Attached files
file | filename |
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EX-21 - EX-21 - MONARCH COMMUNITY BANCORP INC | k48928exv21.htm |
EX-14 - EX-14 - MONARCH COMMUNITY BANCORP INC | k48928exv14.htm |
EX-23 - EX-23 - MONARCH COMMUNITY BANCORP INC | k48928exv23.htm |
EX-32 - EX-32 - MONARCH COMMUNITY BANCORP INC | k48928exv32.htm |
EX-31.2 - EX-31.2 - MONARCH COMMUNITY BANCORP INC | k48928exv31w2.htm |
EX-99.1 - EX-99.1 - MONARCH COMMUNITY BANCORP INC | k48928exv99w1.htm |
EX-31.1 - EX-31.1 - MONARCH COMMUNITY BANCORP INC | k48928exv31w1.htm |
EX-99.2 - EX-99.2 - MONARCH COMMUNITY BANCORP INC | k48928exv99w2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
Commission file number 0-49814
MONARCH COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) |
04-3627031 (I.R.S. Employer Identification No.) |
375 North Willowbrook Road, Coldwater, Michigan | 49036 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (517) 278-4566
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share registered on NASDAQ Capital Market
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share registered on NASDAQ Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of
Section 15(d) of the Exchange Act. Yes o No þ.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES 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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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 | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
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.
The aggregate market value of the registrants common stock held by non-affiliates of the
registrant, based on the average of bid and ask price market price of such stock as of June 30,
2009 was approximately $10.9 million as reported on the NASDAQ Capital Market. (The exclusion from
such amount of the market value of the shares owned by any person shall not be deemed an admission
by the issuer that such person is an affiliate of the issuer.)
As of February 26, 2010, the registrant had 2,044,606 shares of common stock issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE PART III of Form 10-K Portions of the Registrants Proxy
Statement for the Annual Meeting of Stockholders to be held in April 2010.
PART I
ITEM 1. Business
General
Monarch Community Bancorp, Inc. (Company) was incorporated in March 2002 under Maryland law to
hold all of the common stock of Monarch Community Bank (Monarch or 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 Company sold
2,314,375 shares of its common stock in a subscription offering.
On April 15, 2004, the Company completed its acquisition of MSB Financial, Inc., parent company of
Marshall Savings Bank. Accordingly, MSB Financial was merged with and into Monarch Community
Bancorp, Inc. On June 7, 2004, Marshall Savings Bank was merged with and into Monarch Community
Bank. The Company issued a total of 310,951 shares of its common stock and paid cash of $19.7
million to former MSB Financial stockholders. The cash paid in the transaction came from the
Companys existing liquidity. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase
accounting fair value adjustments are being amortized under various methods and over the lives of
the corresponding assets and liabilities. Goodwill recorded for the acquisition amounted to $9.6
million and was not amortized but evaluated for impairment at least annually. It was determined to
be impaired and written off in 2009. A core deposit intangible of $2.1 million was recorded as
part of the acquisition and is being amortized on an accelerated basis over a period of 9.5 years.
Monarch Community Bank provides a broad range of banking services to its primary market area of
Branch, Calhoun and Hillsdale counties, Michigan. The Bank owns 100% ownership 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 Banks customers. The Bank also owns a 24.98%
interest in a limited partnership formed to construct and operate multi-family housing units.
Community Services Group, Inc. with assets totaling $996,000 as of April 30, 2006 was dissolved
with no gain or loss on the dissolution.
On June 3, 2006, the Company completed the conversion of the Bank from a federally chartered stock
savings institution to a Michigan state chartered commercial bank. As a result of the conversion,
the Company became a federal bank holding company regulated by the Board of Governors of the
Federal Reserve. The Bank will be regulated by the Michigan Office of Financial and Insurance
Regulation (OFIR) and the Federal Deposit Insurance Corporation (FDIC). Prior to the
conversion, both the Company and the Bank had been regulated by the federal Office of Thrift
Supervision. The Banks deposits continue to be insured to the maximum extent allowed by the
Federal Deposit Insurance Corporation (FDIC). The Bank has a website at http://www.monarchcb.com.
References in this Form 10-K to we, us, and our refer to the Company and/or the Bank as the
context requires. Our common stock trades on The NASDAQ Capital Market under the symbol MCBF.
Our principal business consists of attracting retail deposits from the general public and investing
those funds primarily in permanent loans secured by first mortgages on owner-occupied, one-to-four
family residences, loans secured by commercial and multi-family real estate, commercial business
loans and construction loans secured primarily by residential real estate. We also originate home
equity loans and a variety of consumer loans. Our originations of consumer loans has steadily
declined over the last five years.
Our revenues are derived principally from interest on loans, investment securities and overnight
deposits, as well as from sales of loans and fees and charges on deposit accounts.
We offer a variety of deposit accounts having a wide range of interest rates and terms, which
generally include passbook and statement savings accounts, money market deposit accounts, interest
bearing and non-interest bearing checking accounts and certificates of deposit with varied terms
ranging from six months to 60 months. We solicit deposits in our market area and utilize brokered
deposits.
At December 31, 2009, we had assets of $283.2 million, including net loans of $220.9, deposits of
$213.4 million and stockholders equity of $23.2 million.
2
Forward-Looking Statements
This document, including information incorporated by reference, future filings by Monarch Community
Bancorp on Form 10-Q and Form 8-K and future oral and written statements by Monarch Community
Bancorp and its management may contain forward-looking statements which are based on assumptions
and describe future plans, strategies and expectations of Monarch Community Bancorp and Monarch.
These forward-looking statements are generally identified by use of the words believe, expect,
intend, anticipate, estimate, project, or similar words. Our ability to predict results or
the actual effect of future plans or strategies is uncertain and we disclaim any obligation to
update or revise any forward-looking statements based on the occurrence of future events, the
receipt of new information or otherwise. 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.
Employees
The Bank employs 88 full-time and 6 part-time employees as of December 31, 2009. The holding
company does not have any employees.
Market Area
Headquartered in Coldwater, Michigan, our geographic market area for loans and deposits is
principally Branch, Calhoun and Hillsdale counties. As of June 30, 2009, we had an 20.05% market
share of FDIC-insured deposits in Branch County, a 6.45% market share of FDIC-insured deposits in
Calhoun County and a 4.89% market share of FDIC-insured deposits in Hillsdale County, ranking us
third, seventh and seventh, respectively, in those counties among all insured depository
institutions.
The local economy is based primarily on manufacturing and agriculture. Most of the job growth,
particularly in Hillsdale County, has been in automobile products-related manufacturing. Median
household income and per capita income for our primary market are below statewide averages,
reflecting the rural economy and limited economic growth opportunities.
Lending Activities
General. At December 31, 2009, our net loan portfolio totaled $220.9 million, which constituted 78%
of our total assets.
Our mortgage loans carry either a fixed or an adjustable rate of interest. Mortgage loans are
generally long-term and amortize on a monthly basis with principal and interest due each month.
Mortgage loans up to $300,000 may be approved by certain loan officers and loans up to $500,000 may
be approved by the President, within individual lending limits set by the Board of Directors. Loans
up to $1.5 million may be approved by the Management Loan Committee which is comprised of several
senior managers. Loans over $1.5 million must be approved by the Board of Directors Loan
Committee. Applications for loans that would be considered sub-prime cannot be approved by
individual loan officers and must be presented to the Management Loan Committee for review and
approval. Our legal lending limit is summarized in the Loans to One Borrower paragraph of the
Regulation and Supervision section of this document.
3
Loan Portfolio Composition. The following table presents information concerning the
composition of our loan portfolio as of the dates indicated.
December 31, 2009 | December 31, 2008 | December 31, 2007 | December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Real Estate Loans: |
||||||||||||||||||||||||||||||||||||||||
One-to four-family |
$ | 108,354 | 47.70 | % | $ | 124,855 | 49.80 | % | $ | 126,780 | 55.80 | % | $ | 140,374 | 60.30 | % | $ | 139,636 | 64.40 | % | ||||||||||||||||||||
Multi-family |
5,421 | 2.39 | 5,728 | 2.26 | 5,594 | 3.22 | 7,511 | 3.22 | 3,534 | 1.67 | ||||||||||||||||||||||||||||||
Commercial |
72,689 | 32.00 | 75,730 | 30.19 | 56,714 | 24.97 | 41,079 | 17.64 | 34,721 | 16.03 | ||||||||||||||||||||||||||||||
Construction or
development |
9,528 | 4.20 | 9,499 | 3.79 | 6,409 | 2.82 | 9,529 | 4.09 | 5,415 | 2.50 | ||||||||||||||||||||||||||||||
Total real estate loans |
195,992 | 86.29 | 215,812 | 86.04 | 195,497 | 85.25 | 198,493 | 85.25 | 183,306 | 84.60 | ||||||||||||||||||||||||||||||
Other loans: |
||||||||||||||||||||||||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||||||||||||||
Home equity |
18,174 | 8.00 | 20,677 | 8.24 | 20,430 | 8.99 | 19,077 | 8.19 | 16,170 | 7.46 | ||||||||||||||||||||||||||||||
Other |
4,706 | 2.07 | 5,737 | 2.29 | 7,014 | 3.09 | 9,087 | 3.90 | 10,822 | 5.00 | ||||||||||||||||||||||||||||||
Total consumer loans |
22,880 | 10.07 | 26,414 | 10.53 | 27,444 | 12.08 | 28,164 | 12.09 | 26,992 | 12.46 | ||||||||||||||||||||||||||||||
Commercial Business Loans |
8,266 | 3.64 | 8,609 | 3.43 | 4,228 | 1.86 | 6,205 | 2.67 | 6,364 | 2.94 | ||||||||||||||||||||||||||||||
Total other loans |
31,146 | 13.71 | 35,023 | 13.96 | 31,672 | 13.94 | 34,369 | 14.76 | 33,356 | 15.40 | ||||||||||||||||||||||||||||||
Total Loans |
227,138 | 100.00 | % | 250,835 | 100.00 | % | 227,169 | 100.00 | % | 232,862 | 100.00 | % | 216,662 | 100.00 | % | |||||||||||||||||||||||||
Less: |
||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses |
5,783 | 2,719 | 1,824 | 2,024 | 2,925 | |||||||||||||||||||||||||||||||||||
Net deferred loan fees |
480 | 574 | 548 | 591 | 640 | |||||||||||||||||||||||||||||||||||
Loans in process |
| | | | | |||||||||||||||||||||||||||||||||||
Total Loans, net |
$ | 220,875 | $ | 247,542 | $ | 224,797 | $ | 230,247 | $ | 213,097 | ||||||||||||||||||||||||||||||
4
The following table shows the composition of our loan portfolio by fixed and adjustable-rate at the
dates indicated.
December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Fixed-Rate Loans |
||||||||||||||||||||||||
Real Estate Loans: |
||||||||||||||||||||||||
One-to-four family |
$ | 80,241 | 35.3 | % | $ | 92,644 | 36.9 | % | $ | 83,386 | 36.7 | % | ||||||||||||
Multi-family |
5,396 | 2.4 | % | 5,524 | 2.2 | % | 5,397 | 2.4 | % | |||||||||||||||
Commercial |
52,495 | 23.1 | % | 47,689 | 19.0 | % | 36,723 | 16.2 | % | |||||||||||||||
Construction or development |
4,127 | 1.8 | % | 8,111 | 3.3 | % | 5,537 | 2.4 | % | |||||||||||||||
Total real estate loans |
142,259 | 62.6 | % | 153,968 | 61.4 | % | 131,043 | 57.7 | % | |||||||||||||||
Consumer |
15,323 | 6.8 | % | 19,406 | 7.7 | % | 21,354 | 9.4 | % | |||||||||||||||
Commercial Business |
6,244 | 2.7 | % | 7,011 | 2.8 | % | 2,932 | 1.3 | % | |||||||||||||||
Total fixed-rate loans |
163,826 | 72.1 | % | 180,385 | 71.9 | % | 155,329 | 68.4 | % | |||||||||||||||
Adjustable-Rate Loans |
||||||||||||||||||||||||
Real Estate Loans: |
||||||||||||||||||||||||
One-to-four family |
$ | 28,113 | 12.4 | % | $ | 32,211 | 12.8 | % | $ | 43,394 | 18.3 | % | ||||||||||||
Multi-family |
25 | 0.0 | % | 204 | 0.1 | % | 197 | 0.1 | % | |||||||||||||||
Commercial |
20,194 | 8.9 | % | 28,041 | 11.2 | % | 19,991 | 8.8 | % | |||||||||||||||
Construction or development |
5,401 | 2.4 | % | 1,388 | 0.6 | % | 872 | 0.3 | % | |||||||||||||||
Total real estate loans |
53,733 | 23.7 | % | 61,844 | 24.7 | % | 64,454 | 27.5 | % | |||||||||||||||
Consumer |
7,557 | 3.3 | % | 7,008 | 2.8 | % | 6,090 | 2.7 | % | |||||||||||||||
Commercial Business |
2,022 | 0.9 | % | 1,598 | 0.6 | % | 1,296 | 0.6 | % | |||||||||||||||
Total adjustable-rate loans |
63,312 | 27.9 | % | 70,450 | 28.1 | % | 71,840 | 31.6 | % | |||||||||||||||
Total loans |
227,138 | 100 | % | 250,835 | 100.0 | % | 227,169 | 100.0 | % | |||||||||||||||
Less: |
||||||||||||||||||||||||
Allowance for loan losses |
5,783 | 2,719 | 1,824 | |||||||||||||||||||||
Net deferred loan fees |
480 | 574 | 548 | |||||||||||||||||||||
Loans in process |
| | | |||||||||||||||||||||
Total Loans, net |
$ | 220,875 | $ | 247,542 | $ | 224,797 | ||||||||||||||||||
5
The following table illustrates the contractual maturity of our loan portfolio at December 31,
2009. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the
period during which the contract is due. The table does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Real Estate | ||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family and | Construction or | |||||||||||||||||||||||||||||||||||||||||||||||
One-to-Four Family | Commercial | Development | Consumer | Commercial Business | Total | |||||||||||||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Due to Mature: |
||||||||||||||||||||||||||||||||||||||||||||||||
One year or less (1) |
7,070 | 5.51 | % | 6,337 | 6.53 | % | 1,527 | 5.30 | % | 2,567 | 6.90 | % | 1,056 | 5.29 | % | 18,557 | 6.02 | % | ||||||||||||||||||||||||||||||
After one year
through five years |
14,450 | 6.78 | % | 52,415 | 6.55 | % | 1,926 | 6.88 | % | 11,553 | 7.25 | % | 3,079 | 6.71 | % | 83,423 | 6.70 | % | ||||||||||||||||||||||||||||||
After five years |
86,834 | 6.39 | % | 19,358 | 5.81 | % | 6,075 | 5.41 | % | 8,760 | 5.14 | % | 4,131 | 7.33 | % | 125,158 | 6.20 | % |
(1) | Includes demand loans. |
The total amount of loans due after December 31, 2010 which have predetermined interest rates is
$128.9 million while the total amount of loans due after such date which have floating or
adjustable rates is $32.5 million.
6
One-to-Four Family Residential Real Estate Lending. We have focused our lending efforts primarily
on the origination of loans secured by first mortgages on owner-occupied, one-to-four family
residences in our market area. At December 31, 2009, one-to-four family residential mortgage loans
totaled $108.4 million, or 47.7% of our gross loan portfolio.
We have originated sub-prime residential mortgage loans since 1985. However in more recent years
we have moved away from this type of lending due to the higher risk associated with it. Our
definition of sub-prime lending is substantially similar to regulatory guidelines. We review a
borrowers credit score, debt-to-income ratio and the loan-to-value ratio of the collateral in
determining whether a loan is sub-prime. We utilize a loan risk grading system for all one-to-four
family residential loans. The risk grading system provides that all loans with a credit score of
less than 660 shall be considered for potential sub-prime classification. For a loan with a credit
score between 600 and 660, loan-to-value ratio, debt-to-income ratio and the borrowers history
with the Bank will determine whether or not the loan is classified as sub-prime.
At December 31, 2009, $16.3 million, or 15.0% of our residential mortgage loans were classified as
sub-prime loans as compared to $15.5 million, or 12.4% at December 31, 2008. The increase is
primarily due to refinancing and restructuring existing loans in our portfolio. We charge higher
interest rates on our sub-prime residential mortgage loans to attempt to compensate for the
increased risk in these loans. Sub-prime lending entails a higher risk of delinquency, foreclosure
and ultimate loss than residential loans made to more creditworthy borrowers. Delinquencies,
foreclosure and losses generally increase during economic slowdowns or recessions as experienced in
recent history. During 2009, $627,000, or 6.1%, of our total net charge-offs of $10.3 million were
due to sub-prime loans as compared to $303,000, or 16.7% of our total net charge-offs of $1.8
million for 2008. During 2009, we have made significant efforts in assisting borrowers who are
experiencing financial difficulty. See Asset Quality.
We generally underwrite our one-to-four family loans based on the applicants employment and credit
history and the appraised value of the subject property. Presently, we lend up to 103% of the
lesser of the appraised value or purchase price for one-to-four family residential loans. For loans
with a loan-to-value ratio in excess of 89%, we generally require private mortgage insurance to
reduce our credit exposure below 80%. Properties secured by one-to-four family loans are appraised
by licensed appraisers. We obtain title insurance and require our borrowers to obtain hazard
insurance and flood insurance, if necessary, in an amount not less than the value of the property
improvements.
We currently originate one-to-four family mortgage loans on either a fixed rate or adjustable rate
basis, as consumer demand dictates. Our pricing strategy for mortgage loans includes setting
interest rates that are competitive with secondary market requirements and other local financial
institutions, and consistent with our asset/liability strategies. Our pricing for sub-prime loans
is higher, as we attempt to offset the increased risks and costs involved in dealing with a greater
percentage of delinquencies and foreclosures.
Adjustable-rate mortgages, or ARM loans, are offered with either a one-year, three-year, five-year
or seven-year term to the initial repricing date. After the initial period, the interest rate for
each ARM loan adjusts annually for the remaining term of the loan. During the years ended December
31, 2009 and December 31, 2008, we originated $5.2 million and $3 million of one-to-four family ARM
loans, respectively, and $28.8 million and $51.8 million of one-to-four family fixed-rate mortgage
loans, respectively.
Fixed-rate loans secured by one-to-four family residences have contractual maturities of up to 30
years, and are generally fully amortizing, with payments due monthly. We also offer balloon loans
with one, three, five and seven year maturities. These loans normally remain outstanding, however,
for a substantially shorter period of time because of refinancing and other prepayments. A
significant change in the current level of interest rates could alter the average life of a
residential loan in our portfolio considerably. Our one-to-four family loans are generally not
assumable, do not contain prepayment penalties and do not permit negative amortization of
principal. Most are written using secondary market underwriting guidelines, although we retain in
our portfolio those loans which do not qualify for sale in the secondary market. Our real estate
loans generally contain a due on sale clause allowing us to declare
the unpaid principal balance due and payable upon the sale of the security property.
7
Our one-to-four family residential ARM loans are fully amortizing loans with contractual maturities
of up to 30 years, with payments due monthly. Our ARM loans generally provide for a maximum 2%
annual adjustment and 6% lifetime adjustment to the initial rate. As a consequence of using caps,
the interest rates on these loans may not be as rate sensitive as is our cost of funds.
In order to remain competitive in our market area, we may originate ARM loans at initial rates
below the fully indexed rate, although that has not been a strategy in recent years.
ARM loans generally pose different credit risks than fixed-rate loans, primarily because as
interest rates rise, the borrowers payment rises, increasing the potential for default. In past
periods of rising interest rates, we have not experienced difficulty with the payment history for
these loans. See - Asset Quality Non-performing Assets and Classified Assets.
Multi-family and Commercial Real Estate Lending. We offer a variety of multi-family and commercial
real estate loans. These loans are secured primarily by residential rental properties, commercial
properties, retail establishments, churches and small office buildings located in our market area.
At December 31, 2009, multi-family and commercial real estate loans totaled $78.1 million or 34.4%
of our gross loan portfolio.
Our loans secured by multi-family and commercial real estate are originated with either a fixed or
variable interest rate. The interest rate on variable-rate loans is based on the Wall Street
Journal prime rate plus or minus a margin, generally determined through negotiation with the
borrower. Loan-to-value ratios on our multi-family and commercial real estate loans typically do
not exceed 80% of the appraised value of the property securing the loan. These loans which are
typically balloon loans, in general require monthly payments, may not be fully amortizing and have
maximum maturities of 25 years.
Loans secured by multi-family and commercial real estate are underwritten based on the income
producing potential of the property and the financial strength of the borrower. We generally
require personal guarantees of the principals of the borrower in addition to the security property
as collateral for these loans. When legally permitted, we require an assignment of rents or leases
in order to be assured that the cash flow from the project will be used to repay the debt.
Appraisals on properties securing multi-family and commercial real estate loans are generally
performed by independent state licensed fee appraisers approved by the Board of Directors. See -
Loan Originations, Purchases, Sales and Repayments.
We do not generally maintain an insurance escrow account for loans secured by multi-family and
commercial real estate, although we may maintain a tax escrow account for these loans. In order to
monitor the adequacy of cash flows on income-producing properties, the borrower is requested or
required to provide periodic financial information.
Loans secured by multi-family and commercial real estate properties are generally larger and
involve a greater degree of credit risk than one-to-four family residential mortgage loans. These
loans typically involve large balances to single borrowers or groups of related borrowers. Because
payments on loans secured by multi-family and commercial real estate properties are often dependent
on the successful operation or management of the properties, repayment may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the project is reduced,
or if leases are not obtained or renewed, the borrowers ability to repay the loan may be impaired.
See - Asset Quality Non-performing Loans.
8
Construction and Land Development Lending. We make construction loans to builders and to
individuals for the construction of their residences as well as to businesses and individuals for
commercial real estate construction projects. At December 31, 2009, we had $9.5 million in
construction and land development loans outstanding, representing 4.2% of our gross loan portfolio.
Construction and land development loans are obtained through continued business with builders who
have previously borrowed from us, from walk-in customers and through referrals from realtors and
other customers. The application process includes submission of plans, specifications and costs of
the project to be constructed. These items are used as a basis to determine the appraised value of
the subject property. Loans are based on the lesser of current appraised value and/or the cost of
construction, including the land and the building. We conduct regular inspections of the
construction project being financed. During the construction phase, the borrower generally pays
interest only on a monthly basis. Loan-to-value ratios on our construction and development loans
typically do not exceed 80% of the appraised value of the project on an as completed basis,
although the Board of Directors has made limited exceptions to this policy where special
circumstances exist.
Because of the uncertainties inherent in estimating construction and development costs and the
market for the project upon completion, it is relatively difficult to evaluate accurately the total
loan funds required to complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. These loans also involve many of the same risks discussed above
regarding multi-family and commercial real estate loans and tend to be more sensitive to general
economic conditions than many other types of loans.
Consumer and Other Lending. Consumer loans generally have shorter terms to maturity, which reduces
our exposure to changes in interest rates, and carry higher rates of interest than do one-to-four
family residential mortgage loans. In addition, management believes that offering consumer loan
products helps to expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing opportunities. At December 31, 2009,
our consumer loan portfolio totaled $22.9 million, or 10.1% of our gross loan portfolio. We offer a
variety of secured consumer loans, including home equity loans and lines of credit, auto loans,
manufactured housing loans and loans secured by savings deposits, however the majority of new
originations are home equity loans and lines of credit. We also offer a limited amount of
unsecured loans including home improvement loans. We originate our consumer loans in our market
area.
Our home equity lines of credit totaled $18.2 million, and comprised 8.0% of our gross loan
portfolio at December 31, 2009. These loans may be originated in amounts, together with the amount
of the existing first mortgage, of up to 100% of the value of the property securing the loan. The
term to maturity on our home equity lines of credit ranges from 3 to 5 years for fixed rate loans
and 1 to 15 for variable rate loans. No principal payments are required on most home equity lines
of credit during the loan term. Other consumer loan terms vary according to the type of collateral,
length of contract and creditworthiness of the borrower.
Consumer loans may entail greater risk than do one-to-four family residential mortgage loans,
particularly in the case of consumer loans which are secured by rapidly depreciable assets, such as
automobiles, boats, and manufactured housing. In these cases, any repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As
a result, consumer loan collections are dependent on the borrowers continuing financial stability
and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.
9
Commercial Business Lending. At December 31, 2009, commercial business loans comprised $8.3
million, or 3.6% of our gross loan portfolio. Most of our commercial business loans have been
extended to finance local businesses and include short term loans to finance machinery and
equipment purchases, inventory and accounts receivable. Commercial business loans also involve the
extension of revolving credit for a combination of equipment acquisitions and working capital
needs.
The terms of loans extended on the security of machinery and equipment are based on the projected
useful life of the machinery and equipment, generally not to exceed seven years. Operating lines of
credit generally are available to borrowers for up to 12 months, and may be renewed by Monarch. We
issue a few standby letters of credit which are offered at competitive rates and terms and are
generally issued on a secured basis. At December 31, 2009, there was a $160,000 financial standby
letter of credit outstanding.
Our commercial business lending policy includes credit file documentation and analysis of the
borrowers background, capacity to repay the loan, the adequacy of the borrowers capital and
collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the
borrowers past, present and future cash flows is also an important aspect of our credit analysis.
Based on this underwriting information we assign a risk rating which assists management in
evaluating the quality of the loan portfolio. We generally obtain personal guarantees on our
commercial business loans. Nonetheless, these loans are believed to carry higher credit risk than
more traditional single family loans.
Unlike residential mortgage loans, commercial business loans are typically made on the basis of the
borrowers ability to make repayment from the cash flow of the borrowers business. As a result,
the availability of funds for the repayment of commercial business loans is substantially dependent
on the success of the business itself (which, in turn, is often dependent in part upon general
economic conditions). Our commercial business loans are usually, but not always, secured by
business assets. However, the collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the business.
Loan Originations, Purchases, Sales and Repayments. We originate loans through referrals from
real estate brokers and builders and other customers, our marketing efforts, and our existing and
walk-in customers. While we originate adjustable-rate and fixed-rate loans, our ability to
originate loans is dependent upon customer demand for loans in our market area. Demand is affected
by local competition and the interest rate environment.
During the last several years up to 2009, due to low market interest rates, our dollar volume of
fixed-rate, one-to-four family loans has substantially exceeded the dollar volume of the same type
of adjustable-rate loans. Adjustable-rate loan originations as a percentage of total originations
were .5% and 8.5% in 2009 and 2008 respectively. We sell a significant portion of the conforming,
fixed-rate, one-to-four family residential loans we originate, primarily those with lower interest
rates. We keep the sub-prime residential real estate loans we originate. We may purchase
residential loans and commercial real estate loans from time to time.
In periods of economic uncertainty, the ability of financial institutions, including us, to
originate or purchase large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in income.
10
The following table shows the loan origination, sale and repayment activities of Monarch for
the periods indicated.
Years Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Originations by type: |
||||||||
Real Estate: |
||||||||
One-to-four family |
$ | 104,416 | $ | 54,846 | ||||
Multi-family |
760 | 250 | ||||||
Commercial |
9,025 | 31,316 | ||||||
Construction or development |
4,943 | 5,358 | ||||||
Total real estate loans |
119,144 | 91,770 | ||||||
Consumer Loans: |
||||||||
Home Equity |
5,073 | 5,809 | ||||||
Other |
827 | 891 | ||||||
Commercial business |
743 | 7,101 | ||||||
Total loans originated |
125,787 | 105,571 | ||||||
Sales and Repayments: |
||||||||
One-to-four family loans sold |
89,901 | 27,838 | ||||||
Commercial real estate loans sold |
| | ||||||
Principal repayments |
59,583 | 54,067 | ||||||
Total reductions |
149,484 | 81,905 | ||||||
Increase in other items, net |
2,970 | 921 | ||||||
Net increase (decrease) |
$ | (26,667 | ) | $ | 22,745 | |||
Asset Quality
When a borrower fails to make a payment on a residential mortgage loan on or before the due date, a
late notice is mailed 10 to 15 days after the due date. All delinquent accounts are reviewed by a
collector, who attempts to cure the delinquency by contacting the borrower once the loan is 30 days
past due. Additionally, each week the collections department gives each loan officer a list of his
or her loans that are 30 days past due. The loan officer attempts to contact the borrower to
determine the reason for the delinquency and to urge the borrower to bring the loan current. Once
the loan becomes 30 days delinquent, a letter is sent to the borrower requesting the borrower to
bring the loan current, or, if that is not possible, to fill out and return a financial information
update form. If the form is returned, the senior collector determines if the borrower exhibits an
ability to repay, and, if so, brings the file to the Delinquency Committee for a decision whether
to forbear collection action to allow the borrower to demonstrate the ability to make timely
payments and/or establish an acceptable repayment plan to bring the loan current. If the borrower
makes timely payments for a period of at least six months but does not appear to have the ability
to bring the loan current, the file is given to a loan officer to obtain a new loan application
from the borrower for the purpose of rewriting the loan in accordance with established loan policy.
