. government agency obligations
    3,155       41             3,196  
Mortgage-backed securities
    5,454       82               5,536  
Obligations of states and political subdivisions
    6,061       199             6,260  
 
                       
Total available-for-sale securities
  $ 15,725     $ 338     $     $ 16,063  
 
                       
 
                               
Held-to-maturity securities:
                               
Municipal securities
  $ 23     $     $       23  
 
                       
Proceeds from sales of securities available for sale were $1.6 million and $0 for the six months ended June 30, 2010 and 2009, respectively. Gross gains of $37,000 and $0 were realized on these sales during 2010 and 2009, respectively.

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The amortized cost and fair value of securities available for sale at June 30, 2010 by contractual maturity follow (dollars in thousands). The actual maturity may differ from the contractual maturity because issuers may have a right to call or prepay obligations.
                                 
    Held to Maturity Securities     Available for Sale Securities  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
    (Dollars in Thousands)  
Due in one year or less
  $ 10     $ 10     $ 1,236     $ 1,246  
Due from one to five years
                12,381       12,757  
Due from five to ten years
                  2,421       2,535  
Due after ten years
                               
Total securities
  $ 10     $ 10     $ 16,038     $ 16,538  
 
                       
There were no securities with unrealized losses at June 30, 2010.
Other-Than Temporary-Impairment
Our portfolio of available for sale securities reviewed quarterly for other-than-temporary-impairment (OTTI) in value. In performing this review many factors are considered including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospect of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether management intends to sell the security, or it is more likely than not that management will be required to sell the security at a loss before anticipated recovery.
Management determined that there were no securities with OTTI at June 30, 2010.

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EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the computation of the basic earnings per share and diluted earnings per share is presented below (000s omitted except per share data):
                                 
    Three Months     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    June 30, 2010     June 30, 2009     June 30, 2010     June 30, 2009  
     
Basic earnings per share
                               
Numerator:
                               
Net income
  $ (6,816 )   $ (1,823 )   $ (8,052 )   $ (1,644 )
Dividends and amortization of discount on preferred stock
  $ 88     $ 87     $ 176     $ 138  
 
                       
Net Income (Loss) available to common stock
  $ (6,904 )   $ (1,910 )   $ (8,228 )   $ (1,782 )
 
                       
 
                               
Denominator:
                               
Weighted average common shares outstanding
    2,045       2,046       2,045       2,046  
Less: Average unallocated ESOP shares
    (65 )     (74 )     (65 )     (74 )
Less: Average non-vested RRP shares
    (2 )     (7 )     (2 )     (7 )
 
                       
Weighted average common shares outstanding for basic earnings (loss) per share
    1,978       1,965       1,978       1,965  
 
                       
Basic earnings (loss) per share
  $ (3.49 )   $ (0.97 )   $ (4.16 )   $ (0.91 )
 
                       
 
                               
Diluted earnings per share
                               
Numerator:
                               
Net Income (Loss) available to common stock
  $ (6,904 )   $ (1,910 )   $ (8,228 )   $ (1,782 )
 
                       
 
                               
Denominator:
                               
Weighted average common shares outstanding for basic earnings per share
    1,978       1,965       1,978       1,965  
Add: Dilutive effects of restricted stock, stock options and warrants
                       
 
                       
Weighted average common shares and dilutive potential common shares outstanding
    1,978       1,965       1,978       1,965  
 
                       
Diluted earnings (loss) per share
  $ (3.49 )   $ (0.97 )   $ (4.16 )   $ (0.91 )
 
                       
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2010, FASB issued a statement which expands disclosures about credit quality of financing receivables and allowance for credit losses. The standard will require the Company to expand disclosures about the credit quality of our loans and the related reserves against them. The extra disclosures will include details on our past due loans, credit quality indicators, and modifications of loans. The Company will adopt the standard beginning with our December 31, 2010 financial statements.
FAIR VALUE MEASUREMENTS
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

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In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at June 30, 2010, and December 31, 2009, and the valuation techniques used by the Corporation to determine those fair values. Investment securities with fair value determined by level 1 input include U.S. Treasury securities. Investment securities with fair value determined by level 2 inputs include mortgage backed securities, obligations of states and political subdivisions and U.S Government Agency obligations.
                                 