If the financial information update is not returned, or if the senior collector determines that the
borrower no longer has the ability to repay the loan, or the Delinquency Committee declines to
forbear collection activity, then when the loan becomes 60 days delinquent, the file is reviewed by
the
Delinquency Committee and the foreclosure process is begun by the sending of a notice of intent to
foreclose. If during a period of forbearance the borrower fails to make timely payments, the
Delinquency Committee reviews the loan and the foreclosure process commences unless extenuating
circumstances exist. The notice of intent to foreclose allows the borrower up to 30 days to bring
the account current. All loans over 60 days delinquent are handled by the senior collections
officer until the delinquency is resolved or foreclosure occurs.
11
For consumer loans a similar collection process is followed. Follow-up contacts are generally on an
accelerated basis compared to the mortgage loan procedure due to the nature of the collateral.
Commercial loan collections are handled by our Delinquency Committee in conjunction with our
Collection Department and the appropriate loan officer. The nature of these loans dictates that
collection procedures are adjusted to suit each situation.
Delinquent Loans. The following tables set forth our loan delinquencies (60 days past due
and over) by type, number, amount and percentage of type at the dates indicated:
December 31, 2009 | ||||||||||||||||||||||||||||||||||||
Loans Delinquent For: | ||||||||||||||||||||||||||||||||||||
60-89 Days | 90 Days and Over | Total Delinquent Loans | ||||||||||||||||||||||||||||||||||
Percent of Loan | Percent of Loan | Percent of Loan | ||||||||||||||||||||||||||||||||||
Number | Amount | Category | Number | Amount | Category | Number | Amount | Category | ||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
Real Estate |
||||||||||||||||||||||||||||||||||||
One-to-four family |
39 | $ | 2,656 | 2.45 | % | 21 | $ | 1,580 | 1.46 | % | 60 | $ | 4,236 | 3.91 | % | |||||||||||||||||||||
Multi-family |
1 | 187 | 3.45 | % | | | 0.00 | % | 1 | 187 | 3.45 | % | ||||||||||||||||||||||||
Commercial |
3 | 792 | 1.09 | % | 8 | 2,506 | 3.45 | % | 11 | 3,298 | 4.54 | % | ||||||||||||||||||||||||
Construction or development |
| | 0.00 | % | | | 0.00 | % | | | 0.00 | % | ||||||||||||||||||||||||
Total real estate loans |
43 | $ | 3,635 | 1.85 | % | 29 | $ | 4,086 | 2.08 | % | 72 | $ | 7,721 | 3.94 | % | |||||||||||||||||||||
Consumer |
6 | 123 | 0.54 | % | 1 | | 0.00 | % | 7 | 123 | 0.54 | % | ||||||||||||||||||||||||
Commercial Business |
1 | 5 | 0.06 | % | 1 | 77 | 0.93 | % | 2 | 82 | 0.99 | % | ||||||||||||||||||||||||
Total |
50 | $ | 3,763 | 1.66 | % | 31 | $ | 4,163 | 1.83 | % | 81 | $ | 7,926 | 3.49 | % | |||||||||||||||||||||
December 31, 2008 | ||||||||||||||||||||||||||||||||||||
Loans Delinquent For: | ||||||||||||||||||||||||||||||||||||
60-89 Days | 90 Days and Over | Total Delinquent Loans | ||||||||||||||||||||||||||||||||||
Percent of Loan | Percent of Loan | Percent of Loan | ||||||||||||||||||||||||||||||||||
Number | Amount | Category | Number | Amount | Category | Number | Amount | Category | ||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
Real Estate |
||||||||||||||||||||||||||||||||||||
One-to-four family |
50 | $ | 2,284 | 1.83 | % | 23 | $ | 466 | 0.37 | % | 73 | $ | 2,750 | 2.20 | % | |||||||||||||||||||||
Multi-family |
| | 0.00 | % | 1 | 164 | 2.86 | % | 1 | 164 | 2.86 | % | ||||||||||||||||||||||||
Commercial |
5 | 770 | 1.02 | % | 2 | 175 | 0.23 | % | 7 | 945 | 1.25 | % | ||||||||||||||||||||||||
Construction or development |
| | 0.00 | % | 1 | 139 | 1.46 | % | 1 | 139 | 1.46 | % | ||||||||||||||||||||||||
Total real estate loans |
55 | $ | 3,054 | 1.42 | % | 27 | $ | 944 | 0.44 | % | 82 | $ | 3,998 | 1.84 | % | |||||||||||||||||||||
Consumer |
5 | 73 | 0.28 | % | 3 | 115 | 0.44 | % | 8 | 188 | 0.71 | % | ||||||||||||||||||||||||
Commercial Business |
1 | 1 | 0.01 | % | | | 0.00 | % | 1 | 1 | 0.01 | % | ||||||||||||||||||||||||
Total |
61 | $ | 3,128 | 1.25 | % | 30 | $ | 1,059 | 0.42 | % | 91 | $ | 4,187 | 1.67 | % | |||||||||||||||||||||
12
Non-performing Assets. The table below sets forth the amounts and categories of the Banks
non-performing assets. Loans are placed on non-accrual status when the loan is seriously delinquent
and there is serious doubt that the Bank will collect all interest owing. Generally, all loans past
due at least 90 days are placed on non-accrual status. For all years presented, the Bank had no
troubled debt restructurings that involved forgiving a portion of interest or principal on any
loans or making loans at a rate materially less than that of market rates. Foreclosed assets
include assets acquired in settlement of loans.
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Non-accruing loans: |
||||||||||||||||||||
One-to-four family |
3,484 | 622 | 607 | $ | 408 | $ | 406 | |||||||||||||
Multi-family |
874 | 164 | | | | |||||||||||||||
Commercial real estate |
7,139 | 459 | | 397 | ||||||||||||||||
Construction or development |
2,507 | 1,298 | 153 | | | |||||||||||||||
Consumer |
| 28 | | 60 | 8 | |||||||||||||||
Commercial business |
1,566 | | | | | |||||||||||||||
Total |
15,570 | 2,571 | 760 | 468 | 811 | |||||||||||||||
Accruing loans delinquent 90 days or more: |
||||||||||||||||||||
One-to-four family |
| | | | | |||||||||||||||
Multi-family |
| | | | | |||||||||||||||
Commercial real estate |
| | 87 | | | |||||||||||||||
Construction or development |
| | | | | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Commercial business |
| | 18 | | | |||||||||||||||
Total |
| | 105 | | | |||||||||||||||
Foreclosed assets: |
||||||||||||||||||||
One-to-four family (1) |
2,577 | 1,669 | 1,453 | 1,580 | 2,239 | |||||||||||||||
Multi-family |
122 | | | | | |||||||||||||||
Commercial real estate |
140 | 407 | 62 | | 480 | |||||||||||||||
Construction or development |
| | | | | |||||||||||||||
Consumer |
| | | 100 | 22 | |||||||||||||||
Commercial business |
| | | | 70 | |||||||||||||||
Total |
2,839 | 2,076 | 1,515 | 1,680 | 2,811 | |||||||||||||||
Total non-performing assets |
$ | 18,409 | $ | 4,647 | $ | 2,380 | $ | 2,148 | $ | 3,622 | ||||||||||
Total as a percentage of total assets |
6.50 | % | 1.59 | % | 0.85 | % | 0.74 | % | 1.31 | % | ||||||||||
(1) | Includes $1.1 million, $1.3 million, $630,000, $895,000 and $1.3 million in real estate in judgment and subject to redemption at December 31, 2009, 2008, 2007, 2006 and 2005 respectively. |
For the years ended December 31, 2009, 2008 and 2007, respectively, there was $611,000,
$116,000 and $89,000 of gross interest income which would have been recorded had non-accruing loans
been current in accordance with their original terms.
13
Classified Assets. Federal regulations provide for the classification of loans, foreclosed and
repossessed assets and other assets, such as debt and equity securities considered by the FDIC and
OFIR to be of lesser quality, as substandard, doubtful or loss. An asset is considered
substandard if it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard assets include those characterized by
the distinct possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent
in those classified substandard, with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets without the establishment
of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard or doubtful, it may
establish general allowances for loan losses in an amount deemed prudent by management and approved
by the board of directors. General allowances represent loss allowances which have been established
to recognize the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an insured institution
classifies problem assets as loss, it is required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to charge off such amount. An
institutions determination as to the classification of its assets and the amount of its valuation
allowances is subject to review by the FDIC and OFIR, which may order the establishment of
additional general or specific loss allowances.
In accordance with our classification of assets policy, we regularly review the problem assets in
our portfolio to determine whether any assets require classification in accordance with applicable
regulations. On the basis of managements review of our assets, at December 31, 2009, we had
classified $19.7 million of our assets as substandard, $600,000 as doubtful and none as loss. The
total amount classified as substandard represented 84.9% of the Banks equity capital and 7.0% of
the Banks assets at December 31, 2009. The allowance for loan losses at December 31, 2008 includes
$221,000 related to substandard loans. At December 31, 2009, $15.0 million and $600,000 of
substandard and doubtful assets, respectively, have been included in the table of non-performing
assets. See - Asset Quality Delinquent Loans.
Provision for Loan Losses. We recorded a provision for loan losses totaling $13.3 million for the
year
ended December 31, 2009 compared to $2.7 million recorded for the year ended December 31, 2008. The
provision for loan losses is charged to income to establish the allowance for loan losses to cover
all known and inherent losses in the loan portfolio that are both probable and reasonable to
estimate based on the factors discussed below under Allowance for Loan Losses. See Managements
Discussion and Analysis of Financial Condition and Results of Operations Comparison of Operating
Results for the Years Ended December 31, 2009 and 2008 Provision for Loan Losses for a
discussion of the reasons for the change in our loan loss provision.
Allowance for Loan Losses. The allowance is based on regular, quarterly assessments of the
estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriateness
of the allowance consists of several key elements, which include the formula allowance and specific
allowances for identified problem loans and portfolio segments. In addition, the allowance
incorporates the results of measuring impaired loans.
The formula allowance is calculated by applying loss factors to outstanding loans based on the
internal risk evaluation of these loans or pools of loans. Changes in risk evaluations of both
performing and nonperforming loans affect the amount of the formula allowance. Loss factors are
based both on our historical loss experience as well as on significant factors that, in
managements judgment, affect the collectibility of the portfolio as of the evaluation date.
14
The appropriateness of the allowance 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 such conditions were believed to have had on the collectibility of the loan.
Senior management reviews these conditions 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, managements 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 managements judgment, significant factors which affect the collectibility 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.
Assessing the adequacy of the allowance for loan losses is inherently subjective as it requires
making material estimates, including the net realizable value of collateral expected to be received
on impaired loans that may be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, covers all known and inherent losses in the loan portfolio that
are both probable and reasonable to estimate.
15
The following table summarizes activity in the allowance for loan losses for the years ending
(000s omitted):
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Balance at beginning of year |
$ | 2,719 | $ | 1,824 | $ | 2,024 | $ | 2,925 | $ | 6,420 | ||||||||||
Charge-offs: |
||||||||||||||||||||
One-to-four family |
2,288 | 879 | 774 | 223 | 754 | |||||||||||||||
Multi-family |
10 | | 28 | | | |||||||||||||||
Commercial real estate |
4,299 | 321 | 197 | 15 | 1,904 | |||||||||||||||
Construction or development |
3,075 | 50 | | 340 | 6 | |||||||||||||||
Consumer |
533 | 532 | 386 | 494 | 393 | |||||||||||||||
Commercial business |
352 | 239 | 17 | 113 | 386 | |||||||||||||||
Total |
10,557 | 2,021 | 1,402 | 1,185 | 3,443 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
One-to-four family |
20 | 4 | 16 | 4 | 78 | |||||||||||||||
Multi-family |
1 | | | | | |||||||||||||||
Commercial real estate |
14 | 2 | | | 1 | |||||||||||||||
Construction or development |
| | | | | |||||||||||||||
Consumer |
215 | 198 | 175 | 275 | 230 | |||||||||||||||
Commercial business |
22 | | 40 | 5 | 24 | |||||||||||||||
Total |
272 | 204 | 231 | 284 | 333 | |||||||||||||||
Net charge-offs: |
10,285 | 1,817 | 1,171 | 901 | 3,110 | |||||||||||||||
Allowance acquired in acquisition |
| | | | | |||||||||||||||
Additions charged to operations |
13,349 | 2,712 | 971 | | | |||||||||||||||
Provision recovered from operations |
| | | | (385 | ) | ||||||||||||||
Balance at end of year |
$ | 5,783 | $ | 2,719 | $ | 1,824 | $ | 2,024 | $ | 2,925 | ||||||||||
Ratio of net
charge-offs during the year to average loans outstanding during the year |
4.24 | % | 0.76 | % | 0.49 | % | 0.39 | % | 1.42 | % | ||||||||||
Allowance as a percentage of non-performing loans |
37.14 | % | 105.76 | % | 210.87 | % | 432.48 | % | 360.67 | % | ||||||||||
Allowance as a percentage of total loans (end of year) |
2.55 | % | 1.08 | % | 0.81 | % | 0.93 | % | 1.37 | % | ||||||||||
16
The distribution of our allowance for losses on loans at the dates indicated is summarized as
follows:
December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Amount of | Percentage | Amount of | Percentage | Amount of | Percentage | |||||||||||||||||||
Loan Loss | of | Loan Loss | of | Loan Loss | of | |||||||||||||||||||
Allowance | Allowance | Allowance | Allowance | Allowance | Allowance | |||||||||||||||||||
One-to-four family |
$ | 2,576 | 44.5 | % | $ | 1,618 | 59.5 | % | $ | 979 | 53.7 | % | ||||||||||||
Multi-family and non-residential
real estate |
903 | 15.6 | % | 533 | 19.6 | % | 351 | 19.2 | % | |||||||||||||||
Construction or development |
10 | 0.2 | % | 75 | 2.8 | % | 154 | 8.4 | % | |||||||||||||||
Consumer |
393 | 6.8 | % | 305 | 11.2 | % | 287 | 15.7 | % | |||||||||||||||
Commercial business |
1,901 | 32.9 | % | 188 | 6.9 | % | 53 | 2.9 | % | |||||||||||||||
Total |
$ | 5,783 | 100.0 | % | $ | 2,719 | 100.0 | % | $ | 1,824 | 100.0 | % | ||||||||||||
2006 | 2005 | |||||||||||||||
Amount of | Percentage | Amount of | Percentage | |||||||||||||
Loan Loss | of | Loan Loss | of | |||||||||||||
Allowance | Allowance | Allowance | Allowance | |||||||||||||
One-to-four family |
$ | 783 | 60.3 | % | $ | 1,378 | 64.4 | % | ||||||||
Multi-family and non-residential
real estate |
809 | 20.8 | % | 1,091 | 17.7 | % | ||||||||||
Construction or development |
7 | 4.1 | % | 17 | 2.5 | % | ||||||||||
Consumer |
302 | 12.1 | % | 284 | 12.5 | % | ||||||||||
Commercial business |
123 | 2.7 | % | 155 | 2.9 | % | ||||||||||
$ | 2,024 | 100.0 | % | $ | 2,925 | 100.0 | % | |||||||||
Investment Activities
Commercial banks have the authority to invest in various types of liquid assets, including United
States Treasury obligations and securities of various federal agencies, including callable
securities, certain certificates of deposit of insured banks and savings institutions, certain
bankers acceptances, repurchase agreements and federal funds. Subject to various restrictions,
state chartered commercial banks may also invest their assets in investment grade commercial paper
and corporate debt securities and mutual funds whose assets conform to the investments that a state
chartered commercial banks is otherwise authorized to make directly.
The President/CEO has the basic responsibility for the management of our investment portfolio,
under the guidance of the asset and liability management committee. The President/CEO considers
various factors when making decisions, including the marketability, maturity and tax consequences
of the proposed investment. The maturity structure of investments will be affected by various
market conditions, including the current and anticipated slope of the yield curve, the level of
interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit
withdrawals and loan originations and purchases.
The general objectives of our investment portfolio are to provide liquidity when loan demand is
high, to assist in maintaining earnings when loan demand is low and to maximize earnings while
satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest
rate risk. See Managements Discussion and Analysis of Financial Condition and Results of
Operations Asset and Liability Management and Market Risk.
17
Our investment portfolio consists of U.S. government agency securities, municipal bonds and
overnight deposits. This provides us with flexibility and liquidity. We also have a limited amount
of mortgage-backed securities. See Note 3 of the Notes to Consolidated Financial Statements.
The following table sets forth the composition of our securities portfolio at the dates indicated
(dollars in thousands):
December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Fair | Total | Fair | Total | |||||||||||||||||||||
Amortized | Market | Fair Market | Amortized | Market | Fair Market | |||||||||||||||||||
Cost | Value | Value | Cost | Value | Value | |||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
U.S Treasury |
1,055 | 1,071 | 6.7 | % | ||||||||||||||||||||
U.S. government agency obligations |
$ | 3,155 | $ | 3,196 | 19.9 | % | $ | 5,698 | $ | 5,761 | 64.3 | % | ||||||||||||
Mortgage-backed securities |
5,454 | 5,536 | 34.4 | % | 739 | 734 | 8.2 | % | ||||||||||||||||
Obligations
of states and political subdivisions |
6,061 | 6,260 | 38.9 | % | 2,375 | 2,421 | 27.0 | % | ||||||||||||||||
Total available-for-sale securities |
$ | 15,725 | $ | 16,063 | 99.9 | % | $ | 8,812 | $ | 8,916 | 99.6 | % | ||||||||||||
Held-to-maturity securities: |
||||||||||||||||||||||||
Municipal security |
$ | 23 | $ | 23 | 0.1 | % | $ | 37 | $ | 37 | 0.4 | % | ||||||||||||
Total investment securities |
$ | 15,748 | $ | 16,086 | 100.0 | % | $ | 8,849 | $ | 8,953 | 100.0 | % | ||||||||||||
December 31, 2007 | ||||||||||||
Percent of | ||||||||||||
Fair | Total | |||||||||||
Amortized | Market | Fair Market | ||||||||||
Cost | Value | Value | ||||||||||
Available-for-sale securities: |
||||||||||||
U.S. government agency obligations |
$ | 7,692 | $ | 7,730 | 68.3 | % | ||||||
Mortgage-backed securities |
932 | 918 | 8.1 | % | ||||||||
Obligations of states and
political subdivisions |
2,381 | 2,436 | 21.5 | % | ||||||||
Total available-for-sale securities |
$ | 11,005 | $ | 11,084 | 97.9 | % | ||||||
Held-to-maturity securities: |
||||||||||||
Municipal security |
238 | 239 | 2.1 | % | ||||||||
Total investment securities |
$ | 11,243 | $ | 11,318 | 100.0 | % | ||||||
18
The maturities of the investment securities portfolio, excluding FHLB stock, as of December 31,
2009 are indicated in the following table:
Less than 1 year | 1 to 5 years | 5 to 10 years | Over 10 years | Total Securities | ||||||||||||||||||||||||||||||||||||
Wgt | Wgt | Wgt | Wgt | Wgt | ||||||||||||||||||||||||||||||||||||
Amortized | Ave | Amortized | Ave | Amortized | Ave | Amortized | Ave | Amortized | Ave | |||||||||||||||||||||||||||||||
Cost | Yield | Cost | Yield | Cost | Yield | Cost | Yield | Cost | Yield | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||||||||||||||||||
U.S Treasury |
$ | | 0.00 | % | $ | 1,055 | 4.63 | % | $ | | 0.00 | % | $ | | 0.00 | % | $ | 1,055 | 4.63 | % | ||||||||||||||||||||
U.S. government agency obligations |
| 0.00 | % | 2,013 | 3.95 | % | 1,141 | 6.32 | % | | 0.00 | % | 3,154 | 4.81 | % | |||||||||||||||||||||||||
Mortgage-backed securities |
136 | 4.50 | % | 294 | 4.50 | % | 2,116 | 4.30 | % | 2,908 | 4.79 | % | 5,454 | 4.58 | % | |||||||||||||||||||||||||
Obligations
of states and political subdivisions |
500 | 3.00 | % | 3,178 | 4.36 | % | 2,384 | 4.38 | % | | 0.00 | % | 6,062 | 4.26 | % | |||||||||||||||||||||||||
Total available-for-sale securities |
636 | 3.32 | % | 6,540 | 4.28 | % | 5,641 | 4.74 | % | 2,908 | 0.00 | % | 15,725 | 3.48 | % | |||||||||||||||||||||||||
Held-to-maturity securities: |
||||||||||||||||||||||||||||||||||||||||
Municipal security |
3 | 4.50 | % | 20 | 4.45 | % | | 0.00 | % | | 0.00 | % | 23 | 4.46 | % | |||||||||||||||||||||||||
Total investment securities |
$ | 639 | 3.32 | % | $ | 6,560 | 3.54 | % | $ | 5,641 | 4.74 | % | $ | 2,908 | 0.00 | % | $ | 15,748 | 3.17 | % | ||||||||||||||||||||
Sources of Funds
General. Our sources of funds are deposits, borrowings, receipt of principal and interest on loans,
interest earned on or maturation of investment securities and overnight funds and funds provided
from operations.
Deposits. We offer a variety of deposit accounts to both consumers and businesses having a wide
range of interest rates and terms. Our deposits consist of passbook and statement savings accounts,
money market deposit accounts, NOW and demand accounts and certificates of deposit. We solicit
deposits in our market area and have accepted and continue to utilize brokered deposits. At
December 31, 2009, we had $24.0 million of brokered deposits. In our experience brokered deposits
are an attractive and stable source of funds and are necessary to supplement our local market
deposit gathering. However, brokered deposits may be less stable than local deposits if deposit
brokers or investors lose confidence in us or find more attractive rates at other financial
institutions. We primarily rely on competitive pricing policies, marketing and customer service to
attract and retain these deposits.
The flow of deposits is influenced significantly by general economic conditions, changes in money
market and prevailing interest rates and competition. The variety of deposit accounts we offer has
allowed us to be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. We try to manage the pricing of our deposits in
keeping with our asset/liability management, liquidity and profitability objectives, subject to
competitive factors. Based on our experience, we believe that our deposits are relatively stable
sources of funds. Despite this stability, our ability to attract and maintain these deposits and
the rates paid on them has been and will continue to be significantly affected by market
conditions.
19
The following table sets forth our deposit flows during the periods indicated:
Year Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
(Dollars in Thousands) | ||||||||
Opening balance |
$ | 192,156 | $ | 177,936 | ||||
Net deposits (withdrawals) |
16,206 | 8,359 | ||||||
Interest credited |
5,006 | 5,861 | ||||||
Ending balance |
$ | 213,368 | $ | 192,156 | ||||
Net increase |
$ | 21,212 | $ | 14,220 | ||||
Percent increase (decrease) |
11.04 | % | 7.99 | % | ||||
The following table sets forth the dollar amount of savings deposits in the various types of
deposit programs offered by Monarch at the dates indicated:
Year Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Percent | Percent | |||||||||||||||
Amount | of Total | Amount | of Total | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Transaction and Savings Deposits: |
||||||||||||||||
Non-interest bearing accounts |
$ | 14,422 | 6.8 | % | $ | 13,883 | 7.2 | % | ||||||||
Savings accounts |
20,302 | 9.5 | % | 18,488 | 9.6 | % | ||||||||||
Checking & NOW accounts |
23,084 | 10.8 | % | 16,058 | 8.4 | % | ||||||||||
Money market accounts |
57,052 | 26.7 | % | 41,156 | 21.4 | % | ||||||||||
Total transaction and savings |
$ | 114,860 | 53.8 | % | $ | 89,585 | 46.6 | % | ||||||||
Certificates: |
||||||||||||||||
0.00-1.99% |
26,994 | 12.7 | % | 72 | 0.0 | % | ||||||||||
2.00-3.99% |
36,459 | 17.1 | % | 45,309 | 23.6 | % | ||||||||||
4.00-5.99% |
35,055 | 16.4 | % | 57,190 | 29.8 | % | ||||||||||
Total certificates |
98,508 | 46.2 | % | 102,571 | 53.4 | % | ||||||||||
Total deposits |
$ | 213,368 | 100.0 | % | $ | 192,156 | 100.0 | % | ||||||||
20
The following table indicates the amount of our certificates of deposit by time remaining until
maturity as of December 31, 2009:
Maturity | ||||||||||||||||||||
Over | Over | Over | ||||||||||||||||||
3 Months | 3 to 6 | 6 to 12 | 12 | |||||||||||||||||
or less | Months | Months | Months | Total | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Certificates of deposit less than $100,000 |
$ | 7,207 | $ | 10,236 | $ | 11,427 | $ | 28,488 | $ | 57,358 | ||||||||||
Certificates of deposit of $100,000 or more |
2,911 | 7,146 | 6,729 | 24,364 | 41,150 | |||||||||||||||
Total certificates of deposit |
$ | 10,118 | $ | 17,382 | $ | 18,157 | $ | 52,851 | $ | 98,508 | ||||||||||
The following table shows rate and maturity information for our certificates of deposit as of
December 31, 2009:
Percent | ||||||||||||||||||||||||
0.00-1.99% | 2.00-3.99% | 4.00-5.99% | 6.00-7.99% | Total | of Total | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Certificate accounts
maturing in quarter ending: |
||||||||||||||||||||||||
March 31, 2010 |
4,351 | 1,942 | 3,825 | | 10,118 | 10.3 | % | |||||||||||||||||
June 30, 2010 |
6,486 | 8,814 | 2,083 | | 17,383 | 17.6 | % | |||||||||||||||||
September 30, 2010 |
4,164 | 2,587 | 4,449 | | 11,200 | 11.4 | % | |||||||||||||||||
December 31, 2010 |
4,006 | 1,626 | 1,374 | | 7,006 | 7.1 | % | |||||||||||||||||
March 31, 2011 |
96 | 1,149 | 3,942 | | 5,187 | 5.3 | % | |||||||||||||||||
June 30, 2011 |
7,092 | 2,344 | 1,381 | | 10,817 | 10.9 | % | |||||||||||||||||
September 30, 2011 |
258 | 1,488 | 5,159 | | 6,905 | 7.0 | % | |||||||||||||||||
December 31, 2011 |
262 | 2,416 | 3,509 | | 6,187 | 6.3 | % | |||||||||||||||||
Thereafter |
280 | 14,093 | 9,332 | | 23,705 | 24.1 | % | |||||||||||||||||
Total |
$ | 26,995 | $ | 36,459 | $ | 35,054 | $ | | $ | 98,508 | 100.0 | % | ||||||||||||
Percent of total |
27.40 | % | 37.01 | % | 35.58 | % | 0.00 | % | ||||||||||||||||
Borrowings. Although deposits are our primary source of funds, we utilize borrowings when they are
a less costly source of funds, when we desire additional capacity to fund loan demand or when they
meet our asset/liability management goals. Our borrowings historically have consisted of advances
from the Federal Home Loan Bank of Indianapolis and Fed funds purchased from a correspondent bank.