            Significant        
    Quoted Prices in Active   Other   Significant    
    Markets for Identical   Observable   Unobservable   Balance at June 30,
    Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3)   2010
Assets:
                               
June 30, 2010
                               
U.S. Treasury
  $ 3,215     $  —     $  —     $ 3,215  
U.S. government agency obligations
          2,700             2,700  
Mortgage-backed securities
          4,844             4,844  
Obligations of states and political subdivisions
          5,779             5,779  
                                 
            Significant        
    Quoted Prices in Active   Other   Significant    
    Markets for Identical   Observable   Unobservable   Balance at June 30,
    Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3)   2010
Assets:
                               
December 31, 2009
                               
U.S. Treasury
  $ 1,071     $     $  —     $ 1,071  
U.S. government agency obligations
          3,196             3,196  
Mortgage-backed securities
          5,536             5,536  
Obligations of states and political subdivisions
          6,260             6,260  

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The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans and foreclosed assets. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the Corporation’s assets at fair value on a nonrecurring basis as of June 30, 2010 and December 31, 2009 (000s omitted):
                                         
    Assets Measured at Fair Value on a Nonrecurring Basis      
    Balance at   Quoted Prices in Active   Significant Other   Significant   Change in Fair Value for the
    June 30,   Markets for Identical   Observable Inputs   Unobservable Inputs   six months ended June 30,
    2010   Assets (Level 1)   (Level 2)   (Level 3)   2010
Impaired Loans accounted for under FASB ASC 310
  $ 19,199     $  —     $  —     $ 19,199     $ (4,684 )
Foreclosed Assets
  $ 3,659     $  —     $  —     $ 3,659     $ (885 )
                                         
    Assets Measured at Fair Value on a Nonrecurring Basis      
    Balance at   Quoted Prices in Active   Significant Other   Significant   Change in Fair Value for
    December   Markets for Identical   Observable Inputs   Unobservable Inputs   the year ended December 31,
    31, 2010   Assets (Level 1)   (Level 2)   (Level 3)   2010
Impaired Loans accounted for under FASB ASC 310
  $ 18,653     $  —     $  —     $ 18,653     $ (7,895 )
Foreclosed Assets
  $ 2,839     $  —     $  —     $ 2,839     $ (1,819 )
Fair Value of Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC), FASB ASC 820-10-50, Fair Value Measurements and Disclosures, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.
The fair value of all financial instruments not discussed below (Cash and cash equivalents, Federal funds sold, Federal Home Loan Bank stock, Accrued interest receivable, Federal funds purchased and Interest payable) are estimated to be equal to their carrying amounts as of June 30, 2010 and December 31, 2009. The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:
Securities — Fair values for securities are described above.
Loans Held for Sale — Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.
Loans Receivable — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flows analyses using current market rates applied to the estimated life. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

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Deposit Liabilities — The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances — The fair values of the Corporation’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.
The estimated fair values, and related carrying or notional amounts, of the Corporation’s financial instruments are as follows (000s omitted):
                                 
    June 30,   December 31,
    2010   2009
    Carrying Amount   Fair Value   Carrying Amount   Fair Value
Assets:
                               
Cash and cash equivalents
  $ 19,271     $ 19,271     $ 23,354     $ 23,354  
Securities — Held to maturity
    10       10       23       23  
Securities — Available for sale
    16,538       16,538       16,063       16,063  
Other securities
    4,237       4,237       4,237       4,237  
Loans held for sale
    755       771       809       827  
Net loans
    204,324       207,208       220,875       230,866  
Accrued interest and late charges receivable
    933       933       1,154       1,154  
 
                               
Liabilities:
                               
Deposits
    201,485       200,393       213,368       214,581  
Federal Home Loan Bank advances
    44,518       47,439       44,518       48,260  
Accrued interest payable
    354       354       397       397  
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements of the Corporation and the accompanying notes.
FORWARD-LOOKING STATEMENTS
In addition to historical information, the following discussion contains “forward-looking statements” that involve risks and uncertainties. All statements regarding the expected financial position, business and strategies are forward-looking statements and the Corporation intends for them to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to the Corporation or management, are intended to identify forward-looking statements. The Corporation believes that the expectations reflected in these forward-looking statements are reasonable based on our current beliefs and assumptions; however, these expectations may prove to be incorrect.
Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, changes in the relative difference between short and long-term interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, including levels of non-performing assets, demand for loan products, deposit flows, competition, demand for financial services in our market area, our operating costs and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements.