We may obtain advances from the Federal Home Loan Bank of Indianapolis upon the security of certain
of our mortgage loans and investment securities. These advances may be made pursuant to several
different credit programs, each of which has its own interest rate, range of maturities and call
features. At December 31, 2009, we had $44.5 million in Federal Home Loan Bank advances
outstanding. See Note 9 of the Notes to Consolidated Financial Statements for information on
maturity dates and interest rates related to our Federal Home Loan Bank advances.
We may also obtain fed funds purchased from a correspondent bank. The Bank has an unsecured
federal funds line of credit with a correspondent bank allowing for overnight borrowings up to $3.0
million. At December 31, 2009 we had no fed funds purchased outstanding.
21
The following table sets forth the maximum month-end balance and average balance of Federal Home
Loan Bank advances and fed funds purchased for the periods indicated:
Year Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
(Dollars in Thousands) | (Dollars in Thousands) | |||||||
Maximum Balance: |
||||||||
FHLB advances |
$ | 59,178 | $ | 62,330 | ||||
Fed funds purchased |
$ | 3,000 | $ | 3,000 | ||||
Average Balance: |
||||||||
FHLB advances |
$ | 48,564 | $ | 55,106 | ||||
Fed funds purchased |
$ | 29 | $ | 55 | ||||
The following table sets forth certain information concerning our borrowings at the dates
indicated.
December 31, | ||||||||
2009 | 2008 | |||||||
(Dollars in Thousands) | (Dollars in Thousands) | |||||||
FHLB advances |
$ | 44,518 | $ | 60,177 | ||||
Fed funds purchased |
$ | | $ | 1,000 | ||||
Weighted average interest rate of FHLB | ||||||||
FHLB advances |
4.43 | % | 4.45 | % | ||||
Fed funds purchased |
0.25 | % | 0.25 | % | ||||
Competition
We face strong competition in originating real estate and other loans and in attracting deposits.
Competition comes from a wide array of sources including but not limited to mortgage brokers,
savings institutions, other commercial banks, and credit unions including non-local Internet based
and telephone-based competition.
Employees
At December 31, 2009, we had a total of 88 employees, including 6 part-time employees. Our
employees are not represented by any collective bargaining group. Management considers its employee
relations to be good.
Federal and State Taxation
Federal Taxation
General. The Company is subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is not a comprehensive
description of the tax rules applicable to Monarch Community Bancorp. Our federal income tax
returns for the past three years are open to audit by the IRS. In our opinion, any examination of
still open returns would not result in a deficiency which could have a material adverse effect on
our financial condition. No federal income tax returns are being audited by the IRS at this time.
Method of Accounting. For federal income tax purposes, the Company reports its income and expenses
on the accrual method of accounting and uses a fiscal year ending on December 31, for filing its
federal income tax return.
22
Bad Debt Reserves. The Bank is on the experience method to determine its bad debt deduction for tax
purposes. The Bank has made a conformity election and charges off bad debts for tax purposes in
accordance with regulatory guidelines.
Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act, bad debt
reserves created prior to the year ended December 31, 1997, were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests. New federal
legislation eliminated these thrift related recapture rules. However, under current law, pre-1988
reserves remain subject to recapture should the Bank make certain non-dividend distributions or
cease to maintain a bank charter.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a
base of regular taxable income plus certain tax preferences, called alternative minimum taxable
income. The alternative minimum tax is payable to the extent such alternative minimum taxable
income is in excess of an exemption amount. Net operating losses can offset no more than 90% of
alternative minimum taxable income. Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years. The Bank has not been subject to the
alternative minimum tax, nor do we have any such amounts available as credits for carryover.
Corporate Dividends-Received Deduction. Monarch Community Bancorp may eliminate from its income
dividends received from the Bank if it elects to file a consolidated return with the Bank. The
corporate dividends-received deduction is 100% or 80%, in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax return, depending on
the level of stock ownership of the payor of the dividend. Corporations which own less than 20% of
the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued
on their behalf. Monarch Community Bancorp has elected to file a consolidated return with the Bank.
State Taxation
Monarch Community Bancorp and Monarch Community Bank are subject to the Michigan Business Tax
(MBT). The MBT is a consolidated tax based on equity of the corporation. The tax returns of the
Bank for the past four years are open to audit by the Michigan taxation authorities. No returns are
being audited by the Michigan taxation authority at the current time. Other applicable state taxes
include generally applicable sales, use, real property taxes, and personal property taxes.
Regulation and Supervision
General
The growth and earnings performance of the Company and the Bank can be affected not only by
management decisions and general economic conditions, but also by the policies of various
governmental regulatory authorities including, but not limited to, the Board of Governors of the
Federal Reserve System (the Federal Reserve), the Federal Deposit Insurance Corporation (the
FDIC), the Michigan Office of Financial and Insurance Regulation (the OFIR), the Internal
Revenue Service and state taxing authorities. Financial institutions and their holding companies
are extensively regulated under federal and state law. The effect of such statutes, regulations
and policies can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions, such as the
Company and the Bank, regulate, among other things, the scope of business, investments, reserves
against deposits, capital levels relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Company and the Bank establishes a comprehensive
framework for their respective operations and is intended primarily for the protection of the
FDICs deposit insurance funds and the depositors, rather than the shareholders, of financial
institutions.
23
The Companys common stock is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Therefore, the Company is
subject to the information, proxy solicitation, insider trading restrictions and other requirements
of the Securities and Exchange Commission under the Exchange Act.
The Companys common stock held by persons who are affiliates (generally officers, directors and
principal stockholders) of the Company may not be resold without registration unless sold in
accordance with certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the public market,
without registration, a limited number of shares in any three-month period.
The following references to material statutes and regulations affecting the Company and the Bank
are brief summaries and do not purport to be complete, and are qualified in their entirety by
reference to such statues and regulations. Any change in applicable law or regulations may have a
material effect on the business of the Company and the Bank. See Recent Developments contained
in Managements Discussion and Analysis.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank
holding company, the Company is required to register with, and is subject to regulation by, the
Federal Reserve under the Bank Holding Company Act, as amended (the BHCA). In accordance with
Federal Reserve policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances where the Company might not do so
absent such policy. Under the BHCA, the Company is subject to periodic examination by the Federal
Reserve and is required to file periodic reports of its operations and such additional information
as the Federal Reserve may require.
Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve
approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own or control more
than 5% of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United States without regard to
geographic restrictions or reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may be held by the
acquiring holding company and all of its insured depository institution affiliates.
The BHCA limits the activities of a bank holding company that has not qualified as a financial
holding company to banking and the management of banking organizations, and to certain non-banking
activities that are deemed to be so closely related to banking or managing or controlling banks as
to be a proper incident to those activities. Such non-banking activities include, among other
things: operating a mortgage company, finance company, credit card company or factoring company;
performing certain data processing operations; providing certain investment and financial advice;
acting as an insurance agent for certain types of credit-related insurance; leasing property on a
full-payout, nonoperating basis; and providing securities brokerage services for customers.
In November 1999, the Gramm-Leach-Bliley Act (the GLB Act) was signed into law. Under the GLB
Act, a bank holding company whose subsidiary depository institutions all are well-capitalized and
well-managed and who have Community Reinvestment Act ratings of at least satisfactory may elect
to become a financial holding company. A financial holding company is permitted to engage in a
broader range of activities than are permitted to bank holding companies.
24
Those expanded activities include any activity which the Federal Reserve (in certain instances in
consultation with the Department of the Treasury) determines, by order or regulation, to be
financial in nature or incidental to such financial activity, or to be complementary to a financial
activity and not to pose a substantial risk to the safety or soundness of depository institutions
or the financial system generally. Such expanded activities include, among others: insuring,
guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing
annuities, and acting as principal, agent, or broker for such purposes; providing financial,
investment, or economic advisory services, including advising a mutual fund; and underwriting,
dealing in, or making a market in securities. The Company has not elected to be treated as a
financial holding company.
Federal law also prohibits the acquisition of control of a bank holding company, such as the
Company, by a person or a group of persons acting in concert, without prior notice to the Federal
Reserve. Control is defined in certain cases as the acquisition of 10% of the outstanding shares
of a bank holding company.
Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and
regulation of bank holding companies. If capital falls below minimum guideline levels, a bank
holding company may, among other things, be denied approval to acquire or establish additional
banks or non-bank businesses.
The Federal Reserve capital guidelines establish the following minimum regulatory capital
requirements for bank holding companies: a risk-based requirement expressed as a percentage of
total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, of which at least 4% must be Tier I capital (which consists principally of
shareholders equity). The leverage requirement consists of a minimum ratio of Tier I capital to
total assets of 3% for the most highly rated bank holding companies, with minimum requirements of
4% to 5% for all others.
The risk-based and leverage standards presently used by the Federal Reserve are minimum
requirements, and higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. Further, any banking
organization experiencing or anticipating significant growth would be expected to maintain capital
ratios, including tangible capital positions (i.e., Tier I capital less all intangible assets),
well above the minimum levels.
Pursuant to its Small Bank Holding Company Policy, the Federal Reserve exempts certain bank holding
companies from the capital requirements discussed above. The exemption applies only to bank
holding companies with less than $500 million in consolidated assets that: (i) are not engaged in
significant nonbanking activities either directly or through a nonbank subsidiary; (ii) do not
conduct significant off-balance sheet activities (including securitization and asset management or
administration) either directly or through a nonbank subsidiary; and (iii) do not have a material
amount of debt or equity securities outstanding (other than trust preferred securities) that are
registered with the SEC. The Company qualifies for this exemption and, thus, is required to meet
applicable capital standards on a bank-only basis. However, bank holding companies with assets of
less than $500 million are subject to various restrictions on debt including requirements that debt
is retired within 25 years of being incurred, that the debt to equity ratio is .30 to 1 within 12
years of the incurrence of debt and that dividends generally cannot be paid if the debt to equity
ratio exceeds 1 to 1.
Dividends. As described below under the heading Recent Developments, as a result of the
Companys issuance of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred
Shares) to the U.S. Department of the Treasury (the Treasury) pursuant to the Troubled Asset
Relief Program (TARP) Capital Purchase Program (CPP), the Company is restricted in the payment
of dividends and, without the Treasurys consent, may not declare or pay any dividend on the
Company common stock
other than its current quarterly cash dividend of $0.09 per share, as adjusted for any stock
dividend or stock split. This restriction no longer applies on the earlier to occur of February 6,
2012 (the third anniversary of the issuance of the Preferred Shares to the Treasury) or the date on
which the Company has redeemed all of the Preferred Shares issued or the date on which the Treasury
has transferred all of the Preferred Shares to third parties not affiliated with the Treasury. In
addition, as long as the Preferred Shares are outstanding, dividend payments are prohibited until
all accrued and unpaid dividends are paid on such Preferred Shares, subject to certain limited
exceptions.
25
Recent Developments. The Emergency Economic Stabilization Act of 2008 (EESA) was enacted on
October 3, 2008. Pursuant to EESA, the Treasury has the authority to among other things, purchase
up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing liquidity to the U.S.
financial markets. Pursuant to its authority under EESA, the Treasury created the TARP CPP under
which the Treasury was authorized to invest in non-voting, senior preferred stock of U.S. banks and
savings associations or their holding companies.
The Company elected to participate in the CPP and on February 6, 2009, completed the sale of $6.785
million in Preferred Shares to the Treasury. The Company issued 6,785 shares of Preferred Shares,
with a $1,000 per share liquidation preference, and a warrant to purchase up to 260,962 shares of
the Companys common stock at an exercise price of $3.90 per share (the Warrant).
The Preferred Shares issued by the Company pay cumulative dividends of 5% a year for the first five
years and 9% a year thereafter. The terms of the Preferred Shares, as amended by the American
Recovery and Reinvestment Act of 2009 (ARRA), provide that the Preferred Shares may be redeemed
by the Company, in whole or in part, upon approval of the Treasury and the Companys primary
banking regulators. Both the Preferred Shares and the Warrant will be accounted for as components
of regulatory Tier 1 capital. Among other restrictions, the securities purchase agreement between
the Company and the Treasury limits the Companys ability to repurchase its stock and subjects the
Company to certain executive compensation limitations. The restrictions on stock repurchases are
in effect until the earlier to occur of February 6, 2012 (the third anniversary of the issuance of
the Preferred Shares to Treasury) or the date on which the Company has redeemed all of the
Preferred Shares issued or the date on which the Treasury has transferred all of the Preferred
Shares to third parties not affiliated with the Treasury.
ARRA was enacted on February 17, 2009. Among other things, ARRA sets forth additional limits on
executive compensation at all financial institutions receiving federal funds under any program,
including the CPP, both retroactively and prospectively. The executive compensation restrictions
in ARRA include among others: limits on compensation incentives, prohibitions on Golden Parachute
Payments, the establishment by publicly registered CPP recipients of a board compensation
committee comprised entirely of independent directors for the purpose of reviewing employee
compensation plans, and the requirement of a non-binding vote on executive pay packages at each
annual shareholder meeting until the government funds are repaid.
On October 22, 2009, the Federal Reserve issued proposed guidance for structuring incentive
compensation arrangements at all financial institutions. The guidance does not set forth any
formulas or pay caps, but sets forth certain principles which companies would be required to follow
with respect to employees and groups of employees that may expose the institution to material
amounts of risk.
The Bank
General. The Bank is a Michigan state-chartered bank, the deposit accounts of which are insured by
the FDIC. As a state-chartered non-member bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the OFIR, as the chartering authority for
state banks, and the FDIC, as administrator of the deposit insurance fund, and to the statutes and
regulations administered by the OFIR and the FDIC governing such matters as capital standards,
mergers, establishment of branch offices, subsidiary investments and activities and general
investment authority. The Bank is required to file reports with the OFIR and the FDIC concerning
its activities and financial condition and is required to obtain
regulatory approvals prior to entering into certain transactions, including mergers with, or
acquisitions of, other financial institutions.
Business Activities. The Banks activities are governed primarily by Michigans Banking Code of
1999 (the Banking Code) and the Federal Deposit Insurance Act (FDI Act). The FDI Act, among
other things, requires that federal banking regulators intervene promptly when a depository
institution experiences financial difficulties; mandates the establishment of a risk-based deposit
insurance assessment system; and requires imposition of numerous additional safety and soundness
operational standards and restrictions. The GLB Act, which amended the FDI Act, among other
things, loosens the restrictions on affiliations between entities engaged in certain financial,
securities, and insurance activities; imposes restrictions on the disclosure of consumers
nonpublic personal information; and institutes certain reforms of the Federal Home Loan Bank
System.
26
The federal laws contain provisions affecting numerous aspects of the operation and regulation of
federally insured banks and empower the FDIC, among other agencies, to promulgate regulations
implementing their provisions.
Branching. Michigan banks, such as the Bank, have the authority under Michigan law to establish
branches throughout Michigan and in any state, the District of Columbia, any U.S. territory or
protectorate, and foreign countries, subject to the receipt of all required regulatory approvals.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows the FDIC and other
federal bank regulators to approve applications for mergers of banks across state lines without
regard to whether such activity is contrary to state law. However, each state can determine if it
will permit out of state banks to acquire only branches of a bank in that state or to establish de
novo branches.
Loans to One Borrower. Under Michigan law, a banks total loans and extensions of credit and
leases to one borrower is limited to 15% of the banks capital and surplus, subject to several
exceptions. This limit may be increased to 25% of the banks capital and surplus upon approval by
a 2/3 vote of its board of directors. Certain loans, including loans secured by bonds or other
instruments of the United States and fully guaranteed by the United States as to principal and
interest, are not subject to the limit just referenced. In addition, certain loans, including
loans arising from the discount of nonnegotiable consumer paper which carries a full recourse
endorsement or unconditional guaranty of the person transferring the paper, are subject to a higher
limit of 30% of capital and surplus. At December 31, 2009, the Banks legal lending limit for
loans to one borrower was $3.1 million; the Banks legal lending limit with approval of two-thirds
of the Board of Directors was $5.2 million.
Enforcement. The OFIR and FDIC each have enforcement authority with respect to the Bank. The
Commissioner of the OFIR has the authority to issue cease and desist orders to address unsafe and
unsound practices and actual or imminent violations of law and to remove from office bank directors
and officers who engage in unsafe and unsound banking practices and who violate applicable laws,
orders, or rules. The Commissioner of the OFIR also has authority in certain cases to take steps
for the appointment of a receiver or conservator of a bank.
The FDIC has similar broad authority, including authority to bring enforcement actions against all
institution-affiliated parties (including shareholders, directors, officers, employees,
attorneys, consultants, appraisers and accountants) who knowingly or recklessly participate in any
violation of law or regulation or any breach of fiduciary duty, or other unsafe or unsound practice
likely to cause financial loss to, or otherwise have an adverse effect on, an insured institution.
Civil penalties under federal law cover a wide range of violations and actions. Criminal penalties
for most financial institution crimes include monetary fines and imprisonment. In addition, the
FDIC has substantial discretion to impose enforcement action on banks that fail to comply with its
regulatory requirements, particularly with respect to capital levels. Possible enforcement actions
range from requiring the preparation of a capital plan or imposition of a capital directive, to
receivership, conservatorship, or the termination of deposit insurance.
Assessments and Fees. The Bank pays a supervisory fee to the OFIR of not less than $1,000 and not
more than 25 cents for each $1,000 of total assets. The fee incurred in 2009 was $25,000. This
fee is
invoiced prior to July 1 each year and is due no later than August 15. The OFIR imposes additional
fees, in addition to those charged for normal supervision, for applications, special evaluations
and analyses, and examinations.
Regulatory Capital Requirements. The Bank is required to comply with capital adequacy standards
set by the FDIC. The FDIC may establish higher minimum requirements if, for example, a bank has
previously received special attention or has a high susceptibility to interest rate risk. Banks
with capital ratios below the required minimum are subject to certain administrative actions. More
than one capital adequacy standard applies, and all applicable standards must be satisfied for an
institution to be considered to be in compliance. There are three basic measures of capital
adequacy: a total risk-based capital measure, a Tier 1 risk-based capital ratio; and a leverage
ratio.
27
The risk-based framework was adopted to assist in the assessment of capital adequacy of financial
institutions by, (i) making regulatory capital requirements more sensitive to differences in risk
profiles among organizations; (ii) introducing off-balance-sheet items into the assessment of
capital adequacy; (iii) reducing the disincentive to holding liquid, low-risk assets; and (iv)
achieving greater consistency in evaluation of capital adequacy of major banking organizations
throughout the world. The risk-based guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to
different risk categories. An institutions risk-based capital ratios are calculated by dividing
its qualifying capital by its risk-weighted assets.
Qualifying capital consists of two types of capital components: core capital elements (or Tier 1
capital) and supplementary capital elements (or Tier 2 capital). Tier 1 capital is generally
defined as the sum of core capital elements less goodwill and certain other intangible assets.
Core capital elements consist of (i) common shareholders equity, (ii) noncumulative perpetual
preferred stock (subject to certain limitations), and (iii) minority interests in the equity
capital accounts of consolidated subsidiaries. Tier 2 capital consists of (i) allowance for loan
and lease losses (subject to certain limitations); (ii) perpetual preferred stock which does not
qualify as Tier 1 capital (subject to certain conditions); (iii) hybrid capital instruments and
mandatory convertible debt securities; (iv) term subordinated debt and intermediate term preferred
stock (subject to limitations); and (v) net unrealized holding gains on equity securities.
Under current capital adequacy standards, the Bank must meet a minimum ratio of qualifying total
capital to risk-weighted assets of 8%. Of that ratio, at least half, or 4%, must be in the form of
Tier 1 capital.
The Bank must also meet a leverage capital requirement. In general, the minimum leverage capital
requirement is not less than 3% Tier 1 capital to total assets if the bank has the highest
regulatory rating and is not anticipating or experiencing any significant growth. All other banks
should have a minimum leverage capital ratio of not less than 4%.
Prompt Corrective Regulatory Action. The FDIC is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the institutions degree
of undercapitalization. Generally, a bank is considered well capitalized if its risk-based
capital ratio is at least 10%, its Tier 1 risk-based capital ratio is at least 6%, its leverage
ratio is at least 5%, and the bank is not subject to any written agreement, order, or directive by
the FDIC.
A bank generally is considered adequately capitalized if it does not meet each of the standards
for well-capitalized institutions, and its risk-based capital ratio is at least 8%, its Tier 1
risk-based capital ratio is at least 4%, and its leverage ratio is at least 4% (or 3% if the
institution receives the highest rating under the Uniform Financial Institution Rating System). A
bank that has a risk-based capital ratio less than 8%, or a Tier 1 risk-based capital ratio less
than 4%, or a leverage ratio less than 4% (3% or less for institutions with the highest rating
under the Uniform Financial Institution Rating System) is considered to be undercapitalized. A
bank that has a risk-based capital ratio less than 6%, or a Tier 1 capital ratio less than 3%, or a
leverage ratio less than 3% is considered to be significantly undercapitalized, and a bank is
considered critically undercapitalized if its ratio of tangible equity to total assets is equal
to or less than 2%.
Subject to a narrow exception, the FDIC is required to appoint a receiver or conservator for a bank
that is critically undercapitalized. In addition, a capital restoration plan must be filed with
the FDIC within 45 days of the date a bank receives notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. Compliance with the plan must
be guaranteed by each company that controls a bank that submits such a plan, up to an amount equal
to 5% of the banks assets at the time it was notified regarding its deficient capital status. In
addition, numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions, and expansion. The FDIC could also take any one of
a number of discretionary supervisory actions, including the issuance of a capital directive and
the replacement of senior executive officers and directors.
28
Deposit Insurance. The Banks deposits are insured up to applicable limitations by a deposit
insurance fund administered by the FDIC. As an FDIC insured institution, the Bank is required to
pay deposit insurance premium assessments to the deposit insurance fund pursuant to a risk-based
assessment system. Deposit accounts are generally insured up to a maximum of $100,000 per
separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts.
Effective October 3, 2008, EESA raised the basic limit on federal deposit insurance coverage from
$100,000 to $250,000 per depositor. This increase is effective on a temporary basis until December
31, 2013.
Under the FDICs risk based assessment regulations there are four risk categories, and each insured institution is assigned to a risk category based on capital levels and supervisory ratings. Well-capitalized institutions with CAMELS composite ratings of 1 or 2 are placed in Risk Category I while other institutions are placed in Risk Categories II, III or IV depending on their capital levels and CAMELS composite ratings. The assessment rates may be changed by the FDIC as necessary to maintain the insurance fund at the reserve ratio designated by the FDIC. The FDIC may set the reserve ratio annually at between 1.15% and 1.50% of insured deposits. Deposit insurance assessments are collected for a quarter at the end of the next quarter. Assessments are based on deposit balances at the end of the quarter, except for institutions with $1 billion or more in assets and any institution that becomes insured on or after January 1, 2007 will have their assessment base determined using average daily balances of insured deposits.
Under the FDICs risk based assessment regulations there are four risk categories, and each insured institution is assigned to a risk category based on capital levels and supervisory ratings. Well-capitalized institutions with CAMELS composite ratings of 1 or 2 are placed in Risk Category I while other institutions are placed in Risk Categories II, III or IV depending on their capital levels and CAMELS composite ratings. The assessment rates may be changed by the FDIC as necessary to maintain the insurance fund at the reserve ratio designated by the FDIC. The FDIC may set the reserve ratio annually at between 1.15% and 1.50% of insured deposits. Deposit insurance assessments are collected for a quarter at the end of the next quarter. Assessments are based on deposit balances at the end of the quarter, except for institutions with $1 billion or more in assets and any institution that becomes insured on or after January 1, 2007 will have their assessment base determined using average daily balances of insured deposits.
Due to a decrease in the reserve ratio of the deposit insurance fund, on October 7, 2008, the FDIC
established a restoration plan to restore the reserve ratio to at least 1.15% within five years
(effective February 27, 2009 the FDIC has extended this time to eight years). On December 16,
2008, the FDIC adopted and issued a final rule increasing the rates banks pay for deposit insurance
uniformly by 7 basis points (annualized) effective January 1, 2009. Under the final rule,
risk-based rates for the first quarter 2009 varied between 12 and 50 basis points depending on an
institutions risk category. On February 27, 2009, the FDIC adopted a final rule amending the way
that the assessment system differentiates for risk and setting new assessment rates beginning with
the second quarter of 2009. As of April 1, 2009, for the highest rated institutions, those in Risk
Category I, the initial base assessment rate was between 12 and 16 basis points and for the lowest
rated institutions, those in Risk Category IV, the initial base assessment rate was 45 basis
points. The final rule modified the means to determine a Risk Category I institutions initial
base assessment rate. It also provided for the following adjustments to an institutions assessment
rate: (1) a decrease for long-term unsecured debt, including most senior and subordinated debt
and, for small institutions, a portion of Tier 1 capital; (2) an increase for secured liabilities
above a threshold amount; and (3) for institutions in risk categories other than Risk Category I,
an increase for brokered deposits above a threshold amount. After applying these adjustments, for
the highest rated institutions, those in Risk Category I, the total base assessment rate is between
7 and 24 basis points and for the lowest rated institutions, those in Risk Category IV, the total
base assessment rate is between 40 and 77.5 basis points.
On May 22, 2009, the FIDC imposed a special assessment of five basis points on each FDIC-insured
depository institutions assets, minus its Tier 1 capital, as of June 30, 2009. The special
assessment was collected on September 30, 2009, and the Bank paid an additional assessment of
$136,526.
On November 12, 2009 the FDIC adopted a final rule that required insured institutions to prepay on
December 31, 2009, estimated quarterly risk-based assessments for the fourth quarter of 2009 and
for all of 2010, 2011 and 2012. For purposes of calculating the prepayment amount, the
institutions third quarter 2009 assessment base was increased quarterly at five percent annual
growth rate through the end of 2012. On September 29, 2009 the FDIC also increased annual
assessment rates uniformly by three basis points beginning January 1, 2011. On December 31, 2009
the Bank prepaid estimated assessments of $1.3 million.
On November 21, 2008, the FDIC adopted final regulations implementing the Temporary Liquidity
Guarantee Program (TLGP) pursuant to which depository institutions could elect to participate.
Pursuant to the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or June 30,
2012, certain newly issued senior unsecured debt issued by participating institutions on or after
October 14, 2008 and before October 31, 2009 (the Debt Guarantee), and (ii) provide full FDIC
deposit insurance coverage for non-interest bearing deposit transaction accounts regardless of
dollar amount for an additional fee assessment by the FDIC (the Transaction Account Guarantee).
These accounts are mainly payment-processing accounts, such as business payroll accounts. The
Transaction Account Guarantee was to expire on December 31, 2009, however, has been extended to
June 30, 2010 for those participating institutions that do not opt out.
29
Participating institutions
are assessed a surcharge on the portion of eligible accounts that exceeds the general limit on
deposit insurance coverage.
Coverage under the TLGP was available to any eligible institution that did not elect to opt out of
the TLGP on or before December 5, 2008. The Bank did not opt out of the Transaction Account
Guarantee portion of the TLGP or the Transaction Account Guarantee extension period. The Company
and the Bank did not opt out of the Debt Guarantee program, but did not issue any debt under the
Debt Guarantee Program.
Payment of Dividends by the Bank. There are state and federal requirements limiting the amount of
dividends which the Bank may pay. Generally, a banks payment of cash dividends must be consistent
with its capital needs, asset quality, and overall financial condition. Additionally, OFIR and the
FDIC have the authority to prohibit the Bank from engaging in any business practice (including the
payment of dividends) which they consider to be unsafe or unsound.
Under Michigan law, the payment of dividends is subject to several additional restrictions. The
Bank cannot declare or pay a cash dividend or dividend in kind unless the Bank will have a surplus
amounting to not less than 20% of its capital after payment of the dividend. The Bank will be
required to transfer 10% of net income to surplus until its surplus is equal to its capital before
the declaration of any cash dividend or dividend in kind. In addition, the Bank may pay dividends
only out of net income then on hand, after deducting its losses and bad debts. These limitations
can affect the Banks ability to pay dividends.