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CRITICAL ACCOUNTING POLICIES
The nature of the financial services industry is such that, other than described below, the use of estimates and management judgment is not likely to present a material risk to the financial statements. In cases where estimates or management judgment are required, internal controls and processes are established to provide assurance that such estimates and management judgments are materially correct to the best of management’s knowledge.
Allowance for Loan Losses. Accounting for loan classifications, accrual status, and determination of the allowance for loan losses is based on regulatory guidance. This guidance includes, but is not limited to, generally accepted accounting principles, the uniform retail credit classification and account management policy issued by the Federal Financial Institutions Examination Council, the joint policy statement on the allowance for loan losses methodologies issued by the Federal Financial Institutions Examination Council and guidance issued by the Securities and Exchange Commission. Accordingly, the allowance for loan losses includes a reserve calculation based on an evaluation of loans determined to be impaired, risk ratings, historical losses, loans past due, collateral values and cost of disposal and other subjective factors.
Foreclosed Assets. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated selling expenses, which consist primarily of commissions that will be paid to an independent real estate agent upon sale of the property. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.
Income Taxes Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance, if needed, reduces deferred tax assets to the amount expect to be realized.
OVERVIEW
Following Monarch Community Bank’s most recent Safety and Soundness examination, the Board of Directors of Monarch Community Bank stipulated to the terms of a formal enforcement action (“Consent Order”) with Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”). The Consent Order, which was effective May 6, 2010, contains specific actions needed to address certain findings from their examination and to address our current financial condition.
We have made substantive progress in implementation of provisions identified within the Consent Order. Our progress includes:
  1)   Hiring a new President & CEO.
 
  2)   Hiring a new Chief Lending Officer.
 
  3)   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.
 
  4)   The completion of a management review by an outside consultant. The results of this review determined that management staffing and skills were adequate for the ongoing operation of the bank.
 
  5)   The enhancement of loan policies and procedures.

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FINANCIAL CONDITION
Assets
Total assets decreased $19.6 million, or 7.4%, to $263.6 million at June 30, 2010 compared to $283.2 million at December 31, 2009. The decrease in assets is largely due to a decrease in loans of $16.6 million or 7.5%, which is attributable to the refinancing of one to four residential mortgages into the secondary market and the write downs of commercial real estate loans.
Securities
Securities increased to $16.5 million at June 30, 2010 compared to $16.1 million at December 31, 2009. The increase was attributable to the replacement of securities to reposition maturities and improve overall credit quality of the portfolio. The yield on investment securities has decreased to 2.9% during the three months ended June 30, 2010 from 3.36% for the same period a year ago. Management has continued to maintain a diversified securities portfolio, which includes obligations of U.S. government-sponsored agencies, securities issued by states and political subdivisions and mortgage-backed securities. Management regularly evaluates asset/liability management needs and attempts to maintain a portfolio structure that provides sufficient liquidity and cash flow.
Loans
The Bank’s net loan portfolio decreased by $16.5 million, or 7.5%, from $220.9 million at December 31, 2009 to $204.3 million at June 30, 2010. The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:
                                 
    June 30, 2010     December 31, 2009  
    Amount     Percent     Amount     Percent  
            (Dollars in thousands)          
Real Estate Loans:
                               
One-to-four family
  $ 101,968       47.5     $ 108,354       47.7  
Multi-family
    5,074       2.4       5,421       2.2  
Commercial
    68,991       32.2       72,689       32.0  
Construction or development
    8,556       4.0       9,528       4.2  
 
                       
Total real estate loans
    184,589       86.0       195,992       86.3  
Other loans:
                               
Consumer loans:
                               
Home equity
    17,286       8.1       18,174       8.0  
Other
    4,036       2.0       4,706       2.1  
 
                       
Total consumer loans
    21,322       10.0       22,880       10.1  
Commercial Business Loans
    8,627       4.0       8,266       3.5  
 
                       
Total other loans
    29,949       14.0       31,146       13.6  
 
                       
Total Loans
    214,538       100.0 %     227,138       100.0 %
 
                           
 
                               
Allowance for loan losses
    9,782               5,783          
Less: Net deferred loan fees
    432               480          
Total Loans, net
  $ 204,324             $ 220,875          
 
                           
One-to-four family loans decreased $6.4 million from year end 2009 as a result of the Bank’s continued strategy to sell a large portion of new one to four family loan originations. Historically low rates on residential mortgages provided us the opportunity to refinance loans and our gains on the sale of mortgages increased substantially in 2009. Management does not expect to see similar gains in 2010. Commercial real estate loans and construction loans decreased $3.7 million or 5.1%. The Bank expects future loan origination to come primarily from in-market lending.

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Changes in the allowance for loan losses were as follows for the three and six months ended June 30, 2010 and 2009.
Summary of Allowance for Loan Losses
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2010     2009     2010     2009  
Beginning Balance
  $ 6,269     $ 3,210     $ 5,783     $ 2,719  
Loans Charged off
    (3,575 )     (1,148 )     (5,011 )     (1,467 )
Recoveries
    49       47       126       135  
Provision for loan losses
    7,040       3,441       8,885       4,163  
 