Loans to Directors, Executive Officers, and Principal Shareholders. Under FDIC regulations, the
Banks authority to extend credit to executive officers, directors, and principal shareholders is
subject to substantially the same restrictions set forth in Federal Reserve Regulation O. Among
other things, Regulation O (i) requires that any such loans be made on terms substantially similar
to those offered to nonaffiliated individuals, (ii) places limits on the amount of loans the Bank
may make to such persons based, in part, on the Banks capital position, and (iii) requires that
certain approval procedures be followed in connection with such loans.
Certain Transactions With Related Parties. Under Michigan law, the Bank may purchase securities or
other property from a director, or from an entity of which the director is an officer, manager,
director, owner, employee, or agent, only if such purchase (i) is made in the ordinary course of
business, (ii) is on terms not less favorable to the Bank than terms offered by others, and (iii)
the purchase is authorized by a majority of the board of directors not interested in the sale. The
Bank may also sell securities or other
property to its directors, subject to the same restrictions (except in the case of a sale by the
Bank, the terms may not be more favorable to the director than those offered to others).
In addition, the Bank is subject to certain restrictions imposed by federal law on extensions of
credit to the Company and its non-bank subsidiaries, on investments in the stock or other
securities of the Company and its non-bank subsidiaries, and on the acceptance of stock or other
securities of the Company or its non-bank subsidiaries as collateral for loans. Various
transactions, including contracts, between the Bank and the Company or its non-bank subsidiaries
must be on substantially the same terms as would be available to unrelated parties.
Standards for Safety and Soundness. The FDIC has established safety and soundness standards
applicable to the Bank regarding such matters as internal controls, loan documentation, credit
underwriting, interest-rate risk exposure, asset growth, compensation and other benefits, and asset
quality and earnings. If the Bank were to fail to meet these standards, the FDIC could require it
to submit a written compliance plan describing the steps the Bank will take to correct the
situation and the time within which such steps will be taken. The FDIC has authority to issue
orders to secure adherence to the safety and soundness standards.
30
Reserve Requirement. Under a regulation promulgated by the Federal Reserve, depository
institutions, including the Bank, are required to maintain cash reserves against a stated
percentage of their net transaction accounts. Effective October 9, 2008, the Federal Reserve Banks
are now authorized to pay interest on such reserves. The current reserve requirements are as
follows:
| for transaction accounts totaling $10.7 million or less, a reserve of 0%; and |
| for transaction accounts in excess of $10.7 million up to and including $55.2 million, a reserve of 3%; and |
| for transaction accounts totaling in excess of $55.2 million, a reserve requirement of $1.335 million plus 10% of that portion of the total transaction accounts greater than $55.2 million. |
The dollar amounts and percentages reported here are all subject to adjustment by the Federal
Reserve.
ITEM 1A. | Risk Factors |
You should consider these risk factors, our Recent Developments contained in Managements
Discussion and Analysis, in addition to the other information in this Form 10-K, before deciding
whether to make an investment in our Companys stock.
We are dependent on the strength of our local economy for our growth and profitability
The success of our business depends on our ability to generate profits and grow our franchise. Our
three county market area has a population base of approximately 231,000, and an economy based
primarily on manufacturing and agriculture. Our local economy has not grown, and is not projected
to grow as rapidly as the national economy. Job losses and unemployment rates in all three
counties exceed the state and national averages.
Our future profits may be affected by our inability to grow core deposits
We have had difficulty growing our core deposits. Competition in our market for core deposits is
intense. Our net income is heavily dependent on net interest income. If we are unable to grow our
core deposits, we will be required to obtain higher costing funds to facilitate asset growth. This could cause our
future profits to be below peer.
We are making commercial real estate loans outside of our normal market area
In an attempt to grow our commercial real estate loan portfolio we consider it necessary in certain
cases to make these loans outside of our normal market area. We have done this because competition
for Commercial Real Estate loans in our local markets is intense. Lending outside of our normal
market area may cause increased loan losses in the future if we lend in an area that we are not
familiar with and that local economy suffers a recession.
Our loan portfolio possesses increased risk due to our subprime residential lending
Up until a few years ago, a significant portion of our one-to-four family residential loan
originations were considered subprime. At December 31, 2009, $16.3 million of our residential
mortgage loans were subprime loans. Historically, our foreclosure rates on our residential loan
portfolio are higher than peer and we believe this is, to a significant extent, the result of our
subprime residential lending and the economy in our market area. Future foreclosures will
negatively impact profits because of higher loan loss provisions and expenses related to foreclosed
properties.
31
If we lose our executive officers, it could adversely affect our operations
The successful operation of Monarch Community Bancorp and Monarch Community Bank is greatly
dependent on the continued availability of capable executive officers. At present, the only
executive officers of both Monarch Community Bancorp and Monarch Community Bank are Donald L.
Denney, President and Chief Executive Officer, Andrew Van Doren, Vice President, Secretary and
Corporate Counsel, and Rebecca S. Crabill, Vice President, Chief Financial Officer and Treasurer.
We have entered into an employment agreement with Mr. Denney but not with the other executive
officers. We do not have key man insurance on any of our executive officers.
The amount of common stock controlled by insiders, our articles of incorporation and bylaws and
state and federal statutory and regulatory provisions could discourage hostile acquisitions of
control.
Purchases of common stock by directors and officers are for investment purposes and not necessarily
for resale. Inside ownership of Monarch Community Bancorp (totaling 236,320 shares as of December
31, 2007) is significant and this inside ownership and provisions in our articles of incorporation
and bylaws may have the effect of discouraging attempts to acquire Monarch Community Bancorp, a
proxy contest for control of Monarch Community Bancorp, the assumption of control of Monarch
Community Bancorp by a holder of a large block of common stock and the removal of Monarch Community
Bancorps management, all of which certain shareholders might think are in their best interests.
These provisions include among other things:
| the staggered terms of the members of the Board of Directors; |
| an 80% shareholder vote requirement for the approval of any merger or consolidation of Monarch Community Bancorp into any entity that directly or indirectly owns 10% or more of Monarch Community Bancorp voting stock if the transaction is not approved in advance by at least a majority of the disinterested members of Monarch Community Bancorps Board of Directors; |
| supermajority shareholder vote requirements for the approval of certain amendments to Monarch Community Bancorps articles of incorporation and bylaws; |
| a prohibition of any holder of common stock voting more than 10% of the outstanding common stock; |
| elimination of cumulative voting by shareholders in the election of directors; |
| restrictions on the acquisition of our equity securities; |
| the authorization of five million shares of preferred stock that could be issued without shareholder approval on terms or in circumstances that could deter a future takeover attempt; and |
| the increase in the number of authorized shares and the reclassification of shares without stockholder approval. |
In addition, the Maryland business corporation law, the state where Monarch Community Bancorp is
incorporated, provides for certain restrictions on acquisition of Monarch Community Bancorp, and
federal law contains restrictions on acquisitions of control of bank holding companies such as
Monarch Community Bancorp.
The low trading volume in our common stock may make the value of the stock volatile and may make it
difficult for shareholders to sell their shares when they desire.
Historically, there have been times when trading volume has been low. During those times the
Companys stock price has encountered some decline. Average daily trading volume for the years
ending December 31, 2009 and 2008 were 2,761 and 3,473 shares respectively. The high and low levels
of our stock price for each quarter of the last two fiscal years are disclosed in this document. A
more detailed history of the Companys stock price can be found under our stock symbol (MCBF).
32
ITEM 1B. Unresolved Staff Comments None
ITEM 2. Properties
At December 31, 2009, we had six full service offices. At December 31, 2009, we owned all of our
offices and the net book value of our investment in premises and equipment, excluding computer
equipment, was $4.2 million. We believe that our current facilities are adequate to meet our
present and immediately foreseeable needs.
The following table provides information regarding our office and other facilities:
Owned/ | ||||
Location | County | Leased | ||
Main Office |
||||
375 North Willowbrook Road
|
Branch | Owned | ||
Coldwater, Michigan 49036 |
||||
Branch Offices |
||||
87 Marshall Street
|
Branch | Owned | ||
Coldwater, Michigan 49036 |
||||
365 N. Broadway
|
Branch | Owned | ||
Union City, Michigan 49094 |
||||
1 West Carleton Road
|
Hillsdale | Owned | ||
Hillsdale, Michigan 49242 |
||||
15975 West Michigan Avenue
|
Calhoun | Owned | ||
Marshall, Michigan 49068 |
||||
107 North Park
|
Calhoun | Owned | ||
Marshall, Michigan 49068 |
||||
Other Facilities |
||||
34 Grand Street (Garage)
|
Branch | Owned | ||
Coldwater, Michigan 49036 |
||||
24 Grand Street (Drive through)
|
Branch | Owned | ||
Coldwater, Michigan 49036 |
We utilize a third party service provider to maintain our data base of depositor and borrower
customer information.
ITEM 3. Legal Proceedings
From time to time we are involved as plaintiff or defendant in various legal actions arising in the
normal course of business. We do not anticipate incurring any material liability as a result of any
current litigation.
ITEM 4. Reserved
33
PART II
ITEM 5. Market for the Companys Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Companys common stock commenced trading on August 29, 2002 on the NASDAQ Stock Market under
the symbol MCBF. The table below shows the high and low sales prices of the common stock for the
periods indicated, as reported on the NASDAQ Capital Market. For the years ended December 31, 2009
and 2008, the Company paid dividends of $0.25 and $0.36 per share, respectively.
Year | Quarter ending | High | Low | Dividends | ||||||||||||
2008 |
March 31 | $ | 10.37 | $ | 9.80 | $ | 0.09 | |||||||||
June 30 | $ | 9.64 | $ | 9.45 | $ | 0.09 | ||||||||||
September 30 | $ | 9.25 | $ | 8.04 | $ | 0.09 | ||||||||||
December 31 | $ | 3.84 | $ | 3.50 | $ | 0.09 | ||||||||||
2009 |
March 31 | $ | 3.48 | $ | 3.30 | $ | 0.09 | |||||||||
June 30 | $ | 6.79 | $ | 6.10 | $ | 0.09 | ||||||||||
September 30 | $ | 3.74 | $ | 3.57 | $ | 0.07 | ||||||||||
December 31 | $ | 2.80 | $ | 2.51 | $ | |
Please refer to Note 13 to the Financial Statements for a discussion of certain restrictions
which impact the Companys ability to pay dividends. Because the Company has no significant
operations, it depends upon dividends from the bank in order to pay dividends to its stockholders.
As of February 26, 2010, there were 2,044,606 shares of the Companys common stock issued and
outstanding and approximately 552 holders of record. The holders of record do include banks and
brokers who act as nominees, each of whom may represent more than one stockholder.
ISSUER PURCHASES OF EQUITY SECURITIES
(a) | (b) | (c) | (d) | |||||||||||||
Maximum Number (or | ||||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||
Shares (or Unit) | Value) of Shares | |||||||||||||||
Purchased as Part | (or Units) that may | |||||||||||||||
Total Number of | of Publicly | yet Be Purchased | ||||||||||||||
Shares (or Units) | Average Price paid | Anounced Plans or | Under the Plans or | |||||||||||||
Period | Purchased | per Share (or Unit) | Programs | Program | ||||||||||||
10/01/09-10/31/09 |
| | | | ||||||||||||
11/01/09-11/30/09 |
| $ | | | | |||||||||||
12/01/09-12/31/09 |
| $ | | | | |||||||||||
Total |
| | | | ||||||||||||
The Company does not currently have a stock repurchase program.
The performance graph required by item 201(e) [ILLEGIBLE] Regulation S-K is not applicable to smaller
reporting companies.
34
ITEM 6. Selected Financial Data
SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under Selected Financial Condition Data and
Selected Operations Data for, and as of the end of, each of the years ended December 31 is
derived from our audited financial statements. The following information is only a summary and you
should read it in conjunction with our consolidated financial statements, including notes thereto,
included elsewhere in this document:
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Selected Financial Condition Data: |
||||||||||||||||||||
Total Assets |
$ | 283,204 | $ | 291,807 | $ | 279,208 | $ | 289,987 | $ | 277,068 | ||||||||||
Loans receivable, net |
220,875 | 247,542 | 224,797 | 230,247 | 213,097 | |||||||||||||||
Investment securities, at carrying value |
16,086 | 8,953 | 11,322 | 13,934 | 14,584 | |||||||||||||||
Fed Funds sold and overnight deposits |
10,723 | 677 | 6,151 | 7,864 | 6,988 | |||||||||||||||
Deposits |
213,368 | 192,156 | 177,936 | 192,572 | 174,715 | |||||||||||||||
Federal Home Loan Bank Advances |
44,518 | 60,178 | 59,330 | 54,476 | 59,562 | |||||||||||||||
Equity |
23,163 | 36,270 | 39,086 | 39,986 | 40,576 |
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Selected Operations Data: |
||||||||||||||||||||
Total interest income |
$ | 15,836 | $ | 17,196 | $ | 17,545 | $ | 17,287 | $ | 15,231 | ||||||||||
Total interest expense |
7,339 | 8,536 | 9,222 | 8,607 | 6,567 | |||||||||||||||
Net interest income |
8,497 | 8,660 | 8,323 | 8,680 | 8,664 | |||||||||||||||
Provision for loan losses |
13,349 | 2,712 | 971 | | (385 | ) | ||||||||||||||
Net interest income after provision for loan losses |
(4,852 | ) | 5,948 | 7,352 | 8,680 | 9,049 | ||||||||||||||
Fees and service charges |
2,682 | 2,757 | 2,921 | 2,642 | 2,496 | |||||||||||||||
Gains on sales of loans, mortgage-backed
securities and investment securities |
2,100 | 629 | 651 | 342 | 562 | |||||||||||||||
Other non-interest income |
211 | 217 | 374 | 138 | 341 | |||||||||||||||
Total non-interest income |
4,993 | 3,603 | 3,946 | 3,122 | 3,399 | |||||||||||||||
Total non-interest expense |
20,085 | 9,152 | 8,992 | 9,710 | 10,503 | |||||||||||||||
Income (loss) before taxes |
(19,944 | ) | 399 | 2,306 | 2,092 | 1,945 | ||||||||||||||
Income tax provision |
(548 | ) | 101 | 561 | 544 | 505 | ||||||||||||||
Net income (loss) |
$ | (19,396 | ) | $ | 298 | $ | 1,745 | $ | 1,548 | $ | 1,440 | |||||||||
35
ITEM 6. Selected Financial Data, continued
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Selected Financial Ratios and Other Data: |
||||||||||||||||||||
Performance Ratios: |
||||||||||||||||||||
Return on assets (ratio of net income (loss) to average total
assets) |
-6.41 | % | 0.10 | % | 0.61 | % | 0.54 | % | 0.52 | % | ||||||||||
Return on Equity (ratio of net income (loss) to average equity) |
-46.88 | % | 0.78 | % | 4.30 | % | 3.85 | % | 3.59 | % | ||||||||||
Interest rate spread information: |
||||||||||||||||||||
Average during period |
2.94 | % | 3.11 | % | 3.05 | % | 3.26 | % | 3.41 | % | ||||||||||
Net interest margin |
3.10 | % | 3.32 | % | 3.27 | % | 3.42 | % | 3.56 | % | ||||||||||
Ratio of operating expense to average total assets |
6.64 | % | 3.20 | % | 3.17 | % | 3.41 | % | 3.80 | % | ||||||||||
Ratio of average interest-earning assets to average
interest-bearing liabilities |
1.06 | 1.06 | 1.06 | 1.05 | 1.05 | |||||||||||||||
Efficiency ratio * |
71.67 | % | 73.25 | % | 72.62 | % | 80.44 | % | 85.39 | % | ||||||||||
Asset Quality Ratios: |
||||||||||||||||||||
Non-performing assets to total assets at end of period |
6.50 | % | 1.59 | % | 0.81 | % | 0.74 | % | 1.31 | % | ||||||||||
Non-performing loans to total loans,net |
7.05 | % | 1.04 | % | 0.33 | % | 0.20 | % | 0.37 | % | ||||||||||
Allowance for loan losses to non-performing loans |
37.14 | % | 105.76 | % | 240.00 | % | 432.48 | % | 360.67 | % | ||||||||||
Allowance for loan losses to loans receivable, net |
2.62 | % | 1.10 | % | 0.81 | % | 0.88 | % | 1.37 | % | ||||||||||
Capital ratios: |
||||||||||||||||||||
Equity to total assets at end of period |
8.19 | % | 12.43 | % | 14.00 | % | 13.79 | % | 14.64 | % | ||||||||||
Other data: |
||||||||||||||||||||
Number of full-service offices |
6 | 6 | 6 | 6 | 6 |
* | Amounts do not include the one time non cash charge for goodwill impairment |
36
ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion is intended to assist in understanding the financial condition and results
of operations of Monarch Community Bank. The discussion and analysis does not include any comments
relating to Monarch Community Bancorp since Monarch Community Bancorp has no significant
operations. The information contained in this section should be read in conjunction with the
consolidated financial statements.
Monarchs results of operations depend primarily on its net interest income, which is the
difference between interest income earned on loans, investments, and overnight deposits, and
interest expense incurred on deposits and borrowings. Monarchs results of operations also are
significantly affected by the level of its gains from sales of mortgage loans.
Critical Accounting Policies
Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted
accounting principles and follow general practices within the industries in which we operate. The
most significant accounting policies we follow are presented in Note 1 to the Consolidated
Financial Statements. Application of these principles requires us to make estimates, assumptions,
and judgments that affect the amounts reported in the financial statements and accompanying notes.
Critical accounting estimates are defined as those that require assumptions or judgments to be made
based on information available as of the date of the financial statements. Certain policies
inherently have a greater reliance on the use of estimates. Those policies have a greater
possibility of producing results that could be materially different than reported if there is a
change to any of the estimates, assumptions, or judgments made by us. Based on the potential impact
to the financial statements of the valuation methods, estimates, assumptions, and judgments used,
we identified the determination of the allowance for loan and lease losses, realization of
goodwill, the realization of deferred tax assets, and the determination of income tax expense and
liability to be the accounting estimates that are the most subjective or judgmental.
Allowance for Loan and Lease Losses
A consequence of lending activities is that we may incur losses. The amount of such losses will
vary, depending upon the risk characteristics of the loan and lease portfolio as affected by
economic conditions, including rising interest rates, and the financial performance of borrowers.
The allowance for loan and lease losses provides for credit losses inherent in lending and is
based on loss estimates derived from a comprehensive quarterly evaluation, reflecting analyses of
individual borrowers and historical loss experience, supplemented as necessary by credit judgment
to address observed changes in trends, conditions, and other relevant environmental and economic
factors. The Allowance provides for probable and estimable losses inherent in our loan and lease
portfolio. The Allowance is increased or decreased through the provisioning process. There is no
exact method of predicting specific losses or amounts that ultimately may be charged-off on
particular segments of the loan and lease portfolio.
Our determination of the amount of the allowance for loan and lease losses is a critical accounting
estimate as it requires the use of estimates and significant judgment as to the amount and timing
of expected future cash flows on impaired loans, estimated loss rates on homogenous portfolios, and
deliberation on economic factors and trends. Our estimates of collateral on impaired loans are
supported by appraisals when the repayment of principal and interest is unlikely. See Note 4 to
the Consolidated Financial Statements for more information on the allowance for loan and lease
losses.
Income Taxes
We determine our liabilities for income taxes based on current tax regulation and interpretations
in tax jurisdictions where our income is subject to taxation. In estimating income taxes payable or
receivable, we assess the relative merits and risks of the appropriate tax treatment considering
statutory, judicial, and regulatory guidance in the context of each tax position. Accordingly,
previously estimated liabilities are regularly reevaluated and adjusted, through the provision for
income taxes.
Changes in the estimate of income taxes payable or receivable occur periodically due to changes in
tax rates, interpretations of tax law, the status of examinations being conducted by various taxing
authorities, and newly enacted statutory, judicial and regulatory guidance that impact the relative
merits and risks of each tax position. These changes, when they occur, affect accrued income taxes
and can be significant to our operating results. See Note 10 to the Consolidated Financial
Statements for more information on income taxes.
37
Deferred tax assets generally represent items that can be used as a tax deduction or credit in
future income tax returns, for which a financial statement tax benefit has already been recognized.
The realization of the net deferred tax asset generally depends upon future levels of taxable income
and the existence of prior years taxable income to which carry back refund claims could be made.
Valuation allowances are established against those deferred tax assets determined not likely to be
realized. The Company had a $3.1 million tax valuation allowance as of December 31, 2009. No
valuation allowance was recorded in 2008.
Management Strategy
Our strategy is to operate as an independent retail oriented financial institution dedicated to
serving the needs of customers in our market area. We are committed to providing a broad range of
products and services to meet the needs of our consumer and small business customers.
Our focus in 2010 is to continue to grow the relationships with our commercial and retail customers
that live and work in our market area. It is our intent to work with our borrowing base to make
funds available where necessary to promote the growth of new business and expansion of existing
business. We have put processes in place to restructure the debt of homeowners to keep them in
their homes while we are dealing with historically high unemployment levels. We are continuing to
improve credit quality by hiring a more experienced lending and underwriting staff. We are
continually monitoring non-interest expense in order to achieve a higher level of profit for our
shareholders. We will strive to achieve the highest level of profitability while making prudent
business decisions in this ever changing economy.
Changes in Financial Condition from December 31, 2008 to December 31, 2009
General. Monarchs total assets decreased $8.6 million, or 2.9%, to $283.2 million at December 31,
2009 compared to $291.8 million at December 31, 2008. The most significant decrease was in the in
loan portfolio which decreased $26.7 million.
Loans. Loans remain our largest category of interest earning assets and the largest source of
revenue. The net loan portfolio decreased $26.7 million, or 10.8%, from $247.5 million at December 31, 2008
to $220.1 million at December 31, 2009. Gross loans decreased $23.7 million, or 9.4%, from $250.1
million at December 31, 2008 to $227.9 million at December 31, 2009.
Commercial business loans decreased $343,000 in 2009 as compared to 2008. Commercial real estate
loans decreased $3.0 million mainly as a result of charge offs in the amount of $2.4 million
related to two large borrowing relationships. While construction loans only decreased slightly
overall by $29,000, the total construction loans originated in 2009 of $4.9 million which consisted
mainly of one to four family loans were offset by charge offs in the amount of $3.4 million
associated with the previously mentioned large borrowing relationships. The Bank also experienced
decreases in the level of multifamily real estate primarily due normal repayments.
Residential loans decreased $16.5 million in 2009, primarily as a result of the migration of one to
four family residential loans to the secondary market due to the attractive interest rates
available as a result of the decline in interest rates consistent through out 2009. The decrease
in Home Equity loans of $2.5 million from 2008 to 2009 is also mainly attributable to the
refinancing activity seen in the residential market and the declining real estate values.
Installment loans or Other loans as categorized in Note 4 include primarily automobile and
recreational vehicle loans. Other loans decreased $1.0 million in 2009 mainly due to normal
repayments. Please refer to Note 4 to our financial statements for additional information on the
composition of our loan portfolio.
Credit Risk. Credit Risk is defined as the risk that borrowers or counter-parties will not be able
to repay their obligations to us. Credit exposures reflect legally binding commitments for loans,
leases, bankers acceptances, standby and commercial letters of credit, and deposit account
overdrafts. Our overall credit risk position is reflective of the continued weak economy in 2009,
with increased levels of net charge offs, non-performing assets and provision for loan and lease
losses compared to December 31, 2008.
38
Loans are carried at an amount which management believes will be collected. A balance considered
not collectible is charged against the allowance for loan losses. Charge-offs for loan and lease
losses were $10.6 million for 2009, compared to $2.0 million for 2008 and $1.4 million for 2007.
The increase in charge-offs from 2009 to 2008 was primarily due to charge offs related to two large
commercial relationships mentioned previously and an increase in nonperforming loans related to
weaker economic conditions. We have also seen an increase in charge offs related to one to four
family residential mortgages as a result of an increase in foreclosure activity and historically
high unemployment rates.
The provision for loan and lease losses was $13.3 million for 2009, compared to the provision for
loan and lease losses of $2.7 million for 2008 and the provision for loan and lease losses of $1.0
million for 2007. The increased provision for loan and lease losses in 2009 and 2008 was due to the
increased level of charge offs and the deterioration in the loan portfolio mainly due to the
deterioration in the economy.
Nonperforming assets include nonaccrual loans, and other real estate. Our policy is to discontinue
the accrual of interest on loans and leases where principal or interest is past due and remains
unpaid for 90 days or more, or when an individual analysis of a borrowers credit worthiness
indicates a credit should be placed on nonperforming status, except for residential mortgage loans,
which are placed on nonaccrual at the time the loan is placed in foreclosure and consumer loans
that are both well secured and in the process of collection.
Nonperforming assets increased to $18.4 million as of December 31, 2009 from $4.6 million as of
December 31, 2008, mainly due to increases in nonaccrual loans. Total nonaccrual loans were $15.6
million as of December 31, 2009 compared to $2.6 million as of December 31, 2008. The increase in
nonaccrual loans was spread among the various loan portfolios, the largest increase seen in the
commercial real estate loan portfolio. The increase in nonaccrual loans was largely due to
economic stresses being felt in Michigan and nationally. Borrowers who normally would be able to
fulfill their obligations have been unable to do so in the current environment. Impaired loans
are commercial loans for which we believe it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement. The average investment in
impaired loans was $10.0 million during 2009 compared to $1.7 million during 2008. At year end,
impaired loans were $19.1 million compared to $2.4 million as of December 31, 2008. Given the
present state of the economy we have determined that it is necessary to work with some borrowers to
lessen potential losses to the Bank. At December 31, 2009 we had $15.0 million restructured loans
where the borrower was in compliance with the terms of agreement or delinquent less than 90 days.
Securities. The Banks securities portfolio increased $7.1 million, or 79.7%, to $16.1 million at
December 31, 2009 from $9.0 million at December 31, 2008. Securities were 5.7% of total assets at
December 31, 2009 as compared to 3.1% at December 31, 2008. The increase was attributable to
$11.6 million in securities being purchased primarily to offset costs associated with the U.S
Treasurys Capital Purchase Program (CPP). Those costs include an annual dividend of 5% and
amortization of the discount on the preferred stock of .16%. The tax equivalent cost of the
capital is 8%. See Equity for further discussion on the CPP. The yield on investment securities has
decreased to 3.41% at December 31, 2009 from 4.30% for the same period a year ago. Management has
slowed further purchasing of securities due to the decline in the current market yield. With the
increase in securities we have 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. We regularly evaluate asset/liability
management needs and attempt to maintain a portfolio structure that provides sufficient liquidity
and cash flow.
Goodwill. Goodwill is tested for impairment annually, as of September 30, using a two-step process
that begins with an estimation of the fair value of the reporting unit. Goodwill impairment exists
when a reporting units carrying value of goodwill exceeds its implied fair value. Goodwill is also tested
for impairment on an interim basis, using the same two-step process as the annual testing, if an
event occurs or circumstances change between annual tests that would more likely than not reduce
the fair value of the reporting unit below its carrying amount.
During 2009, our stock price declined 61%, from $9.25 per common share at September 30, 2008, to
$3.57 per common share at September 30, 2009. Many peer banks also experienced similar significant
declines in market capitalization. This decline primarily reflected the continuing economic
slowdown and increased market concern surrounding financial institutions credit risks and capital
positions, as well as uncertainty related to increased regulatory supervision and intervention. We
determined that these changes would more-likely-than-not reduce the fair value of the reporting
unit below the carrying amount. We utilized a third party for assistance with the impairment
analysis and determined that the goodwill was fully impaired as of December 31, 2009. As a result,
we recorded noncash pretax impairment charge of $9.6 million in the fourth quarter of 2009. The
impairment charge did not affect our regulatory capital ratios.
39
Liabilities. Monarchs deposits increased $21.2 million, or 11.0%, to $213.4 million at December
31, 2009 compared to $192.2 million at December 31, 2008. This increase was primarily in money
market accounts which increased $15.9 million. Brokered CDs decreased $13.7 million from $39.4
million at December 31, 2008 to $25.4 million at December 31, 2009. The Bank has attempted to
reduce its reliance on brokered and large, out of area CDs, although the success of this strategy
is dependent on growing core deposits. Local CD deposits increased $9.7 million. Savings account
balances increased $1.8 million as we experienced movement into these types of accounts into higher
yielding deposit account types. Other interest bearing checking accounts increased $7.0 million.
Non-interest bearing deposit accounts increased $539,000. The Bank expects its non-interest
bearing deposits to increase in the future as a result of strategies to attract more small business
depositors and municipal depositors.
Federal Home Loan Bank advances decreased $15.7 million, or 26.0%, to $44.5 million at December 31,
2009 from $60.1 million at December 31, 2008. For several years our strategy has been to replace
borrowed funds and brokered CDs with lower costing core deposits. With the movement of customers
from the stock market into more conservative types of investments including deposit products we
have been able to take advantage of the shift and significantly reduce our reliance on whole sale
funding. We expect this trend to continue even when customers move back to riskier types of
investing due to the retention of staff specifically focused on building and broadening customer
relationships.
Equity. Total equity amounted to $23.2 million at December 31, 2009 and $36.3 million at December
31, 2008, or 8.2% and 12.4%, respectively, of total assets at both dates. The decrease in equity
resulted from the net loss for 2009 of $19.4 million and dividend payments of $774,000, which
included dividends to common shareholders of $511,000 and $263,000 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. The decrease in equity was offset by the issuance of preferred stock in the amount of
$6.8 million associated with the Capital Purchase Program. Management intends to utilize funds
provided by the issuance of the preferred stock to invest in securities and pursue lending
opportunities. Funds from the issuance of the Preferred stock have been pushed down to the Bank to
bolster capital and management continues to assess options for sources of additional capital.
40
Average
Balances, Net Interest Income, Yields Earned and Rates Paid
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. All average
balances are average daily balances.
Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |||||||||||||||||||
Balance | Paid | Rate | Balance | Paid | Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Fed Funds and overnight deposits |
$ | 11,392 | $ | 6 | 0.05 | % | $ | 8,170 | $ | 102 | 1.25 | % | ||||||||||||
Investment securities |
16,591 | 565 | 3.41 | 9,951 | 428 | 4.30 | ||||||||||||||||||
Other securities |
4,174 | 74 | 1.77 | 4,174 | 209 | 5.01 | ||||||||||||||||||
Loans receivable (1) |
242,289 | 15,191 | 6.27 | 238,838 | 16,457 | 6.89 | ||||||||||||||||||
Total earning assets |
$ | 274,446 | $ | 15,836 | 5.77 | $ | 261,133 | $ | 17,196 | 6.59 | ||||||||||||||
Demand and NOW accounts |
$ | 34,045 | $ | 98 | 0.29 | $ | 32,032 | $ | 95 | 0.30 | ||||||||||||||
Money market accounts |
47,923 | 789 | 1.65 | 35,497 | 1,041 | 2.93 | ||||||||||||||||||
Savings accounts |
19,113 | 71 | 0.37 | 19,123 | 81 | 0.42 | ||||||||||||||||||
Certificates of deposit |
104,275 | 3,952 | 3.79 | 103,569 | 4,644 | 4.48 | ||||||||||||||||||
Fed Funds Purchased |
28 | | | 56 | | | ||||||||||||||||||
Federal Home Loan Bank advances |
53,966 | 2,429 | 4.50 | 55,106 | 2,675 | 4.85 | ||||||||||||||||||
Total interest bearing liabilities |
$ | 259,350 | 7,339 | 2.83 | $ | 245,383 | 8,536 | 3.48 | ||||||||||||||||
Net interest income |
$ | 8,497 | $ | 8,660 | ||||||||||||||||||||
Net interest spread |
2.94 | % | 3.11 | % | ||||||||||||||||||||
Net interest margin |
3.10 | % | 3.32 | % | ||||||||||||||||||||
2007 | ||||||||||||
Average | Interest | |||||||||||
Outstanding | Earned/ | Yield/ | ||||||||||
Balance | Paid | Rate | ||||||||||
(dollars in thousands) | ||||||||||||
Fed Funds and overnight deposits |
$ | 7,373 | $ | 389 | 5.28 | % | ||||||
Investment securities |
13,445 | 599 | 4.46 | |||||||||
Other securities |
4,174 | 188 | 4.50 | |||||||||
Loans receivable (1) |
229,451 | 16,369 | 7.13 | |||||||||
Total earning assets |
$ | 254,443 | $ | 17,545 | 6.90 | |||||||
Demand and NOW accounts |
$ | 32,619 | $ | 78 | 0.24 | |||||||
Money market accounts |
24,451 | 902 | 3.69 | |||||||||
Savings accounts |
21,502 | 90 | 0.42 | |||||||||
Certificates of deposit |
103,970 | 5,037 | 4.84 | |||||||||
Fed Funds Purchased |
||||||||||||
Federal Home Loan Bank advances |
57,268 | 3,115 | 5.44 | |||||||||
Total interest bearing liabilities |
239,810 | 9,222 | 3.85 | |||||||||
Net interest income |
8,323 | |||||||||||
Net interest spread |
3.05 | % | ||||||||||
Net interest margin |
3.27 | % | ||||||||||
(1) | Calculated net of deferred loan fees, loan discounts and loans in process. Nonaccrual loans are included in the average outstanding balance. |
41
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense
for major components of interest-earning assets and interest-bearing liabilities. For each category
of interest-earning assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume, which are changes in volume multiplied by the old rate, and
(2) changes in rate, which are changes in rate multiplied by the old volume. Changes attributable
to both rate and volume are shown as mixed.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||||||||||
Total | Total | |||||||||||||||||||||||||||||||
Increase (Decrease) Due to | Increase | Increase (Decrease) Due to | Increase | |||||||||||||||||||||||||||||
Rate | Volume | Mix | (Decrease) | Rate | Volume | Mix | (Decrease) | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Interest-earning assets |
||||||||||||||||||||||||||||||||
Fed funds and overnight deposits |
$ | (98 | ) | $ | 40 | (39 | ) | (96 | ) | $ | (297 | ) | $ | 42 | (32 | ) | (287 | ) | ||||||||||||||
Investment securities |
$ | (89 | ) | $ | 286 | (59 | ) | 137 | (21 | ) | (156 | ) | 5 | (171 | ) | |||||||||||||||||
Other securities |
$ | (135 | ) | $ | | | (135 | ) | 21 | | | 21 | ||||||||||||||||||||
Loans receivable |
$ | (1,482 | ) | $ | 238 | (21 | ) | (1,266 | ) | (559 | ) | 670 | (23 | ) | 88 | |||||||||||||||||
Total interest-earning assets |
$ | (1,804 | ) | $ | 564 | $ | (119 | ) | $ | (1,360 | ) | $ | (855 | ) | $ | 556 | $ | (50 | ) | $ | (349 | ) | ||||||||||
Interest-bearing liabilities |
||||||||||||||||||||||||||||||||
Demand and NOW accounts |
$ | (3 | ) | $ | 6 | (0 | ) | 3 | 19 | (1 | ) | (1 | ) | 17 | ||||||||||||||||||
Money market accounts |
$ | (457 | ) | $ | 364 | (160 | ) | (252 | ) | (185 | ) | 407 | (84 | ) | 139 | |||||||||||||||||
Savings accounts |
$ | (10 | ) | $ | (0 | ) | 0 | (10 | ) | 1 | (10 | ) | | (9 | ) | |||||||||||||||||
Certificates of deposit |
$ | (719 | ) | $ | 32 | (5 | ) | (692 | ) | (375 | ) | (19 | ) | 1 | (393 | ) | ||||||||||||||||
Fed Funds Purchased |
$ | | $ | | | | | | | | ||||||||||||||||||||||
Federal Home Loan Bank advances |
$ | (195 | ) | $ | (55 | ) | 4 | (246 | ) | (335 | ) | (118 | ) | 13 | (440 | ) | ||||||||||||||||
Total interest-bearing liabilities |
$ | (1,383 | ) | $ | 347 | $ | (161 | ) | $ | (1,197 | ) | $ | (875 | ) | $ | 259 | $ | (71 | ) | $ | (686 | ) | ||||||||||
Net interest income |
$ | (163 | ) | $ | 337 | |||||||||||||||||||||||||||
Comparison of Results of Operations for the Years Ended December 31, 2009, 2008, and 2007
General. Monarch reported a net loss of $19.4 million for the year ended December 31, 2009 compared
to net income of $298,000 for the year ended December 31, 2008 and net income of $1.7 million in
2007. The Bank recorded a $9.6 million goodwill impairment. The explanation of this change is
detailed under Goodwill in the Changes in Financial Condition section. The reasons for the
change in net income for the years are discussed below.
Net Interest Income. Our primary source of earnings is net interest income, the difference between
income on earning assets and the cost of funds supporting those assets. Significant categories of
earning assets are loans and securities while deposits and borrowings represent the major portion
of interest-bearing liabilities. Net interest income before provision for loan losses
decreased to $8.5 million for 2009 compared to $8.7 million in 2008, following an increase from
$8.3 million in 2007.
Net interest margin (the ratio of net interest income to average earning assets) is affected by
movements in interest rates and changes in the mix of earning assets and the liabilities that fund
those assets. Our net interest margin has decreased from 3.32% in 2008 to 3.10% in 2009 compared to the increase
from 3.27% in 2007. The decrease from 2008 to 2009 is primarily due to the declining interest rate
environment consistent throughout 2008 and 2009 and the yields on earning assets decreasing more
rapidly than the cost of funds. Previously, the cost on interest-bearing liabilities decreased
more rapidly (3.85% in 2007 to 3.48% in 2008) than yields on interest-earning assets (6.90% in 2007
to 6.59% in 2008). Growing lower cost core deposits remains a challenge in our current market
area. Our reliance on money market accounts, brokered CDs and FHLB borrowings continues to have
an impact on our high cost of funds.
42
Interest Income. Total interest income in 2009 decreased $1.4 million primarily due to the decline
in interest rates consistent through 2009. This followed a $349,000 decrease in 2008 compared to
2007 which is also attributable to declining interest rates. In both 2008 and 2009 the decline in
average yield significantly offset the increase in average loans outstanding.
Interest Expense. Total interest expense decreased $1.2 million in 2009 compared to 2008. This
followed a decrease of $686,000 in 2008 compared to 2007. The decrease in 2009 was attributable to
the declining interest rate environment. The increase in average deposits offset the decrease in
average borrowings and the decline in interest rates in 2009 compared to 2008 and 2008 compared to
2007. The increase in average deposits in 2008 and 2009 was primarily due to an increase in
average money market accounts of $11.0 million from 2007 to 2008 and $12.4 million from 2008 to
2009. The Bank has had difficulty in reducing its cost of funds increase because of increased
market rates for CDs and further competition for money market deposits which has also resulted in
higher rates being paid.
Provision for Loan Losses. The Bank recorded a provision for loan losses of $13.3 million in for
the year ended December 31, 2009 compared to $2.7 million and $971,000 for the same periods in 2008
and 2007, respectively.
The increased provision for 2009 was necessitated by net charge-offs of $10.3 million in 2009 and
increased loan delinquencies at December 31, 2009 as compared to December 31, 2008. Nonperforming
assets increased to 6.50% of assets at December 31, 2009 compared to 1.59% at December 31, 2008.
These levels have increased over the previous two years (see Selected Financial and Other Data
and Credit Risk). Please refer to Note 4 to our financial statements for additional information
on our provision for loan losses.
Non-interest Income. Non-interest income increased to $5.0 million for the year ended December 31,
2009 compared to $3.6 million for the same period in 2008. Non-interest income decreased slightly
to $3.6 million in 2008 compared to $3.9 million for 2007.
Fees and service charges were $2.2 million for 2009, $2.3 million for 2008, $2.5 million for 2007.
The decline in fees and service charges is a result of a decline in income for the Bounce
protection program and loan fees offset by increased income from brokering residential mortgage
loans. Income from the Bounce Protection program has decreased from $1.5 million in 2007 to $1.3
million in 2009 due to decreased customer usage. Future increases in this source of income are
dependent on the Bank increasing the number of checking account customers. Management does not
expect significant increases in Bounce Protection income from its existing customer base due to the
increased regulatory changes effective July 1, 2010.
Income from brokering residential mortgage loans increased to $83,000 in 2009 compared to $41,000
in 2008. 2008 decreased to $41,000 compared to $166,000 in 2007. During 2006, the Bank developed
new mortgage banking relationships with several brokerage companies. The Bank has continued to
utilize these companies as a resource for lending opportunities. The Bank does not expect brokered
loan income to be a significant source of income in the future. Loan fees have declined from
$127,000 in 2007 to $86,000 in 2009 due to competitive pressures as well as lower originations of
construction and consumer loans.
Gain on sale of loans increased to $2.1 million in 2009 from $627,000 in 2008 and $668,000 in 2007.
The increase is largely due to the falling rate environment which has generated a significant
amount of one to four family residential mortgage refinancing. Loan servicing income also
increased from $444,000 in 2007 to $458,000 in 2009. Our strategy, which began in 2007, has been
to sell as many of the residential mortgage originations as possible to manage the Banks interest
rate risk, credit risk and liquidity. Management does not expects similar results in 2010 as seen
in 2009 due to the large amount of refinancing concluded in 2009 and the rising rate environment
anticipated in the later half of 2010.
Net gain (loss) on disposal of premises and equipment was ($7,000) in 2009, $0 in 2008, $49,000 in
2007 as the Company closed and disposed of one of its branch locations in Coldwater in 2007.
43
Other income remained relatively stable in 2009 from 2008. Other income decreased $108,000 in
2008 compared to 2007 ($217,000 in 2008 from $325,000 in 2007).This is due to a net gain of $68,000
on sales of foreclosed properties in 2008 compared to a net gain $139,000 in 2007. These
fluctuations were created by the Bank selling more foreclosed properties in 2008 as compared to
2007. The net gain on sales of foreclosed properties for 2008 compared to 2007 was also impacted by
the decline in the housing market in 2008. The Bank does occasionally experience a gain on sale of
foreclosed property, as it has become increasingly more conservative in valuing these properties
upon acquisition. Management expects 2010 to be similar to 2009 in terms of foreclosure activity and thus potential
gains or losses on subsequent sales of the foreclosed properties. The soft real estate market may
lead to longer holding periods as well as larger losses on disposal as compared to recent years.
Non-interest Expense. Non-interest expense increased $10.9 million in 2009 from $9.2 million in
2008 to $20.1 million in 2009, following an increase of $160,000 in 2008 compared to 2007.
Salaries and employee benefits expense increased from $4.5 million in 2007 to $4.8 million in 2009
as a result of normal increases in salaries and wages. Recruiting and retaining qualified staff
continues to be a priority of Management.
Repossessed property expense has increased from $219,000 in 2008 to $822,000 in 2009. The increase
in 2009 was due to increased collection and repossession activity as our nonperforming assets
increased. Management expects similar trends in 2010 due to the slow recovery of the economy.
Repossessed property expense remained relatively unchanged in 2008 compared to 2007. Management
continues to focus on better management of properties during the holding period, better sales
efforts that have led to shorter holding periods and decreased impairment write-downs due to better
valuation techniques at the time of foreclosure.
Professional services expenses increased to $530,000 in 2009 compared to $401,000 in 2008 primarily
due to increases in legal fees associated with non-performing loans and legal fees associated with
the issuance of preferred stock and common stock warrants as part of the Capital Purchase Program
transaction. Professional services expenses decreased to $401,000 in 2008 compared to $591,000 in
2007 as the expenses moved to similar levels previously experienced in 2006 and 2005. For the year
ended December 31, 2007 we did experience an increase in professional services expense of $150,000
due to the costs incurred in the Companys attempt at going private. We expect professional
services expenses to be at similar levels seen in 2009 due to the additional costs associated with
working with problem loans.
Amortization expense of intangible assets has decreased consistent with the aging of the Core
Deposit Intangible established upon the acquisition of MSB Financial in 2004. As indicated in Note
2 to the Companys financial statements, this expense will continually decline over the remaining
life of the related asset.
Mortgage Banking expense has increased year over year from $359,000 in 2007 to $406,000 in 2008
compared to $546,000 in 2009. This a result of an increase in amortization of mortgage servicing
rights as a result of a continued increase in mortgage loan payoffs due to refinancing associated
with the decrease of interest rates beginning in the fourth quarter of 2008 and continuing through
2009. Management does not expect to see similar trends in 2010 due to the anticipated increase in
rates and the amount of refinancing activity done in 2009.
During 2009, we recorded a $9.6 million goodwill impairment charge. In the fourth quarter of 2009
we updated our goodwill impairment testing. Our common stock price dropped during 2009 resulting in
a difference between our market capitalization and book value. The results of the year end goodwill
impairment testing showed that the estimated fair value of our bank reporting unit was less than
the carrying value of equity. This necessitated a step 2 analysis and valuation. Based on the step
2 analysis (which involved determining the fair value of our banks assets, liabilities and
identifiable intangibles) we concluded that goodwill was now impaired, resulting in this $9.6
million charge.
Other general and administrative expense has increased to $1.5 million in 2009 from $1.2 million in
2008, following an increase in 2008 to $1.2 million from $972,000 in 2007. The increases in 2008
and 2009 were largely due to the increase in FDIC insurance coverage. In 2009, the increase in
FDIC insurance included a $136,000 one-time special assessment on all insured financial
institutions equal to approximately 5 basis points of total assets, less tier one equity, and the
quarterly increases implemented during the year. The increase from 2007 to 2008 was also due to an
increase in advertising and marketing which was primarily attributable to costs incurred in
conjunction with a more aggressive marketing strategy for 2008 that did not occur in 2007.
44
Federal Income Taxes. Our effective tax rate for purposes of the tax provision was 2.75% in 2009
compared to 25.3% in 2008, and 24.3% in 2007. For 2009 the reduced effective tax rate was the
non-deductible writeoff of goodwill and the allowance placed on our deferred tax asset. In prior
years the difference between the effective tax rates and the federal corporate income tax rate of
34% is attributable to the low income housing credits available to the Bank from the investment in
the limited partnership as well as fluctuation of permanent book and tax differences such as
non-taxable income and non-deductible expenses.
Liquidity and Commitments
We are required to maintain appropriate levels of liquid assets under FDIC regulations. Appropriate
levels are determined by our Board of Directors and Management and are included in our asset
liability management policy. Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on loans. We have maintained
liquidity at levels above those believed to be adequate to meet the requirements of normal
operations, including new loan funding and potential deposit outflows. At December 31, 2009, our
liquidity ratio, which is our liquid assets as a percentage of total deposits less certificates of
deposit maturing in more than one year and plus borrowings maturing in one year or less, was 11.0%.
This level of liquidity is higher than that maintained last year. Management has taken steps to
increase liquidity and is confident it will be able to effectively address the Banks liquidity
needs while facilitating increased profitability.
Monarchs liquidity, represented by cash and cash equivalents, is a product of our operating,
investing and financing activities. Monarchs primary sources of funds are deposits, amortization,
prepayments and maturities of outstanding loans, overnight deposits and funds provided from
operations. While scheduled payments from the amortization of loans and overnight deposits are
relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced
by general interest rates, economic conditions and competition. Monarch also generates cash through
borrowings. Monarch 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.
Liquidity management is both a daily and long-term function of business management. Excess
liquidity is generally invested in overnight deposits, including fed funds, and short-term treasury
and governmental agency securities. On a longer term basis, Monarch maintains a strategy of
investing in various investments and lending products. Monarch 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
December 31, 2009, totaled $45.6 million. Based on historical experience, management believes that
a significant portion of these certificates of deposit can be retained by continuing to pay
competitive interest rates.
If necessary, additional funding sources include additional deposits (including core deposits) and
Federal Home Loan Bank advances. Management is committed to increasing our core deposit balances
but we have had difficulty doing so and core deposit growth may not be a significant source of
liquidity in the future. Based on current collateral levels, at December 31, 2009, Monarch could
borrow an additional $19.7 million from the Federal Home Loan Bank at prevailing interest rates. We
anticipate we will continue to have sufficient funds, through deposits and borrowings, to meet our
current commitments. For the year ended December 31, 2009, Monarch had a net increase in cash and
cash equivalents of $17.1 million as compared to a net decrease of $7.5 million for the year ended
December 31, 2008.
The Companys primary sources of funds during 2009 were operations of $1.7 million, increase in
deposits of $21.0 million and $6.8 million increase in cash generated by the issuance of preferred
stock. The primary uses of funds in 2009 were the repayment of $15.7 million of FHLB advances and
purchases of securities of $17.8 million.
The Companys primary sources of funds during 2008 were operations of $3.7 million, increase in
deposits of $14.2 million and net proceeds from Federal Home Loan Bank advances of $1.8 million.
The primary uses of funds in 2008 were an increase in net loan originations of $27.7 million and
repurchases of the Companys stock of $2.7 million.
Off-Balance Sheet Arrangements
At December 31, 2009, the total unused commercial and consumer lines of credit were $17.8 million
and there were outstanding commitments under letters of credit of $160,000. At December 31, 2008,
the total unused commercial and consumer lines of credit were $18.9 million and there were
outstanding commitments under letters of credit of $10,000. The Company has no arrangements with
any other entities that have or are reasonably likely to have a material effect on financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
45
Capital
Consistent with its goals to operate a sound and profitable financial organization, Monarch
actively seeks to maintain a well capitalized institution in accordance with regulatory
standards. Note 12 to the Financial Statements details the capital position of the Bank as well as
the capital levels necessary to remain well capitalized. At December 31, 2009 the equity to assets
ratio of the Company was 8.2%. During 2008, the Company repurchased 272,000 shares of its common
stock in open market purchases.
Impact of Inflation
The consolidated financial statements presented herein have been prepared in accordance with
generally accepted accounting principles. These principles require the measurement of financial
position and operating results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the effects of general levels of inflation. Interest
rates, however, do not necessarily move in the same direction or with the same magnitude as the
price of goods and services, since such prices are affected by inflation. In a period of rapidly
rising interest rates, the liquidity and maturity structures of our assets and liabilities are
critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the
area of non-interest expense. Such expense items as employee compensation, employee benefits and
occupancy and equipment costs may be subject to increases as a result of inflation. An additional
effect of inflation is the possible increase in the dollar value of the collateral securing loans
that we have made. We are unable to determine the extent, if any, to which properties securing our
loans have appreciated in dollar value due to inflation.
MARKET INFORMATION
The Companys common stock commenced trading on August 29, 2002 on the NASDAQ Market under the
symbol MCBF. The table below shows the high and low sales prices of the common stock for the
periods indicated, as reported on the NASDAQ Capital Market. For the years ended December 31, 2009
and 2008, the Company paid dividends of $0.25 and $0.36 per share, respectively.
Year | Quarter ending | High | Low | Dividends | ||||||||||||
2008 |
March 31 | $ | 10.37 | $ | 9.80 | $ | 0.09 | |||||||||
June 30 | $ | 9.64 | $ | 9.45 | $ | 0.09 | ||||||||||
September 30 | $ | 9.25 | $ | 8.04 | $ | 0.09 | ||||||||||
December 31 | $ | 3.84 | $ | 3.50 | $ | 0.09 | ||||||||||
2009 |
March 31 | $ | 3.48 | $ | 3.30 | $ | 0.09 | |||||||||
June 30 | $ | 6.79 | $ | 6.10 | $ | 0.09 | ||||||||||
September 30 | $ | 3.74 | $ | 3.57 | $ | 0.07 | ||||||||||
December 31 | $ | 2.80 | $ | 2.51 | $ | |
Please refer to Note 13 to the Financial Statements for a discussion of certain restrictions
which impact the Companys ability to pay dividends. Because the Company has no significant
operations, it depends upon dividends from the bank in order to pay dividends to its stockholders.
As of February 26, 2010, there were 2,044,606 shares of the Companys common stock isued and
outstanding and approximately 552 holders of record. The holders of record do include banks and
brokers who act as nominees, each of whom may represent more than one stockholder.
46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Asset and Liability Management and Market Risk
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities
generally are established contractually for a period of time. Market interest rates change over
time. Accordingly, our results of operations, like those of other financial institutions, are
impacted by changes in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and our ability to adapt to these
changes is known as interest rate risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to
changes in interest rates and comply with applicable regulations, we monitor our interest rate
risk. In monitoring interest rate risk, we continually analyze and manage assets and liabilities
based on their payment streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
The Board of Directors sets and recommends the asset and liability policies of the Bank which are
implemented by the asset and liability management committee. The asset and liability management
committee is comprised of members of our senior management. The purpose of the asset and liability
management committee is to communicate, coordinate and control asset/liability management
consistent with our business plan and board approved policies. The asset and liability management
committee establishes and monitors the volume and mix of assets and funding sources taking into
account relative costs and spreads, interest rate sensitivity and liquidity needs.
The objectives are to manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals. The asset and liability
management committee generally meets on a quarterly basis to review, among other things, economic
conditions and interest rate outlook, current and projected liquidity needs and capital position,
anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections. The Chief Financial Officer is responsible for reviewing and
reporting on the effects of the policy implementation and strategies to the Board of Directors,
each quarter.
In order to manage our assets and liabilities and achieve the desired liquidity, credit quality,
interest rate risk, profitability and capital targets, we have focused our strategies on:
| originating shorter-term commercial real estate loans for retention in our portfolio; | ||
| selling a significant portion of the long-term, fixed rate residential mortgage loans we make; | ||
| managing our deposits to establish stable deposit relationships with an emphasis on core, non-certificate deposits, supplementing these with brokered deposits, as appropriate; and | ||
| maintaining longer-term borrowings at fixed interest rates to offset the negative impact of longer-term fixed rate loans in our loan portfolio. Future borrowings are expected to be short-term to reduce the average maturity of our borrowings. |
At times, depending on the level of general interest rates, the relationship between long- and
short-term interest rates, market conditions and competitive factors, the asset and liability
management committee may determine to increase Monarchs interest rate risk position somewhat in
order to maintain the net interest margin. In addition, in an effort to manage our interest rate
risk and liquidity, in 2009 and 2008 we sold $90.2 million and $27.8 million, respectively, of
fixed-rate, one-to-four family mortgage loans in the secondary market. We expect to continue to
sell a significant portion of our originated long term, fixed-rate, one-to-four family loans but
may retain some portion of our 15 year and shorter, fixed-rate loans.
Monarch uses an internally generated model that uses scenario analysis to evaluate the IRR exposure
of the Bank by estimating the sensitivity of the Banks portfolios of assets, liabilities, and
off-balance sheet contracts to changes in market interest rates. The information presented in the
following table presents the expected change in Monarchs net portfolio value at December 31, 2009
that would occur upon an immediate change in interest rates.
$ Amount | $ Change | % Change | NPV Ratio | Change | ||||||||||||||||
+ 300 bp |
24,848 | 6,148 | -20 | % | 8.78 | % | -169bp | |||||||||||||
+ 200 bp |
27,068 | 3,928 | -13 | % | 9.42 | % | -105bp | |||||||||||||
+100 bp |
29,477 | 1,519 | -5 | % | 10.10 | % | -37bp | |||||||||||||
0 bp |
30,996 | 0 | 10.47 | % | 0 | |||||||||||||||
-100 bp |
33,829 | 2,833 | 9 | % | 11.25 | % | +78bp | |||||||||||||
-200 bp |
36,891 | 5,895 | 19 | % | 12.08 | % | +161bp | |||||||||||||
-300 bp |
40,838 | 9,842 | 32 | % | 13.15 | % | +268bp |
(1) | Assumes an instantaneous uniform change in interest rates at all maturities. |
Based on the data from the model, management believes that the Banks IRR level remains
minimal.
47
As with any method of measuring interest rate risk, certain shortcomings are inherent in the
method of analysis presented in the foregoing table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, if interest rates change, expected rates
of prepayments on loans and early withdrawals from certificates could deviate significantly from
those assumed in calculating the table.
The Bank, like other financial institutions, is affected by changes in market interest rates. Our
net interest margin can change, either positively or negatively, as the result of increases or
decreases in market interest rates. Some factors affecting net interest margin are outside of our
control; market interest rates are but one factor affecting the Banks net interest margin.