                       
Ending Balance
  $ 9,783     $ 5,550     $ 9,783     $ 5,550  
 
                       
The allowance for loan losses was $9.8 million at June 30, 2010 representing 4.79% of total loans, compared to $5.8 million at December 31, 2009, or 2.62% of total loans and $5.5 million at June 30, 2009 or 2.35% of total loans. The increase of $4.0 million during the six months ended June 30, 2010 was necessitated by the increases in net charge offs and nonperforming assets which are directly related to the continued overall weakness in the Michigan economy. Net charge offs totaled $4.9 million compared to $1.3 million for the same period a year ago. Net charge offs year to date consisted of 26% construction loans, 44% one to four family residential mortgages, 26% commercial real estate, and the remaining 4% included consumer, commercial and industrial and home equity lines of credit. The allowance for loan losses to non-performing loans ratio was 41.4% at June 30, 2010 compared to 37.14% at December 31, 2009 and 69.6% at June 30, 2009. See “Provision for Loan Losses” below for further explanation regarding charge-offs and non-performing loans. The current level of the allowance for loan losses is the result of management’s assessment of the risks within the portfolio based on the information revealed in credit monitoring processes.
The allowance balance is established after considering past loan loss experience, current economic conditions, composition of the loan portfolio, delinquencies, and other relevant factors. We continue to be diligent in reviewing our loan portfolios for problem loans and believe that early detection of troubled credits is critical. We maintain the allowance for loan losses at a level considered adequate to cover losses within the loan portfolio.
Deposits
Total deposits decreased $11.9 million, or 5.6%, from $213.4 million at December 31, 2009 to $201.5 million at June 30, 2010. The decline in deposits included decreases of $9.7 million in money market deposits, $4.9 million in brokered certificates of deposits and $3.5 million in local certificates of deposit. The Bank continues to be committed to increasing its core deposit balances during 2010 and saw increases in demand deposits of $1.4 million and in interest bearing checking and savings accounts of $4.8 million.
We have used brokered certificates of deposit to diversity our sources of funds and improve pricing at certain terms compared to the local market and advances available from Federal Home Loan Bank of Indianapolis. Due to the fact that Bank’s regulatory capital ratios are less than the levels necessary to be considered “well capitalized”, it may not obtain new brokered funds as a funding source and is subject to rate restrictions that limit the amount that can be paid on all types of retail deposits. The maximum rates the Bank can pay on all types of retail deposits are limited to the national average rate, plus 75 basis points. We have compared the Bank’s current rates with the national rate caps and reduced any rates over the rate cap to fall within those caps. There has been no material impact to our deposit balances resulting from the rate caps.
Federal Home Loan Bank Advances
Total Federal Home Loan Bank (FHLB) advances remained unchanged during the six months ended June 30, 2010 compared December 31, 2009. Management is attempting to reduce its reliance on borrowed funds through the growth of low cost core deposits. Should this strategy not succeed, management anticipates the need for future borrowings to fund loan growth. See “Net Interest Income” below, and also see “Liquidity” later in this report regarding available borrowings.

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Equity
Total equity was $15.1 million at June 30, 2010 compared to $23.2 million at December 31, 2009. This represents 5.7% and 8.2% of total assets at June 30, 2010 and December 31, 2009, respectively. Decreases in equity for the six months ended June 30, 2010 included a net loss of $8.1 million and $170,000 in accrued dividend payments on the Preferred Stock. The annual 5% dividend on the Preferred Stock together with the amortization of the discount will reduce net income (or increase the net loss) applicable to common stock by approximately $350,000 annually. Effective February 2010, the Corporation deferred regularly scheduled dividend payments on the $6.7 million in principal outstanding on its Series A fixed rate, cumulative perpetual preferred stock (aggregate liquidation preference of $6.8 million) which was issued to the U.S. Treasury in February 2009.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income before any provision for loan losses decreased $269,000 for the quarter ended June 30, 2010 compared to the same period in 2009. Net interest income before any provision for loan losses decreased $335,000 for the six months ended June 30, 2010 compared to the same period in 2009.
The net interest margin for the second quarter of 2010 decreased 24 basis points to 2.83% compared to 3.07% for the same period in 2009. The decline in the margin is largely due to the decline in earning assets. The Bank has seen runoff in the mortgage portfolio as loan originations have moved into the secondary market, (see further discussion below). The increased level of nonperforming loans and the associated nonaccrual interest adjustment have also significantly impacted the margin. The yield on loans has decreased to 5.67% for the quarter compared to 6.44% for the same period in 2009.
The net interest margin decreased 10 basis points to 2.96% for the six months ending June 30, 2010 compared to 3.06% for the same period in 2009. The decline in margin year over year is mainly due to the reasons mentioned previously. Cost of funds continues to decrease to 2.2% as the Corporation remains focused on deposit pricing strategies and growing core deposits to reduce its reliance on whole sale funding.
The Bank’s ability to maintain its net interest margin is heavily dependent on future loan demand and its ability to attract core deposits to offset the effect of higher cost certificates of deposits and borrowings. The Bank continues to be challenged in its efforts to increase lower costing core deposits. Management continues to put its efforts towards meeting this challenge.

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The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made.
                                                 
    Six Months Ended June 30,     Six Months Ended June 30,  
    2010     2009  
    Average     Interest             Average     Interest        
    Outstanding     Earned/     Yield/     Outstanding     Earned/     Yield/  
    Balance     Paid     Rate     Balance     Paid     Rate  
    (dollars in thousands)  
Fed Funds and overnight deposits
  $ 18,429     $ 1       0.01 %   $ 9,779     $ 3       0.06 %
Investment securities
  $ 16,886     $ 252       3.01       14,654     $ 261       3.59  
Other securities
  $ 4,174     $ 42       2.03       4,174     $ 19       0.92  
Loans receivable
  $ 223,174     $ 6,428       5.81       246,448     $ 7,827       6.40  
 
                                   
Total earning assets
  $ 262,663     $ 6,723       5.16     $ 275,055     $ 8,110       5.95  
 
                                       
 
                                               
Demand and NOW Accounts
  $ 39,843     $ 57       0.29     $ 32,788     $ 43       0.26  
Money market accounts
  $ 55,668     $ 262       0.95     $ 42,290     $ 417       1.99  
Savings accounts
  $ 21,285     $ 28       0.27     $ 18,914     $ 37       0.39  
Certificates of deposit
  $ 96,213     $ 1,503       3.15     $ 105,506     $ 2,097       4.01  
Federal Home Loan Bank Advances
  $ 44,518     $ 992       4.49     $ 57,672     $ 1,301       4.55  
Fed Funds Purchased
  $ 5     $       0.00     $     $       0.00  
 
                                   
Total interest bearing liabilities
  $ 257,532     $ 2,842       2.23     $ 257,170     $ 3,895       3.05  
 
                                       
Net interest income
          $ 3,881                     $ 4,215          
Net interest spread
                    2.94 %                     2.89 %
Net interest margin
                    2.96 %                     3.06 %
Provision for Loan Losses
The provision for loan losses was $7.0 million in the second quarter of 2010 compared to $3.4 million for the second quarter of 2009. The significant increase in the provision was primarily driven by the continued deteriorating economic conditions in Michigan and weaknesses in the local real estate markets which resulted in downgrades to the credit ratings of certain loans in the portfolio and a significant increase in the balances of nonperforming loans. The Company continues to monitor real estate dependent loans and focus on asset quality. Non-performing assets totaled $27.3 million at the end of the second quarter of 2010, an increase of $8.9 million from December 31, 2009. Net charge offs for the quarter ended June 30, 2010 were $3.5 million compared to $1.1 million for the same period in 2009. Year to date 2010 net charge offs totaled $4.9 million compared to $1.3 million for the same period a year ago. Net charge offs year to date consisted of 46% one to four family residential mortgages, 26% construction, 26% commercial real estate, and the remaining 3% included consumer, commercial and industrial and home equity lines of credit.
Nonperforming assets including the amount of real estate in judgment and foreclosed and repossessed properties, increased from $18.4 million at the end of 2009 to $27.3 million as of June 30, 2010. This increase was largely due to an increase nonperforming loans, specifically in commercial real estate loans. Management classified two large commercial loan relationships in the amount of $7.3 million as non-performing during the second quarter.

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The following table presents non-performing assets and certain asset quality ratios at June 30, 2010 and December 31, 2009.
                 
    June 30, 2010     December 31, 2009  
    (In thousands)  
Non-performing loans
  $ 23,620     $ 15,570  
Real estate in judgement
    2,425       1,126  
Foreclosed and repossessed assets
    1,233       1,713  
 
           
Total non-performing assets
  $ 27,278     $ 18,409  
 
           
 