However, management has the ability, through its asset/liability management and pricing policies to
affect the Banks net interest margin notwithstanding the level of market interest rates. The
preceding table indicates the Banks net portfolio value will decrease in an increasing interest
rate scenario and increase in a decreasing interest rate scenario. Management believes that its net
interest margin will behave similarly.
If rising interest rates stifle loan demand or create additional competitive pressures in
attracting and retaining deposits, the Banks desire for growth in total assets may cause
management to alter its strategy that could negatively impact the net interest margin. The timing
and magnitude of interest rate changes, as well as the sector affected (short-term vs. long-term)
will have an impact on the Banks net interest margin.
The following table provides information about the Companys financial instruments that are
sensitive to changes to interest rates as of December 31, 2009. The Company had no derivative
instruments, or trading portfolio as of that date. The expected maturity date values for loans
receivable, mortgage-backed securities and investment securities were calculated without adjusting
the contractual maturity dates for expectations of repayments. Expected maturity date values for
non-maturity, interest bearing deposits were based on the opportunity for repricing.
Principal Amount Maturing In:
2015 and | Fair Value | |||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | beyond | Total | 12/31/2009 | |||||||||||||||||||||||||
Rate-sensitive assets |
||||||||||||||||||||||||||||||||
Fed funds and overnight deposits |
$ | 10,723 | $ | | $ | | $ | | $ | | $ | | $ | 10,723 | $ | 10,723 | ||||||||||||||||
Average interest rate |
1.25 | % | ||||||||||||||||||||||||||||||
Securities |
$ | 638 | $ | 2,270 | $ | 1,395 | $ | 1,211 | $ | 1,685 | $ | 8,549 | $ | 15,748 | $ | 16,063 | ||||||||||||||||
Average interest rate |
3.32 | % | 4.00 | % | 4.21 | % | 4.25 | % | 4.74 | % | 4.76 | % | ||||||||||||||||||||
Gross loans |
$ | 18,556 | $ | 20,737 | $ | 23,278 | $ | 26,803 | $ | 12,606 | $ | 125,158 | $ | 227,138 | 230,866 | |||||||||||||||||
Average interest rate |
5.88 | % | 6.34 | % | 6.98 | % | 6.70 | % | 6.65 | % | 6.16 | % | ||||||||||||||||||||
Rate-sensitive liabilities |
||||||||||||||||||||||||||||||||
Savings & interest-bearing
demand deposits |
$ | 100,438 | $ | | $ | | $ | | $ | | $ | | $ | 100,437 | $ | 100,350 | ||||||||||||||||
Average interest rate |
0.89 | % | ||||||||||||||||||||||||||||||
Certificates of deposit |
$ | 45,707 | $ | 29,097 | $ | 6,647 | $ | 12,730 | $ | 3,755 | $ | 572 | $ | 98,508 | $ | 99,978 | ||||||||||||||||
Average interest rate |
2.63 | % | 3.46 | % | 3.99 | % | 4.17 | % | 3.76 | % | 4.18 | % | ||||||||||||||||||||
FHLB advances |
$ | 8,168 | $ | 16,175 | $ | 13,116 | $ | 7,059 | $ | | $ | | $ | 44,518 | $ | 48,260 | ||||||||||||||||
Average interest rate |
5.64 | % | 3.45 | % | 5.08 | % | 4.10 | % | ||||||||||||||||||||||||
48
ITEM 8. Financial Statements and Supplementary Data
Monarch Community Bancorp, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Financial Report
December 31, 2009
December 31, 2009
Monarch Community Bancorp, Inc. and Subsidiaries
Contents | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
8-40 |
Plante & Moran, PLLC | ||
Suite 400 | ||
634 Front Avenue N.W. | ||
Grand Rapids, MI 49504 | ||
Tel: 616.774.8221 | ||
Fax: 616.774.0702 | ||
plantemoran.com |
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Monarch Community Bancorp, Inc. and Subsidiaries
Monarch Community Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Monarch Community Bancorp, Inc. and
Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders equity, and cash flows for each year in the three-year period ended
December 31, 2009. These consolidated financial statements are the responsibility of the
Corporations management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Monarch Community Bancorp, Inc. and
Subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and
their cash flows for each year in the three-year period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Plante Moran, PLLC
Grand Rapids, Michigan
March 16, 2010
Grand Rapids, Michigan
March 16, 2010
3
Monarch Community Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheet
(000s omitted, except per share data)
(000s omitted, except per share data)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Cash and due from banks |
$ | 12,631 | $ | 5,595 | ||||
Federal Home Loan Bank overnight time and
other interest bearing deposits |
10,723 | 677 | ||||||
Total cash and cash equivalents |
23,354 | 6,272 | ||||||
Securities Available for sale (Note 3) |
16,063 | 8,916 | ||||||
Securities Held to maturity (Note 3) |
23 | 37 | ||||||
Other securities (Note 3) |
4,237 | 4,237 | ||||||
Loans held for sale |
809 | 860 | ||||||
Loans, net (Note 4) |
220,875 | 247,542 | ||||||
Foreclosed assets, net (Note 6) |
2,839 | 2,076 | ||||||
Premises and equipment (Note 7) |
4,467 | 4,456 | ||||||
Goodwill (Note 2) |
| 9,606 | ||||||
Core deposit (Note 2) |
532 | 681 | ||||||
Other assets (Notes 5 and 10) |
10,005 | 7,124 | ||||||
Total assets |
$ | 283,204 | $ | 291,807 | ||||
Liabilities and Stockholders Equity |
||||||||
Liabilities |
||||||||
Deposits |
||||||||
Noninterest-bearing |
14,422 | 13,883 | ||||||
Interest-bearing (Note 8): |
198,946 | 178,273 | ||||||
Total deposits |
213,368 | 192,156 | ||||||
Federal Home Loan Bank advances (Note 9) |
44,518 | 60,178 | ||||||
Fed funds purchased (Note 9) |
| 1,000 | ||||||
Accrued expenses and other liabilities (Note 15) |
2,155 | 2,203 | ||||||
Total liabilities |
260,041 | 255,537 | ||||||
Stockholders Equity (Notes 12 ,13 , 14 and 19) |
||||||||
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 December 31, 2009 |
6,739 | | ||||||
Common stock $0.01 par value, 20,000,000 shares authorized, 2,044,606
shares issued and outstanding at December 31, 2009
and 2,046,102 issued and outstanding at December 31, 2008 |
20 | 20 | ||||||
Additional paid-in capital |
21,216 | 21,152 | ||||||
Retained earnings (Accumulated deficit) |
(4,355 | ) | 15,867 | |||||
Accumulated other comprehensive income |
223 | 69 | ||||||
Unearned compensation |
(680 | ) | (838 | ) | ||||
Total stockholders equity |
23,163 | 36,270 | ||||||
Total liabilities and stockholders equity |
$ | 283,204 | $ | 291,807 | ||||
See Notes to Consolidated Financial Statements.
4
Monarch Community Bancorp, Inc. and Subsidiaries
Consolidated Statement Of Operations
(000s omitted, except per share data)
(000s omitted, except per share data)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Interest Income |
||||||||||||
Loans, including fees |
$ | 15,191 | $ | 16,457 | $ | 16,369 | ||||||
Investment securities |
639 | 637 | 787 | |||||||||
Federal funds sold and overnight deposits |
6 | 102 | 389 | |||||||||
Total interest income |
15,836 | 17,196 | 17,545 | |||||||||
Interest Expense |
||||||||||||
Deposits |
4,910 | 5,861 | 6,107 | |||||||||
Federal Home Loan Bank advances |
2,429 | 2,675 | 3,115 | |||||||||
Total interest expense |
7,339 | 8,536 | 9,222 | |||||||||
Net Interest Income |
8,497 | 8,660 | 8,323 | |||||||||
Provision for Loan Losses (Note 4) |
13,349 | 2,712 | 971 | |||||||||
Net Interest Income (Loss) After Provision for Loan Losses |
(4,852 | ) | 5,948 | 7,352 | ||||||||
Noninterest Income |
||||||||||||
Fees and service charges |
2,224 | 2,314 | 2,477 | |||||||||
Loan servicing fees |
458 | 443 | 444 | |||||||||
Net gain on sale of loans |
2,090 | 627 | 668 | |||||||||
Net gain (loss) on sale of investment securities (Note 3) |
10 | 2 | (17 | ) | ||||||||
Net gain (loss) on disposal of premises and equipment |
(7 | ) | | 49 | ||||||||
Other income (Note 6) |
218 | 217 | 325 | |||||||||
Total noninterest income |
4,993 | 3,603 | 3,946 | |||||||||
Noninterest Expense |
||||||||||||
Salaries and employee benefits (Note 15, 19 and 20) |
4,818 | 4,584 | 4,522 | |||||||||
Occupancy and equipment (Note 7) |
1,044 | 1,032 | 1,008 | |||||||||
Data processing |
700 | 777 | 731 | |||||||||
Mortgage banking |
546 | 406 | 359 | |||||||||
Professional services |
530 | 401 | 591 | |||||||||
Amortization of intangible assets (Note 2) |
149 | 181 | 230 | |||||||||
NOW account processing |
149 | 176 | 180 | |||||||||
ATM/Debit card processing |
232 | 200 | 192 | |||||||||
Repossessed property expense (Note 6) |
822 | 219 | 207 | |||||||||
Other general and administrative |
1,488 | 1,176 | 972 | |||||||||
Goodwill Impairment (Note 2) |
9,607 | | | |||||||||
Total noninterest expense |
20,085 | 9,152 | 8,992 | |||||||||
Income (Loss) - Before income taxes |
(19,944 | ) | 399 | 2,306 | ||||||||
Income Taxes (Note 10) |
(548 | ) | 101 | 561 | ||||||||
Net Income (Loss) |
$ | (19,396 | ) | $ | 298 | $ | 1,745 | |||||
Dividends and accretion of discount on preferred stock |
$ | 315 | $ | | $ | | ||||||
Net Income (Loss) available to common stockholders |
$ | (19,711 | ) | $ | 298 | $ | 1,745 | |||||
Earnings (Loss) Per Share |
||||||||||||
Basic |
$ | (10.03 | ) | $ | 0.14 | $ | 0.73 | |||||
Diluted |
$ | (10.03 | ) | $ | 0.14 | $ | 0.73 |
See Notes to Consolidated Financial Statements.
5
Monarch Community Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholders Equity
(000s omitted)
(000s omitted)
(Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||
Preferred | Common Stock | deficit) | Other | |||||||||||||||||||||||||||||||||
Stock Number | Number of | Additional Paid | Retained | Comprehensive | Unearned | |||||||||||||||||||||||||||||||
of Shares | Amount | Shares | Amount | in Capital | Earnings | Income (Loss) | Compensation | Total | ||||||||||||||||||||||||||||
Balance January 31, 2007 |
| | 2,534 | $ | 25 | $ | 26,191 | $ | 15,319 | $ | (63 | ) | $ | (1,486 | ) | $ | 39,986 | |||||||||||||||||||
3,326 shares repurchased at average
price of $11.95/share |
(3 | ) | (40 | ) | (40 | ) | ||||||||||||||||||||||||||||||
Vesting of 17,589 restricted shares |
235 | 235 | ||||||||||||||||||||||||||||||||||
Allocation of ESOP shares (Note 19) |
43 | 93 | 136 | |||||||||||||||||||||||||||||||||
Repurchase of 208,570 shares at average
price of $11.78/share |
(209 | ) | (2 | ) | (2,454 | ) | (2,456 | ) | ||||||||||||||||||||||||||||
Stock option expenses |
88 | 88 | ||||||||||||||||||||||||||||||||||
Comprehensive Income (Loss): |
||||||||||||||||||||||||||||||||||||
Net Income |
1,745 | 1,745 | ||||||||||||||||||||||||||||||||||
Change in
unrealized loss on securities available-for-sale, net of tax |
115 | 115 | ||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) |
1,860 | |||||||||||||||||||||||||||||||||||
Dividends paid ($0.29/share) |
| | | | | (723 | ) | | | (723 | ) | |||||||||||||||||||||||||
Balance December 31, 2007 |
| | 2,322 | $ | 23 | $ | 23,828 | $ | 16,341 | $ | 52 | $ | (1,158 | ) | $ | 39,086 | ||||||||||||||||||||
Vesting of 17,289 restricted shares |
227 | 227 | ||||||||||||||||||||||||||||||||||
Allocation of ESOP shares (Note 19) |
15 | 93 | 108 | |||||||||||||||||||||||||||||||||
Repurchase of 275,483 shares at average
price of $9.81/share |
(275 | ) | (3 | ) | (2,701 | ) | (2,704 | ) | ||||||||||||||||||||||||||||
Stock option expenses |
10 | 10 | ||||||||||||||||||||||||||||||||||
Comprehensive Income (Loss): |
||||||||||||||||||||||||||||||||||||
Net Income |
298 | 298 | ||||||||||||||||||||||||||||||||||
Change in
unrealized loss on securities available-for-sale, net of tax |
17 | 17 | ||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) |
315 | |||||||||||||||||||||||||||||||||||
Dividends paid ($0.36/share) |
| | | | | (772 | ) | | | (772 | ) | |||||||||||||||||||||||||
Balance December 31, 2008 |
| | 2,047 | $ | 20 | $ | 21,152 | $ | 15,867 | $ | 69 | $ | (838 | ) | $ | 36,270 | ||||||||||||||||||||
Vesting of 4,978 restricted shares |
65 | 65 | ||||||||||||||||||||||||||||||||||
Allocation of ESOP shares (Note 19) |
(39 | ) | 93 | 54 | ||||||||||||||||||||||||||||||||
Repurchase of 3,013 shares at average
price of $9.48/share |
(1 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||||||||||
Issuance of 6,785 shares of preferred
stock and 260,962 of common stock
warrants through the U.S. Treasurys
Capital Purchase Program |
6,785 | 6,729 | 56 | 6,785 | ||||||||||||||||||||||||||||||||
Stock option expenses |
50 | 50 | ||||||||||||||||||||||||||||||||||
Comprehensive Income (Loss): |
||||||||||||||||||||||||||||||||||||
Net (Loss) |
(19,396 | ) | (19,396 | ) | ||||||||||||||||||||||||||||||||
Change in
unrealized loss on |
154 | 154 | ||||||||||||||||||||||||||||||||||
securities available-for-sale, net of tax |
| |||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) |
(19,242 | ) | ||||||||||||||||||||||||||||||||||
Dividends on preferred stock and
accretion of discount |
10 | (315 | ) | (305 | ) | |||||||||||||||||||||||||||||||
Dividends paid ($0.25/share) |
| | | | | (511 | ) | | | (511 | ) | |||||||||||||||||||||||||
Balance December 31, 2009 |
6,785 | $ | 6,739 | 2,046 | $ | 20 | $ | 21,216 | $ | (4,355 | ) | $ | 223 | $ | (680 | ) | $ | 23,163 | ||||||||||||||||||
See Notes
to Consolidated Financial Statements.
6
Monarch Community Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(000s omitted)
(000s omitted)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash Flows From Operating Activities |
||||||||||||
Net income (loss) |
$ | (19,396 | ) | $ | 298 | $ | 1,745 | |||||
Adjustments
to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
1,297 | 1,082 | 1,100 | |||||||||
Provision for loan loss |
13,349 | 2,712 | 971 | |||||||||
Stock option expense |
50 | 10 | 88 | |||||||||
(Gain) loss on sale of foreclosed assets |
(13 | ) | (68 | ) | (138 | ) | ||||||
Deferred income taxes |
(237 | ) | (270 | ) | (394 | ) | ||||||
Mortgage loans originated for sale |
(90,197 | ) | (28,273 | ) | (28,224 | ) | ||||||
Proceeds from sale of mortgage loans |
92,337 | 28,464 | 29,407 | |||||||||
Gain on sale of mortgage loans |
(2,090 | ) | (627 | ) | (668 | ) | ||||||
(Gain) Loss on sale of available for sale securities |
(10 | ) | (2 | ) | 17 | |||||||
(Gain) Loss on sale of premises and equipment |
7 | | (49 | ) | ||||||||
Earned stock compensation |
119 | 335 | 371 | |||||||||
Goodwill Impairment |
9,607 | | | |||||||||
Net change in: |
||||||||||||
Accrued interest receivable |
146 | 64 | (63 | ) | ||||||||
Other assets |
(3,247 | ) | 341 | (226 | ) | |||||||
Accrued expenses and other liabilities |
(72 | ) | (390 | ) | (109 | ) | ||||||
Net cash provided by operating activities |
1,650 | 3,676 | 3,828 | |||||||||
Cash Flows From Investing Activities |
||||||||||||
Activity in available-for-sale securities: |
||||||||||||
Purchases |
(17,815 | ) | (3,519 | ) | (3,819 | ) | ||||||
Proceeds from sale of securities |
10,774 | 5,691 | 4,428 | |||||||||
Proceeds from maturities of securities |
| 208 | 2,173 | |||||||||
Activity in held-to-maturity securities: |
||||||||||||
Purchases |
| (7 | ) | (30 | ) | |||||||
Proceeds from maturities of securities |
14 | | 20 | |||||||||
Loan originations and principal collections, net |
10,846 | (27,672 | ) | 3,001 | ||||||||
Proceeds from sale of foreclosed assets |
1,579 | 1,715 | 1,793 | |||||||||
Proceeds on sale of premises and equipment |
| | 283 | |||||||||
Purchase of premises and equipment |
(484 | ) | (254 | ) | (131 | ) | ||||||
Net cash provided by (used in) investing activities |
4,914 | (23,838 | ) | 7,718 | ||||||||
Cash Flows From Financing Activities |
||||||||||||
Net increase (decrease) in deposits |
21,212 | 14,220 | (14,636 | ) | ||||||||
Repurchases of common stock |
(3 | ) | (2,704 | ) | (2,496 | ) | ||||||
Dividends paid |
(816 | ) | (772 | ) | (723 | ) | ||||||
Proceeds from FHLB advances |
| 44,500 | 41,500 | |||||||||
Repayment of Fed Funds Purchased |
(1,000 | ) | | | ||||||||
Repayment of FHLB advances |
(15,660 | ) | (42,652 | ) | (36,646 | ) | ||||||
Issuance of Preferred Stock |
6,785 | | | |||||||||
Net cash provided by (used in) financing activities |
10,518 | 12,592 | (13,001 | ) | ||||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
17,082 | (7,570 | ) | (1,455 | ) | |||||||
Cash and Cash Equivalents Beginning |
6,272 | 13,842 | 15,297 | |||||||||
Cash and Cash Equivalents End |
$ | 23,354 | $ | 6,272 | $ | 13,842 | ||||||
See Notes to Consolidated Financial Statements.
7
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 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.
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. The Bank also owns a
24.98% interest in a limited partnership formed to construct and operate multi-family
housing units.
On June 3, 2006, the Corporation completed the conversion of the Bank from a federally
chartered stock savings institution to a Michigan state chartered commercial bank. As
a result of the conversion, the Corporation became a federal bank holding company
regulated by the Board of Governors of the Federal Reserve and the Bank became
regulated by the State of Michigan Office of Financial and Insurance Regulation
(OFIR) and the Federal Deposit Insurance Corporation (FDIC). Prior to the
conversion, both the Corporation and the Bank had been regulated by the Office of
Thrift Supervision.
Basis of Presentation and Consolidation The consolidated financial statements include
the accounts of Monarch Community Bancorp, Inc., Monarch Community Bank, and First
Insurance Agency, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates The accounting and reporting policies of the Corporation and its
subsidiaries conform to accounting principles generally accepted in the United States
of America. Management is required to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results
could differ from these estimates and assumptions. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, identification and valuation of
impaired loans, valuation of the mortgage servicing asset, valuation of investment
securities, valuation of intangible assets, valuation of deferred taxes, and the
valuation of the foreclosed assets.
Significant Group Concentrations of Credit Risk Most of the Corporations activities
are with customers located within its primary market areas in Michigan. Note 3
summarizes the types of securities the Corporation invests in. Note 4 summarizes the
types of lending that the Corporation engages in. The Corporation has a significant
concentration of loans secured by residential real estate located in Branch, Calhoun
and Hillsdale counties.
Cash and Cash Equivalents For the purpose of the consolidated statement of cash
flows, cash and cash equivalents include cash and balances due from banks,
interest-bearing deposits and overnight time deposits with the Federal Home Loan Bank
and fed funds sold. The Bank is required to maintain average balances on hand or with
the Federal Reserve Bank. At December 31, 2009 and 2008, these reserve balances
amounted to approximately $461,000 and $441,000, respectively.
8
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Securities
Debt securities that management has the positive intent and ability
to hold to maturity are classified as held to maturity and recorded at amortized
cost. Securities not classified as held to maturity or trading including equity
securities with readily determinable fair values, are classified as available for
sale and recorded at fair value, with unrealized gains and losses, net of deferred
income taxes, excluded from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of held-to-maturity
securities below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other-than-temporary impairment losses,
management considers (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 prospects of the issuer,
and (3) the intent and ability of the Corporation to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in fair
value. Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans
Held for Sale Loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized in a valuation allowance by charges to
income.
Loans The Corporation grants mortgage, commercial and consumer loans to
customers. Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding unpaid principal
balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees
or costs on originated loans.
The accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well-secured and in process of collection. In all
cases, loans are placed on nonaccrual or charged-off at an earlier date if collection
of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or
charged off is reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is
based upon managements periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse situations
that may affect the borrowers ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is inherently subjective
as it requires estimates that are susceptible to significant revision as more
information becomes available.
9
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
The allowance consists of specific, general and unallocated components. The specific
components relates to loans that are classified as either doubtful, substandard or
special mention. For such loans that are also classified as impaired, an allowance is
established when the discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower that the carrying value of that loan. The general
component covers non-classified loans and is based on historical loss experience
adjusted for qualitative factors. The unallocated component is maintained to cover
uncertainties that could affect managements estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision inherent in
the underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and the borrower,
including length of the delay, the reasons for the delay, the borrowers prior payment
record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the loans
effective interest rate, the loans obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of homogeneous loans are collectively evaluated for impairment.
Accordingly, the Corporation does not separately identify individual consumer and
residential loans for impairment disclosures.
Servicing Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing rights are
reported in other assets and are amortized into noninterest expense in proportion to,
and over the period of, the estimated future net servicing income of the underlying
financial assets. Servicing assets are evaluated for impairment based upon the fair
value of the rights as compared to amortized cost.
Impairment is determined by stratifying rights by predominant characteristics, such as
interest rates and terms. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Impairment is recognized through a valuation allowance for an
individual stratum, to the extent that fair value is less than the capitalized amount
for the stratum.
Credit
Related Financial Instruments In the ordinary course of business, the
Corporation has entered into commitments to extend credit, including commitments under
commercial letters of credit and standby letters of credit. Such financial instruments
are recorded when they are funded.
10
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
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.
Premises and Equipment Land is carried at cost. Buildings and equipment are carried
at cost, less accumulated depreciation computed on the straight-line method over the
estimated useful lives of the assets.
Goodwill and Other Intangible Assets Goodwill results from business acquisitions and
represents the excess of the purchase price over the fair value of acquired tangible
assets and liabilities and identifiable intangible assets. Goodwill is assessed at
least annually for impairment and any such impairment is recognized in the period
identified. Monarch Community Bank utilizes a third party to provide testing of
goodwill. See further discussion of goodwill in Note 2.
Other intangible assets consist of core deposit, acquired customer relationship
intangible assets arising from whole bank acquisitions. They are initially measured at
fair value and then are amortized on an accelerated method over their estimated useful
lives.
Income Taxes We record income tax expense based on the amount of taxes due on our tax
return plus the change in deferred taxes, computed based on the future tax consequences
of temporary differences between the carrying amounts and tax bases of assets and
liabilities using enacted tax rates. A valuation allowance, if needed, reduces deferred
tax assets to the amount expected to be realized.
Comprehensive Income Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance sheet. Such
items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects are as follows
(000s omitted):
2009 | 2008 | 2007 | ||||||||||
Change in unrealized holding gain (loss)
on available-for-sale securities |
$ | 234 | $ | 25 | $ | 158 | ||||||
Reclassification adjustment for (gains) losses
realized in income |
(10 | ) | (2 | ) | 17 | |||||||
Net unrealized gains (losses) |
$ | 224 | $ | 23 | $ | 175 | ||||||
Tax effect |
(70 | ) | (6 | ) | (60 | ) | ||||||
Net-of-tax amount |
$ | 154 | $ | 17 | $ | 115 | ||||||
11
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Earnings (Loss) Per Common Share Basic earnings (loss) per share represents income
(loss) available to common stockholders divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings (loss) per share reflects
additional common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustments to income (loss) that would result
from the assumed issuance. Potential common shares that may be issued by the
Corporation relate to outstanding stock options, Recognition and Retention Plan shares
and warrants, and are determined using the treasury stock method.
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):
2009 | 2008 | 2007 | ||||||||||
Basic earnings (loss) per share |
||||||||||||
Numerator: |
||||||||||||
Net income (loss) |
$ | (19,396 | ) | $ | 298 | $ | 1,745 | |||||
Dividends and accretion of discount on preferred stock |
$ | 315 | $ | | $ | | ||||||
Net Income (loss) available to common stockholders |
$ | (19,711 | ) | $ | 298 | $ | 1,745 | |||||
Denominator: |
||||||||||||
Weighted average common shares outstanding |
2,046 | 2,159 | 2,508 | |||||||||
Less: Average unallocated ESOP shares |
(74 | ) | (83 | ) | (93 | ) | ||||||
Less: Average non-vested RRP shares |
(6 | ) | (11 | ) | (32 | ) | ||||||
Weighted average common shares outstanding
for basic earnings per share |
1,966 | 2,065 | 2,383 | |||||||||
Basic earnings (loss) per share |
$ | (10.03 | ) | $ | 0.14 | $ | 0.73 | |||||
Diluted earnings (loss) per share |
||||||||||||
Numerator: |
||||||||||||
Net Income (loss) available to common stockholders |
$ | (19,711 | ) | $ | 298 | $ | 1,745 | |||||
Denominator: |
||||||||||||
Weighted average common shares outstanding |
1,966 | 2,065 | 2,383 | |||||||||
Add: Dilutive effects of assumed exercises of stock options |
| | | |||||||||
Add: Dilutive effects of average non-vested RRP shares |
| | | |||||||||
Weighted average common shares and dilutive
potential common shares outstanding |
1,966 | 2,065 | 2,383 | |||||||||
Diluted earnings (loss) per share |
$ | (10.03 | ) | $ | 0.14 | $ | 0.73 | |||||
12
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
At December 31, 2009, stock options and warrants not considered in computing diluted
earnings per share because they were antidilutive totaled 455,324 and non-vested RRP
shares not considered in computing diluted earnings per share because they were
antidilutive totaled 2009. At December 31, 2008, there were 162,262 antidilutive stock
options and 7,528 non-vested RRP shares. At December 31, 2007, there were 174,757
antidilutive stock options and 24,817 non-vested RRP shares.
Employee
Stock Ownership Plan (ESOP) Compensation expense is recognized as
ESOP shares are committed to be
released. Allocated and committed to be released ESOP shares are considered outstanding
for earnings per share calculation based on debt service payments. Dividends declared
on allocated ESOP shares are charged to retained earnings. Dividends declared on
unallocated ESOP shares are used for debt service. The Corporation has committed to
make contributions to the ESOP sufficient to service the debt to the extent not paid
through dividends. The value of unearned shares to be allocated to ESOP participants
for future services not yet performed is reflected as a reduction of stockholders
equity.
Stock Based Compensation All companies measure the cost for stock options provided to
employees in return for employee service. The cost is measured at the fair value of the
options granted and recognized over the employee service period, which is usually the
vesting period for the options. The effect on the Corporations net income will depend
on the level of future option grants and the calculation of the fair value of the
options granted, as well as the vesting periods provided.