               
Non-performing loans to total loans
    11.56 %     6.85 %
Non-performing assets to total assets
    10.35 %     6.50 %
Allowance for loan losses to non-performing loans
    41.40 %     37.14 %
Allowance for loan losses to net loans receivable
    4.79 %     2.54 %
Non-interest Income
Non-interest income for the quarter ended June 30, 2010 decreased $614,000, or 42.0%, from $1.5 million to $854,000 compared to the same period a year ago. This decrease is attributable to a decrease in gain on sale of loans offset by an increase in other income.
Net gain on of sale loans decreased $599,000 for the quarter ended June 30, 2010 from $748,000 to $149,000 compared to the same period a year ago. The decrease is largely due to the decline in one to four family residential mortgage refinancing activity. Management expects current trends to continue through the remainder of the year and be more consistent with the gains recognized in 2008.
Non-interest income for the six months ended June 30, 2010 decreased $916,000, or 32.2%, from $2.8 million to $1.9 million for the same period in 2009. Net gain on sale loans decreased $1.1 million for the six months ended June 30, 2009 from $1.5 million to $349,000 compared to the same period a year ago. Fees and Service charges increased $44,000 for the six months ended June 30, 2010 compared to the same period a year ago. The increase in fees and service charges is primarily due to an increase in deposit related fees of $24,000 which consists of an increase in ATM income of $28,000 and in early withdrawal penalties of $18,000. Overdraft fees decreased $18,000 as a result of customers managing their finances more closely in order to reduce overdraft fees because of the current challenging economic conditions. All other deposit fees decreased $4,000. An increase in loan related fees of $20,000 which consisted of an increase in Brokered loan income of $16,000 also significantly impacted fees and service charges.
A gain of $37,000 on the sale of investments was recognized in the six months of 2010 as management replaced securities to reposition maturities and improve overall credit quality of the portfolio. Other income increased $91,000 primarily due to a $34,000 increase in gain on sale of other repossessed property.
Non-interest Expense
Noninterest expense decreased $96,000, or 3.7%, for the three months ended June 30, 2010 compared to the same period ending a year ago. Salaries and employee benefits decreased $30,000. The decline in personnel expense was primarily attributable to a decline in general staffing, the discontinuance of our 401k match and the increased employee match for health insurance coverage. Amortization of mortgage servicing rights decreased $55,000 as a result of the slow down in residential mortgage refinancing activity mentioned previously. Foreclosed property expense decreased $18,000. Other operating expenses decreased $115,000. Professional services increased $122,000 primarily due to increases in legal fees associated with non-performing loans.
Noninterest expense decreased $111,000, or 2.2%, for the six months ended June 30, 2010 compared to the same period ending a year ago. Salaries and employee benefits decreased $73,000, in 2010. Cost control remains a focus of the Corporation and early in the third quarter the Corporation completed a reduction-in-staff initiative and a branch consolidation that will significantly reduce the Bank’s salaries and employee benefits expenses. Approximately 20 full-time equivalent positions were eliminated as a result of the reduction-in-staff initiative, with pre-tax savings estimated to be approximately $800,000 on an annual basis. Management will continue to reduce staffing levels, where possible, through attrition, throughout 2010.

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Amortization of mortgage servicing rights decreased $166,000 for reasons mentioned previously. Occupancy and equipment decreased $46,000. Other operating expenses decreased $125,000. Professional services increased $144,000 primarily due to increases in legal fees associated with non-performing loans and legal fees associated with the Consent Order. Foreclosed property expense increased $155,000, due to increases in loan collection costs, and losses and impairment charges associated with the disposition of other real estate.
Federal Income Tax Expense
An income tax benefit was not recognized for the first six month of 2010. A $2.0 million tax benefit for the six months of 2010, primarily associated with the $8.1 million net operating loss before income taxes, was offset by a corresponding increase in the valuation allowance on deferred tax assets. A significant component of income tax expense is made up of general tax credits generated each year. Due to the current year loss, these tax credits may not be fully utilized.
LIQUIDITY
The Bank’s liquidity, represented by cash, overnight funds and investments, is a product of our operating, investing, and financing activities. The Bank’s primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans, and funds provided from operations. While scheduled payments from the amortization of loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank also generates cash through borrowings. The Bank utilizes Federal Home Loan Bank advances to leverage its capital base and provide funds for its lending and investment activities, and to enhance its interest rate risk management.
At June 30, 2010, the Bank was considered “adequately capitalized” under regulatory guidelines which subjects the Bank to restrictions under the FDIC. These restrictions prohibit the Bank from accepting, renewing, or rolling over brokered deposits except with a waiver from the FDIC. This act also subjects the Bank to restrictions on the interest rates that can be paid on deposits.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, the Bank maintains a strategy of investing in various investments and lending products. The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. Certificates of deposit scheduled to mature in one year or less at June 30, 2010 totaled $46.3 million. Management believes that a significant portion of these certificates of deposit will remain with the Bank provided the Bank pays a rate of interest that is competitive both in the local and national markets.
If necessary, additional funding sources include additional deposits, Federal Home Loan Bank advances and securities available for sale. Deposits can be obtained in the local market area. At June 30, 2010 and based on current collateral levels, the Bank could borrow an additional $15.1 million from the Federal Home Loan Bank at prevailing interest rates. This borrowing capacity can be increased in the future if the Bank pledges additional collateral to the Federal Home Loan Bank. The Corporation anticipates that it will continue to have sufficient funds, through deposits, and borrowings, to meet its current commitments.
The Bank’s total cash and cash equivalents decreased by $4.1 million during the six months ended June 30, 2010 compared to a $6.6 million increase for the same period in 2009. The primary sources of cash for the six months ended June 30, 2010 were $10.9 million in proceeds from the sale of mortgage loans, $3.9 million in sales and maturities of available-for-sale investment securities and $5.4 of principal loan collections in excess of loan originations compared to $6.8 million increase in cash generated by the issuance of preferred stock, $10.2 million increase in deposits, $66.3 million in proceeds from the sale of mortgage loans, $6.1 million in maturities of available-for-sale investment securities. The primary uses of cash for the six months ended June 30, 2010 were $10.9 million of mortgage loans originated for sale, decrease in deposits of $11.9 million and $4.2 million in purchases of available-for-sale investment securities compared to $65.3 million of mortgage loans originated for sale, $3.5 million in repayments of FHLB advances, $1.0 million in repayment of Fed funds purchased and $17.8 million in purchases of available-for-sale investment securities.
Effective February 2010, the Corporation deferred regularly scheduled dividend payments on the $6.7 million in principal outstanding on its Series A fixed rate, cumulative perpetual preferred stock (aggregate liquidation preference of $6.8 million) which was issued to the U.S. Treasury in February 2009. By taking this action, the Corporation expects to save approximately $339,250 in annual cash payments.