Recent Accounting Pronouncements The FASB issued new guidance in 2009 on the
accounting for transfers of financial assets. The new guidance eliminates the concept
of a qualifying special-purpose entity. Other changes from current accounting
standards include new de-recognition criteria for a transfer to be accounted for as a
sale, and a change to the amount of recognized gain/loss on transfers accounted for as
a sale when beneficial interests are received by the transferor. This new standard
will be applied prospectively to new transfers of financial assets and will be
effective for the first annual period beginning after November 15, 2009 and interim
periods within that first annual period. Early application is prohibited. The Company
is currently assessing the impact this new standard will have on its financial
statements.
13
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies (Continued)
Supplemental Cash Flow Information (000s omitted)
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash paid for: |
||||||||||||
Interest |
$ | 7,468 | $ | 8,553 | $ | 9,218 | ||||||
Income taxes |
$ | 210 | $ | 400 | $ | 500 | ||||||
Noncash investing activities |
||||||||||||
Loans transferred to real estate in judgement |
$ | 2,380 | $ | 1,715 | $ | 1,478 | ||||||
Real estate in judgement transferred to real estate owned |
$ | 4,240 | $ | 2,528 | $ | 1,738 |
Reclassifications Certain prior year amounts have been reclassified to conform
with current year presentation.
14
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 Goodwill and Intangible Assets
Under the provisions of FASB ASC 350-10-35-1Goodwill and Other Intangibles, goodwill is no
longer amortized into the income statement over an estimated life, but rather is tested at least
annually for impairment. Impairment of goodwill is evaluated by reporting unit and is based on a
comparison of the recorded balance of goodwill to the applicable market value or discounted cash
flows. To the extent that impairment may exist, the current carrying amount is reduced by the
estimated shortfall. Intangible assets which have finite lives are amortized over their estimated
useful lives and are subject to impairment testing. During 2009, it was determined that goodwill
was impaired. Accordingly, 100% of our goodwill, or $9.6 million was written-off in the 4th quarter
of 2009. The Bank has approximately $532,000 in remaining intangible assets which consists of a
core deposit premium.
Acquired intangible assets at year end were as follows:
(In thousands of Dollars) | ||||||||||||
Gross | Accumulated | Net | ||||||||||
2009 |
||||||||||||
Amortized intangible assets: |
||||||||||||
Core deposit premium resulting from
bank and branch acquistions |
||||||||||||
Total |
$ | 2,081 | $ | 1,549 | $ | 532 | ||||||
2008 |
||||||||||||
Amortized intangible assets: |
||||||||||||
Core deposit premium resulting from
bank and branch acquistions |
||||||||||||
Total |
$ | 2,081 | $ | 1,400 | $ | 681 | ||||||
Aggregate amortization expense was $149,000, $181,000, and $230,000 for 2009, 2008, and 2007
respectively.
Year Ending | ||||
December 31 | ||||
2010 |
$ | 142 | ||
2011 |
142 | |||
2012 |
142 | |||
2013 |
106 | |||
Total |
$ | 532 | ||
15
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 Securities
The amortized cost and fair value of securities, with gross unrealized gains and
losses, follows (000s omitted):
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
2009 |
||||||||||||||||
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 | |||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
2008 |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. government agency obligations |
$ | 5,698 | $ | 63 | $ | | $ | 5,761 | ||||||||
Mortgage-backed securities |
739 | | (5 | ) | 734 | |||||||||||
Obligations of states and
political subdivisions |
2,375 | 58 | (12 | ) | 2,421 | |||||||||||
Total available-for-sale securities |
$ | 8,812 | $ | 121 | $ | (17 | ) | $ | 8,916 | |||||||
Held-to-maturity securities: |
||||||||||||||||
Municipal securities |
$ | 37 | $ | | $ | | $ | 37 | ||||||||
16
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 Securities (Continued)
The amortized cost and estimated market values of securities at December 31, 2009, by
contractual maturity, are shown below. Expected maturities will differ from contractual
maturities because issuers will have the right to call or prepay obligations with or
without call or prepayment penalties (000s omitted):
Held to Maturity | Available for Sale | |||||||||||||||
Amortized Cost | Market Value | Amortized Cost | Market Value | |||||||||||||
Due in one year or less |
$ | 3 | $ | 3 | $ | 500 | $ | 503 | ||||||||
Due in one through five years |
20 | 20 | 6,245 | 6,402 | ||||||||||||
Due after five years through ten years |
| | 3,526 | 3,622 | ||||||||||||
Due after ten years |
| | | | ||||||||||||
Total |
$ | 23 | $ | 23 | 10,271 | 10,527 | ||||||||||
Mortgage-backed securities |
5,454 | 5,536 | ||||||||||||||
Total available-for-sale securities |
$ | 15,725 | $ | 16,063 | ||||||||||||
For the years ended December 31, 2009, 2008 and 2007, proceeds from sales of securities
available for sale amounted to $10,774,000, $5,691,000, and $4,428,000, respectively.
Gross realized gains amounted to $10,000, $2,000, and $2,000, respectively. Gross
realized losses amounted to $0, $0, and $19,000, respectively. The tax benefit
applicable to these net realized gains and losses amounted to $2,500, $500, and $4,250,
respectively.
Information pertaining to securities with gross unrealized losses at December 31, 2009
and 2008, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:
Less than Twelve Months | Twelve Months and Over | |||||||||||||||
Gross Unrealized | Gross Unrealized | |||||||||||||||
Losses | Estimated Market Value | Losses | Estimated Market Value | |||||||||||||
2009 |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Mortgage-backed securities |
$ | | $ | | $ | | $ | | ||||||||
Obligations of states and
political subdivisions |
| | | | ||||||||||||
Total available-for-sale securities |
$ | | $ | | $ | | $ | | ||||||||
2008 |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Mortgage-backed securities |
$ | 5 | $ | 734 | $ | | $ | | ||||||||
Obligations of states and
political subdivisions |
12 | 528 | | | ||||||||||||
Total available-for-sale securities |
$ | 17 | $ | 1,262 | $ | | $ | | ||||||||
17
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 Securities (Continued)
Management evaluates securities for other-than-temporary impairment on a periodic basis
as economic or market concerns warrant such evaluation. Consideration is given to the
length of time the security has been in a loss position, the financial condition and
near-term
prospects of the issuer and the intent and ability of the Corporation to retain its
investment in the issuer to allow for recovery of fair value.
Other securities, consisting primarily of restricted Federal Home Loan Bank stock, are
recorded at cost, which approximates market value. Monarch Community Bank had $7.3 and
$5.7 million in pledged securities as collateral for Federal Home Loan Bank Advances at
December 31, 2009 and 2008 respectively.
Note 4 Loans
A summary of the balances of loans follows (000s omitted):
December 31, | ||||||||
2009 | 2008 | |||||||
Mortgage loans on real estate: |
||||||||
One-to-four family |
$ | 108,354 | $ | 124,855 | ||||
Multi-family |
5,421 | 5,728 | ||||||
Commercial |
72,689 | 75,730 | ||||||
Construction or land development |
9,528 | 9,499 | ||||||
Total real estate loans |
195,992 | 215,812 | ||||||
Consumer loans: |
||||||||
Home equity |
18,174 | 20,677 | ||||||
Other |
4,706 | 5,737 | ||||||
Total consumer loans |
22,880 | 26,414 | ||||||
Commercial business loans |
8,266 | 8,609 | ||||||
Subtotal |
227,138 | 250,835 | ||||||
Less: Allowance for loan losses |
5,783 | 2,719 | ||||||
Net deferred loan fees |
480 | 574 | ||||||
Loans, net |
$ | 220,875 | $ | 247,542 | ||||
18
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 Loans (Continued)
The following is an analysis of the allowance for loan losses (000s omitted):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance Beginning |
$ | 2,719 | $ | 1,824 | $ | 2,024 | ||||||
Provision for loan losses |
13,349 | 2,712 | 971 | |||||||||
Loans charged-off |
(10,557 | ) | (2,021 | ) | (1,402 | ) | ||||||
Recoveries of loans previously charged off |
272 | 204 | 231 | |||||||||
Balance Ending |
$ | 5,783 | $ | 2,719 | $ | 1,824 | ||||||
The following is a summary of information pertaining to impaired loans (000s
omitted):
December 31, | ||||||||
2009 | 2008 | |||||||
Impaired loans with a valuation allowance |
$ | 19,136 | $ | 2,394 | ||||
Valuation allowance related to impaired loans |
$ | 1,893 | $ | 364 | ||||
Total non-accrual loans |
$ | 15,570 | $ | 2,571 | ||||
Total loans past-due ninety days or more and still accruing |
$ | | $ | | ||||
The following is a summary of our average investment in impaired loans (000s
omitted):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Average investment in impaired loans |
$ | 8,163 | $ | 1,661 | $ | 1,748 | ||||||
Interest income recognized on impaired loans was not significant for the years ended
December 31, 2009, 2008, and 2007. No additional funds are committed to be advanced in connection
with impaired loans. Trouble debt restructured loans totaled $17.6 million and $5.0 million as of
December 31, 2009 and 2008 respectively.
19
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5
Servicing
Loans serviced for others are not included in the accompanying consolidated balance
sheets. The unpaid principal balances of mortgage loans serviced for others were
$194,029,000 and $175,641,000 at December 31, 2009 and 2008, respectively.
The fair value of mortgage servicing rights approximates $2,099,000 and $1,913,000 at
December 31, 2009 and 2008, respectively. The fair value was determined by discounting
estimated net future cash flows from mortgage servicing activities using an 8.0%
discount rate and estimated prepayment speeds of 4.1 to 17.0 based on current Freddie
Mac experience. The impairment valuation allowance is $0 as of December 31, 2009, 2008,
and 2007. There has been no activity in the impairment valuation allowance during the
years ended December 31, 2009, 2008, and 2007.
The following summarizes mortgage servicing rights capitalized and amortized (000s
omitted):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Mortgage servicing rights Beginning |
$ | 862 | $ | 1,016 | $ | 1,129 | ||||||
Mortgage servicing rights capitalized |
840 | 252 | 246 | |||||||||
Mortgage servicing rights scheduled amortization
and direct writedown for loan payoffs |
(546 | ) | (406 | ) | (359 | ) | ||||||
Mortgage servicing rights Ending |
$ | 1,156 | $ | 862 | $ | 1,016 | ||||||
Note 6
Foreclosed Assets
Foreclosed assets consisted of the following (000s omitted):
December 31, | ||||||||
2009 | 2008 | |||||||
Real estate owned |
$ | 1,713 | $ | 749 | ||||
Real estate in judgment and
subject to redemption |
1,126 | 1,327 | ||||||
Total |
$ | 2,839 | $ | 2,076 | ||||
20
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6
Foreclosed Assets (Continued)
Expenses applicable to foreclosed and repossessed assets include the following (000s
omitted):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net loss (gain) on sales of real estate |
$ | (13 | ) | $ | (68 | ) | $ | (138 | ) | |||
Operating expenses |
822 | 219 | 207 | |||||||||
Total |
$ | 809 | $ | 151 | $ | 69 | ||||||
The following table summarizes the activity associated with other real estate
owned:
(In Thousands of Dollars) | 2009 | 2008 | ||||||
Balance at beginning of year |
$ | 749 | $ | 885 | ||||
Properties transferred into OREO |
4,240 | 2,528 | ||||||
Valuation impairments recorded |
(1,684 | ) | (882 | ) | ||||
Proceeds from Sale of Properties |
(1,579 | ) | (1,714 | ) | ||||
Gain or (Loss) on sale of properties |
(13 | ) | (68 | ) | ||||
$ | 1,713 | $ | 749 | |||||
Note 7 Premises and Equipment
A summary of the cost and accumulated depreciation of premises and equipment follows
(000s omitted):
December 31, | Depreciable | |||||||||||
Life | ||||||||||||
2009 | 2008 | (in Years) | ||||||||||
Land |
$ | 566 | $ | 566 | ||||||||
Buildings and improvements |
5,727 | 5,550 | 5-40 | |||||||||
Furniture, fixtures and equipment |
2,837 | 2,779 | 2-15 | |||||||||
Total bank premises and equipment |
9,130 | 8,895 | ||||||||||
Less accumulated depreciation
and amortization |
4,663 | 4,439 | ||||||||||
Net carrying amount |
$ | 4,467 | $ | 4,456 | ||||||||
Depreciation expense totaled $464,000, $473,000, and $483,000 in 2009, 2008, and
2007, respectively.
21
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 Deposits
The following is a summary of interest bearing deposit accounts (000s omitted):
December 31, | ||||||||
2009 | 2008 | |||||||
Balances by account type: |
||||||||
Demand and NOW accounts |
$ | 23,084 | $ | 16,057 | ||||
Money market |
57,052 | 41,156 | ||||||
Passbook and statement savings |
20,302 | 18,489 | ||||||
Total transactional accounts |
100,438 | 75,702 | ||||||
Certificates of deposit: |
||||||||
$100,000 and over |
41,150 | 46,621 | ||||||
Under $100,000 |
57,358 | 55,950 | ||||||
Total certificates of deposit |
98,508 | 102,571 | ||||||
Total |
$ | 198,946 | $ | 178,273 | ||||
The remaining maturities of certificates of deposit outstanding are as follows
(000s omitted):
December 31, 2009 | ||||||||
Less than | $100,000 & | |||||||
$100,000 | greater | |||||||
Less than one year |
$ | 28,871 | $ | 16,785 | ||||
One to two years |
12,976 | 16,144 | ||||||
Two to three years |
4,130 | 2,544 | ||||||
Three to four years |
8,345 | 4,385 | ||||||
Four to five years |
3,036 | 1,292 | ||||||
Total |
$ | 57,358 | $ | 41,150 | ||||
Note 9 Federal Home Loan Bank Advances and Fed Funds Purchased
The Bank has an unsecured federal funds line of credit with a correspondent bank
allowing for overnight borrowings up to $3.0 million.
The Bank has Federal Home Loan Bank advances of $44,518,000 and $60,178,000 at
December 31, 2009 and 2008, respectively, which mature through 2013. At December 31,
2009, the interest rates on fixed rate advances ranged from 2.53% to 6.21%. At December
31, 2008, the interest rates on fixed rate advances ranged from 2.53% to 6.21%.
22
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9 Federal Home Loan Bank Advances and Fed Funds Purchased (Continued)
At December 31, 2009, the Bank had no floating rate advances. The total advances
outstanding included one floating rate advance in the amount of $1 million with an
interest rate of .65% as of December 31, 2008. The weighted average interest rate of
all advances was 4.43 and 4.45% at December 31, 2009 and 2008, respectively.
At December 31, 2009 and 2008, the Bank had one putable advance of $3,000,000 with an
interest rate of 2.47%, which is included in the total outstanding advances noted
below.
The Bank has provided a pledge of all of the Banks eligible residential mortgage loans
and certain securities as collateral for all FHLB debt. The amount of the residential
loans totaled $86,422,000 and $137,370,000 as of December 31, 2009 and 2008,
respectively.
The contractual maturities of advances are as follows (000s omitted):
Year Ending | ||||
December 31 | ||||
2010 |
$ | 8,168 | ||
2011 |
16,175 | |||
2012 |
13,116 | |||
2013 |
7,059 | |||
Total |
$ | 44,518 | ||
Note 10 Income Taxes
Allocation of income taxes between current and deferred portions is as follows (000s
omitted):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current expense (benefit) |
$ | (311 | ) | $ | 371 | $ | 955 | |||||
Deferred expense (benefit) |
(237 | ) | (270 | ) | (394 | ) | ||||||
Total tax expense |
$ | (548 | ) | $ | 101 | $ | 561 | |||||
23
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 Income Taxes (Continued)
The reasons for the differences between the statutory federal income tax rate and the
effective tax rates are summarized as follows:
Percent of Pretax Income (Loss) | ||||||||||||||
December 31, | ||||||||||||||
2009 | 2008 | 2007 | ||||||||||||
Statutory federal tax rate |
34.00 | % | 34.00 | % | 34.00 | % | ||||||||
Increase (decrease) resulting from: |
||||||||||||||
Nondeductible expenses |
-0.04 | % | 2.50 | % | 0.84 | % | ||||||||
Tax exempt income |
0.53 | % | -18.70 | % | -3.49 | % | ||||||||
Goodwill impairment |
-16.38 | % | 0.00 | % | 0.00 | % | ||||||||
Valuation allowance |
-15.52 | % | 0.00 | % | 0.00 | % | ||||||||
Low income housing credit |
0.00 | % | -20.40 | % | -5.93 | % | ||||||||
Other |
0.16 | % | 27.90 | % | -1.09 | % | ||||||||
Reported tax expense |
2.75 | % | 25.30 | % | 24.33 | % | ||||||||
24
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 Income Taxes (Continued)
The components of the net deferred tax asset are as follows (000s omitted):
December 31, | ||||||||
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Provision for loan losses |
$ | 880 | $ | 297 | ||||
Net deferred loan fees |
164 | 195 | ||||||
Deferred compensation |
321 | 334 | ||||||
General business tax credit carryforward |
1,097 | 480 | ||||||
Depreciation |
285 | 224 | ||||||
Net NOL Carryforward |
1,147 | | ||||||
Other Real Estate |
500 | | ||||||
Other |
314 | 311 | ||||||
Total deferred tax assets |
4,708 | 1,841 | ||||||
Deferred tax liabilities: |
||||||||
Mortgage servicing rights |
$ | 377 | $ | 274 | ||||
Original issue discount |
60 | 72 | ||||||
Net purchase premiums |
596 | 673 | ||||||
Unrealized gain on available for sale securities |
76 | 35 | ||||||
Other |
128 | 133 | ||||||
Total deferred tax liabilities |
1,237 | 1,187 | ||||||
Valuation allowance |
(3,095 | ) | | |||||
Net deferred tax asset |
$ | 376 | $ | 654 | ||||
The Corporation has qualified under a provision of the Internal Revenue Code which permits
it to deduct from taxable income a provision for bad debts in excess of such provision
charged to income in the consolidated financial statements. The general business credits
of $1,097,000 expire between 2026 and 2029. Net operating loss carryforward approximated
$3.4 million and expire in 2029.
The Corporation has recorded an estimate of the tax credit through December 31, 2009. The
Corporations share of tax credits generated by the investee partnership approximated
$191,000, in 2009, 2008, and 2007.
25
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 Off-Balance Sheet Activities
Credit Related Financial Instruments The Corporation is a party to credit related
financial instruments with off-balance sheet risk in the normal course of business to
meet the financing need of its customer. These financial instruments include
commitments to extend credit, and unfunded commitments under lines of credit. Such
commitments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets.
The Corporations exposure to credit loss is represented by the contractual amount of
these commitments. The Corporation follows the same credit policies in making
commitments as it does for on-balance sheet instruments.
The following financial instruments were outstanding whose contract amounts represent
credit risk (000s omitted):
Contract Amount | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Commitments to grant loans |
$ | 1,660 | $ | 6,907 | ||||
Unfunded commitments under lines of credit |
17,787 | 18,952 | ||||||
Unfunded commitments under letters of credit |
160 | 10 |
The above commitments include fixed rate and variable rate loan commitments and
lines of credit with interest rates ranging between 1.25% and 11.50% at December 31,
2009, and 3.25% and 11.50% at December 31, 2008.
Commitments to extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee.
The commitments for equity lines of credit may expire without being drawn upon.
Therefore, the total commitment amounts do not necessarily represent future cash
requirements. The amount of collateral obtained, if it is deemed necessary by the
Corporation, is based on managements credit evaluation of the customer.
Unfunded commitments under commercial lines of credit and revolving credit lines are
commitments for possible future extensions of credit to existing customers. These lines
of credit are collateralized and usually do not contain a specified maturity date and
may be drawn upon to the total extent to which the Corporation is committed.
Collateral Requirements To reduce credit risk related to the use of credit related
financial instruments, the Corporation might deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on the Corporations credit evaluation of
the customer. Collateral held varies but may include cash, securities, accounts
receivable, inventory, property, plant, and equipment and real estate.
26
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note
12 Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and discretionary actions by regulators that could have a direct material
effect on the Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Banks assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices.
Quantitative measures established by regulation to ensure capital adequacy require the
Bank to maintain minimum amounts and ratios, which are shown in the table below.
Management believes, as of December 31, 2009 and 2008, that the Bank has met all of the
capital adequacy requirements to which it is subject.
As of December 31, 2009, the most recent notification from the FDIC categorized the
Bank as well capitalized, under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management believes have
changed the Banks capital category.
A reconciliation of the Banks equity to major categories of capital is as follows
(000s omitted):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Equity per consolidated bank balance sheet |
$ | 21,204 | $ | 36,186 | $ | 38,309 | ||||||
Less: intangible and disallowed assets |
(1,057 | ) | (10,440 | ) | (11,207 | ) | ||||||
Tier 1 Capital |
20,147 | 25,746 | 27,102 | |||||||||
Plus: Allowance for loan losses ** |
2,740 | 2,719 | 1,824 | |||||||||
Total Capital |
$ | 22,887 | $ | 28,465 | $ | 28,926 | ||||||
** | Limited to 1.25% of risk weighted assets |
27
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 Regulatory Matters (Continued)
Regulatory capital balances and ratios are as follows (000s omitted):
To be Well Capitalized | ||||||||||||||||||||||||
To Comply With | Under Prompt | |||||||||||||||||||||||
Minimum Capital | Corrective Action | |||||||||||||||||||||||
Actual | Requirements | Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2009 |
||||||||||||||||||||||||
Total Capital |
||||||||||||||||||||||||
(to Risk-Weighted Assets) |
$ | 22,887 | 10.59 | % | $ | 17,290 | 8.00 | % | $ | 21,613 | 10.00 | % | ||||||||||||
Tier 1 Capital |
||||||||||||||||||||||||
(to Risk-Weighted Assets) |
$ | 20,147 | 9.32 | % | $ | 8,645 | 4.00 | % | $ | 12,968 | 6.00 | % | ||||||||||||
Tier 1 Capital |
||||||||||||||||||||||||
(to Average Assets) |
$ | 20,147 | 6.69 | % | $ | 15,056 | 5.00 | % | $ | 15,056 | 5.00 | % | ||||||||||||
As of December 31, 2008: |
||||||||||||||||||||||||
Total Capital |
||||||||||||||||||||||||
(to Risk-Weighted Assets) |
$ | 28,465 | 12.54 | % | $ | 18,155 | 8.00 | % | $ | 22,693 | 10.00 | % | ||||||||||||
Tier 1 Capital |
||||||||||||||||||||||||
(to Risk-Weighted Assets) |
$ | 25,746 | 11.35 | % | $ | 9,077 | 4.00 | % | $ | 13,616 | 6.00 | % | ||||||||||||
Tier 1 Capital |
||||||||||||||||||||||||
(to Average Assets) |
$ | 25,746 | 9.26 | % | $ | 13,903 | 5.00 | % | $ | 13,903 | 5.00 | % |
Note
13 Restrictions on Dividends, Loans and Advances
Banking regulations place certain restrictions on dividends paid and loans or advances
made by the Bank to the Corporation.
The primary source of liquidity for the Corporation is from dividends paid by the
Bank. Banking regulations place certain restrictions on dividends paid and loans or
advances made by the Bank to the Corporation. The total amount of dividends which may
be paid at any date is generally limited to the retained earnings of the Bank.
However, dividends paid by the Bank would be prohibited if the effect thereof would
cause the Banks capital to be reduced below applicable minimum standards. At December
31, 2009, the Bank had no retained earnings available for the payment of dividends.
Accordingly, $21,204,000 of the Corporations investment in the Bank was restricted at
December 31, 2009.
Loans or advances made by the Bank to the Corporation are generally limited to 10
percent of the Banks capital stock and surplus. Accordingly, at December 31, 2009,
Bank funds available for loans or advances to the Corporation
amounted to $2,139,000.
28
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note
14 Shareholders Equity
We are subject to various regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain adequate capital above regulatory minimums.
On February 6, 2009 we issued 6,785 shares of Series A, $.01 par value $1,000 liquidation
preference, fixed rate cumulative perpetual preferred stock (Preferred Stock) and
warrants to purchase 260,962 shares of our common stock at an exercise price of $3.90 per
share (Warrants), to the U.S. Department of Treasury in return for $6.8 million under the
Capital Purchase Program (CPP). Of the proceeds, $6,729,000 was allocated to the
Preferred Stock and $56,000 was allocated to the Warrants based on the relative fair
value of each. The $56,000 discount on the Preferred Stock is being accreted using an
effective yield method over five years. The Preferred Stock and Warrants qualify as Tier
1 capital.
The Preferred Stock pays cumulative quarterly cash dividends at a rate of 5% per year on
the $1,000 liquidation preference through February 15, 2014 and at a rate of 9% per year
thereafter. We accrue dividends based on the rates, liquidation preference and time since
last quarterly dividend payment. Under the CPP, the consent of the U.S. Treasury is
required for any quarterly common stock dividend per share in excess of $.09 (subject to
adjustment for stock splits, stock dividends and certain other transactions) and for any
common share repurchases (other than common share repurchases in connection with any
benefit plan in the ordinary course of business) in each case until January 30, 2012,
unless the Preferred Stock has been fully redeemed or the U.S. Treasury has transferred
all the Preferred Stock to third parties prior to that date. In addition, all accrued
and unpaid dividends on the Preferred Stock must be declared and the payment set aside
for the benefit of the holders of Preferred Stock before any dividend may be declared on
our common stock and before any shares of our common stock.
Holders of shares of the Preferred Stock have no right to exchange or convert such shares
into any other security of Monarch Community Bancorp and have no right to require the
redemption or repurchase of the Preferred Stock. The Preferred Stock does not have any
sinking fund. The Preferred Stock is non-voting, other than class voting rights on
certain matters that could adversely affect the Preferred Stock.
We may redeem the Preferred Stock for the liquidation preference plus accrued and unpaid
dividends at anytime. Any such redemption is subject to U.S. Treasurys prior
consultation with the Federal Reserve Board.
The Warrants are immediately exercisable for 260,962 shares of our common stock at an
initial exercise price of $3.90 per common share. The Warrants are transferrable and may
be exercised at any time on or before February 6, 2019.
29
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 Retirement Plans
The Corporation is part of a non-contributory, multi-employer defined benefit pension
plan covering substantially all employees. Effective April 1, 2004 employees benefits
under the plan were frozen. The plan is administered by the trustees of the Financial
Institutions Retirement Fund. Because it is a multi-employer plan, there is no separate
valuation of plan benefits or segregation of plan assets specifically for the
Corporation. During 2009, 2008 and 2007, the Corporation recognized expense for this
plan of $86,000, $166,000, and $205,000, respectively.
The Corporation has a Defined Contribution Retirement plan for all eligible employees.
The Corporation has a matching contribution agreement to match 25% of the first 6% of
an employees salary (reduced from a 50% match effective October 1, 2006). During 2009,
2008 and 2007, the Corporation recognized expense for this plan of $35,000, $33,000,
and $32,000, respectively.
The Corporation has a nonqualified deferred-compensation plan (included as part of the
other liabilities section of the consolidated balance sheet) to provide retirement
benefits to the Directors, at their option, in lieu of annual directors fees and
meeting fees. Undistributed benefits are increased by an annual earnings rate which is
based on the higher of the Companys return on average equity or 5.0%. The value of
benefits accrued to participants was $426,000 and $424,000 at December 31, 2009 and
2008, respectively. The expense for the plan, including the increase due to the annual
earnings credit was $21,000, $21,000, and $19,000, for 2009, 2008, and 2007,
respectively.
The Corporation has a liability for the directors deferred compensation plan. This
plan does not allow for future deferrals and all benefits are being paid out to
participants over a 180 month term. Undistributed benefits are increased by an annual
earnings rate based on an index which was 5.97% as of December 31, 2009. The present
value of benefits accrued to participants (also included as part of the other
liabilities section of the balance sheet) is $520,000 and $560,000 at December 31, 2009
and 2008, respectively.