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CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS
The Corporation has certain obligations and commitments to make future payments under contracts. At June 30, 2010, the aggregate contractual obligations and commitments are:
                                         
    Payments Due by Period  
            Less than     1-3     3-5     After  
    Total     1 year     years     years     5 years  
    (Dollars in Thousands)  
Certificates of deposit
  $ 90,045     $ 46,248     $ 31,979     $ 11,818     $  
FHLB advances
    44,518       19,168       18,291       7,059        
 
                             
 
                                       
Total
  $ 134,563     $ 65,416     $ 50,270     $ 18,877     $  
 
                             
                                         
    Amount of commitment expiration per period  
            Less than     1-3     3-5     After  
    Total     1 year     years     years     5 years  
    (Dollars in Thousands)  
Commitments to grant loans
  $ 1,945     $ 1,945     $     $     $  
Unfunded commitments under HELOCs
    13,753       1,461       3,878       2,671       5,743  
Unfunded commitments under Contruction loans
    1,275       665       59             551  
Unfunded commitments under Commercial LOCs
    1,987       1,216       758             13  
Letters of credit
    150       150                    
 
                             
 
                                       
Total
  $ 19,110     $ 5,437     $ 4,695     $ 2,671     $ 6,307  
 
                             
Commitments to grant loans are governed by the Bank’s credit underwriting standards, as established by the Bank’s Loan Policy. The Bank’s policy is to grant Home Equity Lines of Credits (HELOCs) for periods of up to 15 years.
CAPITAL RESOURCES
The Bank is subject to various regulatory capital requirement administered by federal and state banking agencies. The Bank’s regulatory capital ratios as of June 30, 2010 were as follows: Tier 1 leverage ratio 4.9%, Tier 1 risk-based capital ratio 6.80%; and total risk-based capital, 8.04%. As of June 30, 2010, the Bank is considered “adequately capitalized”.
In May 2010, the Bank agreed with the FDIC to increase the Bank’s Tier 1 risk-based capital ratio to at least 9%, and its total risk-based capital ratio to at least 11.0%. At June 30, 2010, these capital ratio requirements had not been met. The Board of Directors and management remain committed to reaching the capital requirements and continue to evaluate different capital raising alternatives.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that if undertaken could have a material adverse effect. Under the FDIC’s prompt corrective action framework, banks with less than a 4% Tier 1 leverage ratio are considered undercapitalized, banks with less than a 3% Tier 1 leverage ratio are considered significantly undercapitalized, and banks with a tangible equity to total assets ratio of less than 2% are considered critically undercapitalized. Each of these categories subjects such bank to increasing levels of regulatory scrutiny which may include increased supervision; restrictions on operations, expansion of activities and growth; potential civil penalties; and in the case of critically undercapitalized banks, the appointment of a conservator.