Note 16 Related Party Transactions
Extensions of credit to principal officers, directors and their affiliates totaled
$2,872,000 and $3,239,000 for the years ending December 31, 2009 and 2008,
respectively. During the year ending December 31, 2009, total principal additions were
$142,000 and total principal payments were $509,000, and during the year ending
December 31, 2008, total principal additions were $3,329,000 and total principal
payments were $608,000. Deposits from related parties and their affiliates held by the Bank at December 31, 2009 and 2008
amounted to $810,000 and $954,000 respectively.
30
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 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 Corporations various financial instruments. In cases
where quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future
cash flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. SFAS 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented may not necessarily represent the underlying fair value of
the Corporation.
The following methods and assumptions were used by the Corporation in estimating fair
value disclosures for financial instruments:
Cash
and Cash Equivalents The carrying amounts of cash and short-term instruments
approximate fair values. The carrying amounts of interest-bearing deposits maturing
within ninety days approximate their fair values. Fair values of other interest-bearing
deposits are estimated using discounted cash flow analyses based on current rates for
similar types of deposits.
Securities Fair values for securities, excluding Federal Home Loan Bank stock, are
based on quoted market prices.
Other Securities The carrying value of Federal Home Loan Bank stock approximates fair
value based on the redemption provisions of the Federal Home Loan Bank.
Mortgage 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
interest rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are estimated using
discounted cash flow analyses or underlying collateral values, where applicable.
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 Corporations Federal Home
Loan Bank advances are estimated using discounted cash flow analyses based on the
Corporations current incremental borrowing rates for similar types of borrowing
arrangements.
31
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 Fair Value of Financial Instruments (Continued)
Fed Funds Purchased The carrying amounts of fed funds purchased approximate fair
value.
Accrued Interest The carrying amounts of accrued interest approximate fair value.
The estimated fair values, and related carrying or notional amounts, of the
Corporations financial instruments are as follows (000s omitted):
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 23,354 | $ | 23,354 | $ | 6,272 | $ | 6,272 | ||||||||
Securities Held to maturity |
23 | 23 | 37 | 37 | ||||||||||||
Securities Available for sale |
16,063 | 16,063 | 8,916 | 8,916 | ||||||||||||
Other securities |
4,237 | 4,237 | 4,237 | 4,237 | ||||||||||||
Loans held for sale |
809 | 827 | 860 | 864 | ||||||||||||
Net loans |
220,875 | 230,866 | 247,542 | 250,068 | ||||||||||||
Accrued interest
and late charges receivable |
1,154 | 1,154 | 1,300 | 1,300 | ||||||||||||
Liabilities: |
||||||||||||||||
Deposits |
213,368 | 214,581 | 192,156 | 192,045 | ||||||||||||
Federal Home Loan Bank |
||||||||||||||||
advances |
44,518 | 48,260 | 60,178 | 63,252 | ||||||||||||
Fed funds purchased |
| | 1,000 | 1,000 | ||||||||||||
Accrued interest payable |
397 | 397 | 526 | 526 |
Note 18 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.
32
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 Fair Value Measurements (Continued)
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 Corporations
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 present information about the Corporations assets and liabilities
measured at fair value on a recurring basis at December 31, 2009 and December 31, 2008,
and the valuation techniques used by the Corporation to determine those fair values
(000s omitted):
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | Balance at | |||||||||||||
Identical Assets | Inputs | Inputs | December | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 31, 2009 | |||||||||||||
Assets |
||||||||||||||||
Investment securities
available for sale |
$ | 9,803 | $ | 6,260 | $ | | $ | 16,063 | ||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | Balance at | |||||||||||||
Identical Assets | Inputs | Inputs | December | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 31, 2008 | |||||||||||||
Assets |
||||||||||||||||
Investment securities
available for sale |
$ | 5,757 | $ | 3,159 | $ | | $ | 8,916 | ||||||||
33
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 Fair Value Measurements (Continued)
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. 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 Corporations assets at fair value on a
nonrecurring basis as of December 31, 2009 and December 31, 2008 (000s omitted):
Assets Measured at Fair Value on a Nonrecurring Basis | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets for | Significant Other | Significant | Change in Fair Value | |||||||||||||||||
Balance at | Identical Assets | Observable Inputs | Unobservable Inputs | for the year ended | ||||||||||||||||
December 31, 2009 | (Level 1) | (Level 2) | (Level 3) | December 31, 2009 | ||||||||||||||||
Impaired Loans |
$ | 18,653 | $ | | $ | | $ | 18,653 | (7,895 | ) | ||||||||||
Foreclosed Assets |
2,839 | | | 2,839 | (1,819 | ) | ||||||||||||||
$ | (9,714 | ) | ||||||||||||||||||
Assets Measured at Fair Value on a Nonrecurring Basis | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets for | Significant Other | Significant | Change in Fair Value | |||||||||||||||||
Balance at December | Identical Assets | Observable Inputs | Unobservable Inputs | for the year ended | ||||||||||||||||
31, 2008 | (Level 1) | (Level 2) | (Level 3) | December 31, 2008 | ||||||||||||||||
Impaired Loans |
$ | 2,377 | $ | | $ | | $ | 2,377 | $ | (193 | ) | |||||||||
The fair value of impaired loans is estimated using either discounted cash flows
or collateral value. Those impaired loans not requiring an allowance represent loans
for which the fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At December 31, 2009 and December 31, 2008, substantially
all of the total impaired loans were evaluated based on fair value of the collateral.
Impaired loans where an allowance is established based on the fair value of the
collateral require classification in the fair value hierarchy. Impaired loans are
categorized as level 3 assets because the values are based on available collateral
(typically based on outside appraisals) and customized discounting criteria, if deemed
necessary. The change in fair value of impaired loans is accounted for in the
allowance for loan losses (see Note 4). The carrying value of foreclosed assets is
estimated using appraisals of the underlying real estate (see Note 6)
34
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 Employee Stock Ownership Plan (ESOP)
As part of the conversion (Note 1), the Corporation implemented an employee stock
ownership plan (ESOP) covering substantially all employees. The Corporation provided a
loan to the ESOP, which was used to purchase 185,150 shares of the Corporations
outstanding stock at $10 per share. In December 2006, the Board of Directors approved
an amendment to the ESOP plan revising the vesting, allocation and loan repayment
guidelines of the plan. As a result of the amendment, the loan bears interest equal to
4.75% and will be repaid over a period of fifteen years ending on December 31, 2016.
Dividends on the allocated shares are distributed to participants and the dividends on
the unallocated shares are used to pay debt service.
The scheduled maturities of the loan are as follows (000s omitted): |
Year Ending | ||||
December 31 | ||||
2010 |
$ | 94 | ||
2011 |
98 | |||
2012 |
103 | |||
2013 |
108 | |||
2014 |
113 | |||
Thereafter |
243 | |||
Total |
$ | 759 | ||
The Corporation has committed to make contributions to the ESOP sufficient to
support debt service of the loan. The ESOP shares initially were pledged as collateral
for its debt. As the debt is repaid, shares are released from collateral and allocated
to active participants. The shares pledged as collateral are included in unearned
compensation in the equity section of the balance sheet. As shares are released they
become outstanding for earnings per share computations.
35
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 Employee Stock Ownership Plan (ESOP) (Continued)
The ESOP shares as of December 31 were as follows (000s omitted except shares):
2009 | 2008 | |||||||
Allocated shares |
111,090 | 101,833 | ||||||
Shares released for allocation |
9,258 | 9,257 | ||||||
Shares distributed |
(38,827 | ) | (34,516 | ) | ||||
Unreleased shares |
64,802 | 74,060 | ||||||
Total ESOP shares |
146,323 | 150,634 | ||||||
Fair value of unallocated shares |
$ | 175 | $ | 259 | ||||
Total compensation expense applicable to the ESOP amounted to approximately
$35,000, $108,000, and $136,000 for the years ended December 31, 2009, 2008, and 2007,
respectively.
Note 20 Stock Compensation Plans
The Corporation has a Recognition and Retention Plan (RRP) which authorizes up to
92,575 shares to be issued to employees and directors. 92,275 shares of restricted
stock have been issued to employees and directors since 2003. Under the plan, the
shares vest 20% per year for five years. Shares forfeited total 400 in 2009 and 0 in
2008. No shares of restricted stock were issued in 2009 or 2008. During 2009, 4,978
shares vested and are no longer restricted for a total of 83,903 vested shares as of
December 31, 2009. During 2008, 17,589 shares vested and are no longer restricted for a
total of 78,925 vested shares as of December 31, 2008. Compensation expense applicable
to the RRP amounted to $57,000, $229,000 and $229,000 for the years ended December 31,
2009, 2008 and 2007 respectively.
The Companys Employee Stock Option Plan (the Plan), which is stockholder approved,
permits the grant of stock options to its employees for up to 231,438 shares of common
stock. The Company believes that such awards better align the interests of its
employees with those of its stockholders. Option awards are generally granted with an
exercise price equal to the market price of the Companys stock at the date of grant;
those option awards generally vest based on five years of continuous service and have
ten year contractual terms.
The fair value of each option award is estimated on the date of grant using a Black
Scholes option valuation model that uses the weighted average assumptions noted in the
following table. Expected volatilities are based on the Companys stock price and
dividend history. The Company uses historical data to estimate option exercise and
employee termination within the valuation model. The risk-free rate for periods within
the contractual life of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
36
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 Stock Compensation Plans (continued)
The fair value of each option granted in 2009 was $1.02. There were no options granted in 2008. The fair value of each option granted in 2007 was $2.05. As of December 31, 2009, there was $1,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized in 2010. The fair value is estimated on the date of the grant using the following weighted average assumptions: |
2009 | 2008 | 2007 | ||||||||||
Dividend yield |
2.7 | % | | 1.8% | ||||||||
Expected life |
5 years | | 5 years | |||||||||
Expected volatility |
37.9 | % | | 22.3% | ||||||||
Risk-free interest rate |
2.5 | % | 0.00 | % | 3.02%-4.80% |
A summary of changes of the status of the Corporations stock option plan is
presented below (000s omitted except per share data):
2009 | 2008 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Exercise | |||||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Outstanding at beginning of year |
162 | 13.22 | 175 | 13.21 | ||||||||||||
Granted |
40 | 3.60 | | | ||||||||||||
Exercised |
| | | | ||||||||||||
Forfeited/expired |
8 | 12.69 | 13 | 13.00 | ||||||||||||
Outstanding at end of year |
194 | 11.27 | 162 | 13.22 | ||||||||||||
Exercisable at year-end |
194 | 11.25 | 152 | 13.20 | ||||||||||||
A summary of changes in exercisable stock options December 31, 2009 and 2008 is as
follows:
2009 | 2008 | |||||||
Beginning of year |
152 | 129 | ||||||
Newly Vested |
42 | 23 | ||||||
Exercised |
| | ||||||
End of year |
194 | 152 | ||||||
37
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 Stock Compensation Plans (continued)
A summary of outstanding and exercisable stock options at December 31, 2009 is as
follows:
Outstanding | Exercisable | |||||||||||
Exercise Price | Number | Remaining | Number | |||||||||
Per share | Outstanding | Life (in Months) | Exercisable | |||||||||
$14.00 |
39,836 | 57 | 39,836 | |||||||||
$13.10 |
5,000 | 60 | 5,000 | |||||||||
$13.00 |
108,726 | 40 | 108,726 | |||||||||
$11.15 |
1,000 | 72 | 800 | |||||||||
$3.60 |
40,000 | 115 | 40,000 |
Note 21 Condensed Financial Statements of Parent Company
The following represents the condensed financial statements of Monarch Community Bancorp,
Inc. (Parent) only. The Parent-only financial information should be read in conjunction
with the Corporations consolidated financial statements.
Condensed Balance Sheet (000s omitted)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Cash |
$ | 626 | $ | 469 | ||||
Investments |
1,611 | 123 | ||||||
Investment in Monarch Community Bank |
21,204 | 36,186 | ||||||
Other assets |
99 | 140 | ||||||
Total assets |
$ | 23,540 | $ | 36,918 | ||||
Liabilities and Stockholders Equity |
||||||||
Accrued expenses |
$ | 377 | $ | 648 | ||||
Stockholders equity |
23,163 | 36,270 | ||||||
Total liabilities and stockholders equity |
$ | 23,540 | $ | 36,918 | ||||
38
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 Condensed Financial Statements of Parent Company (Continued)
Condensed Income Statement (000s omitted)
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Income Interest on investments |
$ | 24 | $ | 15 | $ | 23 | ||||||
Dividends from Monarch Community Bank |
| 2,638 | 3,261 | |||||||||
Operating expense |
234 | 217 | 385 | |||||||||
Income (loss) Before equity in undistributed
net income (loss) of subsidiary |
(210 | ) | 2,436 | 2,899 | ||||||||
Equity in undistributed net income (loss) of
subsidiary |
(19,186 | ) | (2,138 | ) | (1,154 | ) | ||||||
Net income |
$ | (19,396 | ) | $ | 298 | $ | 1,745 | |||||
39
Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 Condensed Financial Statements of Parent Company (Continued)
Condensed Statement of Cash Flows (000s omitted)
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (19,396 | ) | $ | 298 | $ | 1,745 | |||||
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities: |
||||||||||||
Amortization |
58 | 1 | 1 | |||||||||
Allocation of ESOP and RRP |
119 | 335 | 371 | |||||||||
(Increase) decrease in other assets |
41 | (112 | ) | 139 | ||||||||
(Increase) decrease in accrued expenses |
(271 | ) | 326 | 54 | ||||||||
Undistributed net income (loss) of subsidiary |
19,186 | 2,138 | 1,154 | |||||||||
Net cash (used in) provided by operating activities |
(263 | ) | 2,986 | 3,464 | ||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of securities |
(2,560 | ) | (7 | ) | (30 | ) | ||||||
Investment in subisidary |
(4,000 | ) | | | ||||||||
Proceeds from sales and maturities of securities |
1,014 | 208 | 20 | |||||||||
Net cash (used in) provided by investing activities |
(5,546 | ) | 201 | (10 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Issuance of Preferred Stock |
6,785 | | | |||||||||
Repurchase of Common Stock |
(3 | ) | (2,704 | ) | (2,496 | ) | ||||||
Dividends paid |
(816 | ) | (772 | ) | (723 | ) | ||||||
Net cash (used in) provided by financing activities |
5,966 | (3,476 | ) | (3,219 | ) | |||||||
Net increase (decrease) in cash |
157 | (289 | ) | 235 | ||||||||
Cash at beginning of year |
469 | 758 | 523 | |||||||||
Cash at end of year |
$ | 626 | $ | 469 | $ | 758 | ||||||
Note
22 Subsequent events
Subsequent to year end, the Parent Company injected $1.5 million of additional capital
into the subsidiary bank.
40
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain income and expense and per share data on a quarterly basis
for the three-month periods indicated:
Year Ended December 31, 2009 | ||||||||||||||||
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Interest income |
$ | 4,074 | $ | 4,035 | $ | 3,968 | $ | 3,759 | ||||||||
Interest expense |
1,976 | 1,917 | 1,800 | 1,646 | ||||||||||||
Net interest income |
2,098 | 2,118 | 2,168 | 2,113 | ||||||||||||
Provision for loan losses |
722 | 3,441 | 1,250 | 7,936 | ||||||||||||
Net interest income (loss) after
provision for loan losses |
1,376 | (1,323 | ) | 918 | (5,823 | ) | ||||||||||
Noninterest income |
1,373 | 1,468 | 1,094 | 1,058 | ||||||||||||
Noninterest expense |
2,510 | 2,576 | 2,485 | 12,514 | ||||||||||||
Income (loss) before income taxes |
239 | (2,431 | ) | (473 | ) | (17,279 | ) | |||||||||
Income tax expense |
60 | (608 | ) | (121 | ) | 121 | ||||||||||
Net Income (Loss) |
$ | 179 | $ | (1,823 | ) | $ | (352 | ) | $ | (17,400 | ) | |||||
Dividends and amortization of discount on preferred stock |
51 | 87 | $ | 88 | 89 | |||||||||||
Net Income (Loss) available to common stock |
$ | 128 | $ | (1,910 | ) | $ | (440 | ) | $ | (17,489 | ) | |||||
Earnings (Loss) per share: |
||||||||||||||||
Basic |
$ | 0.07 | $ | (0.97 | ) | $ | (0.22 | ) | $ | (8.91 | ) | |||||
Diluted |
$ | 0.07 | $ | (0.97 | ) | $ | (0.22 | ) | $ | (8.91 | ) | |||||
Cash dividends declared per share |
$ | 0.09 | $ | 0.09 | $ | 0.07 | $ | |
(1) | Includes a $9.6 million goodwill impairment |
Year Ended December 31, 2008 | ||||||||||||||||
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Interest income |
$ | 4,285 | $ | 4,295 | $ | 4,297 | $ | 4,319 | ||||||||
Interest expense |
2,213 | 2,126 | 2,112 | 2,085 | ||||||||||||
Net interest income |
2,072 | 2,169 | 2,185 | 2,234 | ||||||||||||
Provision for loan losses |
308 | 448 | 731 | 1,225 | ||||||||||||
Net interest income after
provision for loan losses |
1,764 | 1,721 | 1,454 | 1,009 | ||||||||||||
Noninterest income |
1,000 | 933 | 898 | 772 | ||||||||||||
Noninterest expense |
2,322 | 2,321 | 2,258 | 2,251 | ||||||||||||
Income before income taxes |
442 | 333 | 94 | (470 | ) | |||||||||||
Income tax expense |
110 | 85 | 37 | (131 | ) | |||||||||||
Net Income (Loss) |
$ | 332 | $ | 248 | $ | 57 | $ | (339 | ) | |||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.15 | $ | 0.12 | $ | 0.03 | $ | (0.17 | ) | |||||||
Diluted |
$ | 0.15 | $ | 0.12 | $ | 0.03 | $ | (0.17 | ) | |||||||
Cash dividends declared per share |
$ | 0.09 | $ | 0.09 | $ | 0.09 | $ | 0.09 |
41
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
ITEM 9A (T). Controls and Procedures
An evaluation of the Registrants disclosure controls and procedures (as defined in Section
13(a)-15(e) of the Securities Exchange Act of 1934 (the Exchange Act) as of December 31, 2009 was
carried out under the supervision and with the participation of the Registrants Chief Executive
Officer, Chief Financial Officer and several other members of the Registrants senior management.
The Registrants Chief Executive Officer and Chief Financial Officer concluded that the
Registrants disclosure controls and procedures as currently in effect are effective in ensuring
that the information required to be disclosed by the Registrant in the reports it files or submits
under the Exchange Act is (i) accumulated and communicated to the Registrants management
(including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified in the Security and
Exchange Commissions 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 December 31, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
The Registrant 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
Registrants business. While the Registrant believes the present design of its disclosure controls
and procedures is effective to achieve its goal, future events affecting its business may cause the
Registrant to modify its disclosure controls and procedures.
Monarch Community Bancorp, Inc. and Subsidiaries Managements Report on Internal Control Over
Financial Reporting
The management of Monarch Community Bancorp, Inc. and Subsidiaries is responsible for establishing
and maintaining adequate internal control over financial reporting. Monarch Community Bancorp,
Inc. and Subsidiaries internal control system was designed to provide reasonable assurance to the
Companys management and board of directors regarding the preparation and fair presentation of its
financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective, provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management of Monarch Community Bancorp, Inc. and Subsidiaries assessed the effectiveness of the
Companys internal control over financial reporting as of December 31, 2009. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission
(COSO) in Internal ControlIntegrated Framework. Based on our assessment we believe that, as of
December 31, 2009, the Companys internal control over financial reporting is effective based on
those criteria.
Dated: March 31, 2010
/s/ Donald L. Denney | ||||
Donald L. Denney | ||||
President and Chief Executive Officer | ||||
/s/ Rebecca S. Crabill | ||||
Rebecca S. Crabill | ||||
Vice President and Chief Financial Officer |
42
This annual report does not include an attestation report of the companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to provide only
managements report in this annual report.
ITEM
9B. Other Information Not Applicable
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Information required by this Item 10 is incorporated herein by reference from the definitive proxy
statement for the annual meeting of shareholders, to be held in April 2010, under the captions
Item 1. Election of Directors, The Audit Committee, Audit Committee Financial Expert,
Compliance with Section 16, Code of Conduct, and Role and Composition of the Board of
Directors, a copy of which will be filed not later than 120 days after the close of the fiscal
year.
ITEM 11. Executive Compensation
Information concerning executive compensation is incorporated herein by reference from the
definitive proxy statement for the annual meeting of shareholders, to be held in April 2010, under
the caption Executive Compensation, a copy of which will be filed not later than 120 days after
the close of the fiscal year. The Compensation Committee Report, and Compensation Committee
Interlocks and Insider Participation, are not required for smaller reporting companies.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Information concerning security ownership of certain beneficial owners and management is
incorporated herein by reference from the definitive proxy statement for the annual meeting of
shareholders, to be held in April 2010, under the captions Security Ownership of Shareholder
Holding 5% or More and Security Ownership of Directors, Nominees for Directors, Most Highly
Compensated Executive Officers and All Directors and Officers as a Group, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of December 31, 2009:
Number of | Number of | |||||||||||
securities to be | securities | |||||||||||
issued upon | Weighted-average | remaining available | ||||||||||
exercise of | exercise price of | for future issuance | ||||||||||
outstanding options | outstanding options | under equity | ||||||||||
Plan Category | warrants and rights | warrants and rights | compensation plans | |||||||||
Equity
compensation plans
approved by
security holders
(1) |
194,562 | 11.27 | 40,851 | |||||||||
Equity compensation
plans not approved
by security holders |
| | |
(1) | Includes 2003 Stock Option and Incentive Plan and 2003 Recognition and Retention Plan approved at the 2003 Annual Meeting of Shareholders |
43
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions is incorporated herein by
reference from the definitive proxy statement for the annual meeting of stockholders, to be held in
April 2010, under the captions Transactions with Certain Related Persons and Role and
Composition of the Board of Directors, a copy of which will be filed not later than 120 days after
the close of the fiscal year.
ITEM 14. Principal Accountant Fees and Services
Information concerning principal accountant fees and services is incorporated herein by reference
from the definitive proxy statement for the annual meeting of stockholders, to be held in April
2010, under the caption Item 2. Ratification of Auditors, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
Documents Filed As Part Of This Annual Report on Form 10-K
1. | Financial Statement See the Financial Statements included in Item 8. | ||
2. | Financial Statement Schedules Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements. | ||
3. | Exhibits The exhibits filed as part of this Annual Report on Form 10-K are identified in the Exhibit Index, which Exhibit Index specifically identifies those exhibits that describe or evidence all management contracts and compensation plans or arrangements required to be filed as exhibits to this report. Such Exhibit Index is incorporated herein by reference. |
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MONARCH COMMUNITY BANCORP, INC. |
||||
Dated: March 31, 2010 | By: | /s/ Donald L. Denney | ||
Donald L. Denney, President | ||||
and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Company and in the capacities and on the date
indicated.
Signature | Title | Date | ||
/s/ Donald L. Denney
|
President and Chief Executive Officer (Principal Executive Officer) |
March 31, 2010 | ||
/s/ Stephen M. Ross
|
Chairman of the Board | March 31, 2010 | ||
/s/ Rebecca S. Crabill
|
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
March 31, 2010 | ||
/s/ Harold A. Adamson
|
Director | March 31, 2010 | ||
/s/ Karl F. Loomis
|
Director | March 31, 2010 | ||
/s/ James W. Gordon
|
Director | March 31, 2010 | ||
/s/ Martin L. Mitchell
|
Director | March 31, 2010 | ||
/s/ Gordon L. Welch
|
Director | March 31, 2010 | ||
/s/ Craig W. Dally
|
Director | March 31, 2010 | ||
/s/ Richard L. Dobbins
|
Director | March 31, 2010 |
45
Exhibit Index
Reference to | ||||||
Prior Filing or | ||||||
Exhibit | Exhibit Number | |||||
Number | Document | Attached Hereto | ||||
3.1 (i)
|
Registrants Articles of Incorporation | * | ||||
3.1 (ii)
|
Articles Supplementary (Incorporated by reference from Form 8-K filed 2/9/09) | |||||
3.2 (i)
|
Registrants Bylaws ( Incorporated by reference from Form 8-K filed on 12/23/09) | |||||
4.1
|
Registrants Specimen Stock Certificate | * | ||||
4.2
|
Warrant to Purchase 260,962 shares of Common Stock issued to the U.S. Treasury (Incorporated by reference from Form 8-K filed on 2/12/09) | |||||
10.1
|
Employment Agreement between Monarch Community Bancorp, Inc and Donald L. Denney (incorporated by reference from Form 8-K filed on 9/25/2006) | |||||
10.2
|
Management Continuity Agreement between Monarch Community Bancorp, Inc. and William C. Kurtz and Andrew J. Van Doren (incorporated by reference from Form 8-K filed on 12/21/2004) | |||||
10.3
|
Registrants Employee Stock Ownership Plan | * | ||||
10.4
|
Registrants 2003 Stock Option and Incentive Plan | ** | ||||
10.5
|
Registrants Recognition and Retention Plan | ** | ||||
10.6
|
Form of Stock Option Agreement | *** | ||||
10.7
|
Management Continuity Agreement with Rebecca S. Crabill (Incorporated by reference from Form 8-K filed on 02/27/08) | |||||
10.8
|
Letter Agreement dated February 6, 2009 including the Securities Purchase Agreement Standard Terms Incorporated by reference therein between the Company and the U.S. Treasury (incorporated by reference from Form 8-K filed on 2/12/09) | |||||
10.9
|
Form of Waiver of Senior Executive Officers (Incorporated by reference from Form 8-K, filed on 2/12/09) | |||||
10.10
|
Form of Amendment Agreement (Incorporated by reference from Form 8-K filed on 2/12/09) | |||||
10.11
|
Amendment to Employment Agreement with Donald L. Denney (Incorporated by reference from Annual Report on Form 10-K for the year ended 12/31/08) | |||||
10.12
|
Amendment to Employment Agreement with Andrew J. Van Doren (Incorporated by reference from Annual Report on Form 10-K for the year ended 12/31/08) | |||||
10.13
|
Amendment to Employment Agreement with Rebecca S. Crabill (Incorporated by reference from Annual Report on Form 10-K for the year ended 12/31/08) | |||||
10.14
|
Amendment No. 2 to Donald L. Denney Employment Agreement (Incorporated by reference from Form 10-Q filed on 11/16/09) | |||||
11
|
Statement re computation of per share earnings | See Note 1 of the Notes to Consolidated Financial Statements contained in this report | ||||
12
|
Statements re computation of ratios | None | ||||
13
|
Annual Report to Security Holders | Not required | ||||
14
|
Registrants Code of Conduct | 14 | ||||
16
|
Letter re: change in certifying accountant | None | ||||
18
|
Letter re: change in accounting principles | None | ||||
21
|
Subsidiaries of the registrant | 21 | ||||
22
|
Published report regarding matters submitted to vote of security holders | None | ||||
23
|
Consent of Plante & Moran, PLLC | 23 | ||||
24
|
Power of Attorney | Not required | ||||
31.1
|
Rule 13a-14(a) Certification of the Companys President and Chief Executive Officer | 31.1 | ||||
31.2
|
Rule 13a-14(a) Certification of the Companys Chief Financial Officer | 31.2 | ||||
32
|
Section 1350 Certification. | 32 |
46
Reference to | ||||||
Prior Filing or | ||||||
Exhibit | Exhibit Number | |||||
Number | Document | Attached Hereto | ||||
99.1
|
31 C.F.R. Section 30.15 Certification of Principal Executive Officer | 99.1 | ||||
99.2
|
31 C.F.R Section 30.15 Certification of Principal Financial Officer | 99.2 |
* | Filed on March 27, 2002 as an exhibit to the Registrants Registration Statement on Form SB-2 (File No. 333-85018), and incorporated herein by reference. | |
** | Filed on March 19, 2003 as part of Registrants Schedule 14A (File No. 000-49814), and incorporated by reference | |
*** | Incorporated by reference from Annual Report on Form 10-KSB for the year ended December 31, 2004 |
47