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RECENT DEVELOPMENTS
     Following Monarch Community Bank’s most recent Safety and Soundness examination, the Board of Directors of Monarch Community Bank stipulated to the terms of a formal enforcement action (“Consent Order”) with Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”). The Consent Order, which was effective May 6, 2010, contains specific actions needed to address certain findings from their examination and to address our current financial condition. The Consent Order, among other things, requires the following:
    The Bank is required to have and retain qualified management.
    The Bank is required to retain an independent third party to develop an analysis and assessment of the Bank’s management needs for the purpose of providing qualified management for the Bank.
    The board of directors is required to assume responsibility for the supervision of all of the Bank’s activities.
    The Bank must increase the Bank’s level of Tier 1 capital as a percentage of total assets to at least nine percent and its total capital as a percentage of risk-weighted assets at a minimum of eleven percent.
    The Bank is required to charge off any loans classified as loss.
    The Bank may not extend credit to borrowers that have had loans with the Bank that were classified substandard, doubtful or special mention without prior board approval.
    The Bank may not extend credit to borrowers that have had loans charged off or classified as loss.
    The Bank is required to adopt a plan to reduce the Bank’s risk position in each asset in excess of $250,000 which is more than sixty days delinquent or classified substandard or doubtful.
    The Bank may not declare or pay any cash dividend without prior written consent of the FDIC and OFIR.
    Prior to submission or publication of all Reports of Condition, the board is required to review the adequacy of the Bank’s allowance for loan and lease losses.
    The Bank is required to adopt written lending and collection policies to provide effective guidance and control over the Bank’s lending function.
    The Bank is required to implement revised comprehensive loan grading review procedures.
    Within sixty days of the Consent Order, the Bank is required to adopt a written profit plan and comprehensive budget.
    Within sixty days of the Consent Order, the Bank is required to adopt a written plan to manage concentrations of credit in a safe and sound manner.
    Within sixty days of the Consent Order, the Bank is required to formulate a written plan to reduce the Bank’s reliance on brokered deposits.
    While the Consent Order is in effect, the Bank is required to prepare and submit quarterly progress reports the FDIC and OFIR.
          The Bank believes that it is in compliance with all of the terms of the Consent Order with the exception of the requirement that the Bank increase the Bank’s level of Tier 1 capital as a percentage of total assets to at least nine percent and its total capital as a percentage of risk-weighted assets at a minimum of eleven percent. The Board of Directors and management remain committed to reaching the capital requirements and continue to evaluate different capital raising alternatives.

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ITEM 3.   QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
The Corporation’s primary market risk exposure is interest rate risk (“IRR”). Interest rate risk refers to the risk that changes in market interest rates might adversely affect the Corporation’s net interest income or the economic value of its portfolio of assets, liabilities, and off-balance sheet contracts. Interest rate risk is primarily the result of an imbalance between the price sensitivity of the Corporation’s assets and its liabilities (including off-balance sheet contracts). Such imbalances can be caused by differences in the maturity, repricing and coupon characteristics of assets and liabilities, and options, such as loan prepayment options, interest rate caps and floors, and deposit withdrawal options. These imbalances, in combination with movement in interest rates, will alter the pattern of the Corporation’s cash inflows and outflows, affecting the earnings and economic value of the Corporation.
The Corporation’s primary tool for assessing IRR is a model that uses scenario analysis to evaluate the IRR exposure of the Bank by estimating the sensitivity of the Bank’s portfolios of assets, liabilities, and off-balance sheet contracts to changes in market interest rates. To measure the sensitivity of the Bank’s Net Portfolio Value (NPV) to changes in interest rates, the (NPV) model estimates what would happen to the economic value of each type of asset, liability, and off-balance sheet contract under six different interest rate scenarios. The model estimates the NPV that would result following instantaneous, parallel shifts in the Treasury yield curve of -300, -200, -100, +100, +200, +300 basis points. Management then compares the resulting NPV and the magnitude of change in NPA to regulatory and industry guidelines to determine if the Corporation’s IRR is acceptable.
ITEM 4T.   CONTROLS AND PROCEDURES
An evaluation of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2010 was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer, Chief Financial Officer and several other members of the Corporation’s senior management. The Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Corporation intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Corporation’s business. While the Corporation believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Corporation to modify its disclosure controls and procedures.

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PART II-OTHER INFORMATION
Item 1.   LEGAL PROCEEDINGS
The Corporation and the Bank are from time-to-time involved in legal proceedings arising out of, and incidental to, their business. Management, based on its review with counsel of all actions and proceedings affecting the Corporation and the Bank, has concluded that the aggregate loss, if any, resulting from the disposition of these proceedings should not be material to the Corporation’s financial condition or results of operations.
Item 1A.   RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Corporation. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
Item 3.   DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4.   [RESERVED]
Item 5.   OTHER INFORMATION
Not applicable
Item 6.   EXHIBITS
See the index to exhibits.

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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.
         
  MONARCH COMMUNITY BANCORP, INC.
 
 
Date: August 16, 2010  By:   /s/ Richard J. DeVries    
    Richard J. DeVries   
    President and Chief Executive Officer   
 
     
Date: August 16, 2010  And:   /s/ Rebecca S. Crabill    
    Rebecca S. Crabill   
    Senior Vice President, Chief Financial Officer   

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INDEX TO EXHIBITS
     
Exhibit No.   Description of Exhibit
10.1
  Consent Order (Incorporated by reference from the Form 8-K filed on May 12, 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.

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