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Table of Contents

 
 
UNITED STATES
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, 2010
Commission file number 0-49814
MONARCH COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
     
Maryland   04-3627031
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
375 North Willowbrook Road, Coldwater, Michigan   49036
(Address of principal executive offices)   (Zip Code)
Registrant’s 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
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 registrant’s 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large Accelerated Filer o
  Accelerated Filer o   Non-Accelerated Filer o   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 registrant’s 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, 2010 was approximately $1.855 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 March 25, 2011, the registrant had 2,049,825 shares of common stock issued and outstanding.
 
 

 


TABLE OF CONTENTS

PART I
ITEM 1. Business
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments — None
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Reserved
ITEM 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ITEM 6. Selected Financial Data
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14. Principal Accountant Fees and Services
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
SIGNATURES
Exhibit Index
EX-14
EX-21
EX-23
EX-31.1
EX-31.2
EX-32
EX-99.1
EX-99.2


Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE PART III of Form 10-K – Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in May 2011
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 Company’s 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 Bank’s customers.
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 is 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 Bank’s 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 have 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.

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At December 31, 2010, we had assets of $256.9 million, including net loans of $182.8 million, deposits of $206.0 million and stockholders’ equity of $12.0 million.
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 68 full-time employees as of December 31, 2010. 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, 2010, we had a 19.4% market share of FDIC-insured deposits in Branch County, a 8.2% market share of FDIC-insured deposits in Calhoun County and a 2.3% market share of FDIC-insured deposits in Hillsdale County, ranking us third, seventh and fifth, 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, 2010, our net loan portfolio totaled $182.8 million, which constituted 71% 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. All loans must be presented for approval at Management Loan Committee, which is comprised of several senior managers. Loans in which the total credit relationship with the borrower, directly and indirectly, exceeds $500,000 and up to $1.5 million also must be approved by the Board of Directors’ Loan Committee. Loans in which the total credit relationship with the borrower, directly and indirectly, exceeds $1.5 million also must be approved by the Board of Directors. Our legal lending limit is summarized in the Loans to One Borrower paragraph of the Regulation and Supervision section of this document.

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Loan Portfolio Composition. The following table presents information concerning the composition of our loan portfolio as of the dates indicated.
                                                                                 
    December 31, 2010     December 31, 2009     December 31, 2008     December 31, 2007     December 31, 2006  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
Real Estate Loans:
                                                                               
One-to four-family
  $ 93,294       49.09 %   $ 108,354       47.70 %   $ 124,855       49.80 %   $ 126,780       55.80 %   $ 140,374       60.30 %
Multi-family
    4,783       2.52       5,421       2.39       5,728       2.26       5,594       3.22       7,511       3.22  
Commercial
    62,998       33.14       72,689       32.00       75,730       30.19       56,714       24.97       41,079       17.64  
Construction or development
    3,873       2.04       9,528       4.20       9,499       3.79       6,409       2.82       9,529       4.09  
 
                                                           
Total real estate loans
    164,948       86.79       195,992       86.29       215,812       86.04       195,497       85.25       198,493       85.25  
 
                                                                               
Other loans:
                                                                               
Consumer loans:
                                                                               
Home equity
    14,814       7.80       18,174       8.00       20,677       8.24       20,430       8.99       19,077       8.19  
Other
    3,403       1.79       4,706       2.07       5,737       2.29       7,014       3.09       9,087       3.90  
 
                                                           
Total consumer loans
    18,217       9.59       22,880       10.07       26,414       10.53       27,444       12.08       28,164       12.09  
 
                                                                               
Commercial Business Loans
    6,882       3.62       8,266       3.64       8,609       3.43       4,228       1.86       6,205       2.67  
 
                                                           
Total other loans
    25,099       13.21       31,146       13.71       35,023       13.96       31,672       13.94       34,369       14.76  
 
                                                           
Total Loans
    190,047       100.00 %     227,138       100.00 %     250,835       100.00 %     227,169       100.00 %     232,862       100.00 %
 
                                                                     
 
                                                                               
Less:
                                                                               
Allowance for loan losses
    6,850               5,783               2,719               1,824               2,024          
Net deferred loan fees
    429               480               574               548               591          
 
                                                                             
Loans in process
                                                                     
 
                                                                     
 
                                                                               
Total Loans, net
  $ 182,768             $ 220,875             $ 247,542             $ 224,797             $ 230,247          
 
                                                                     

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The following table shows the composition of our loan portfolio by fixed and adjustable-rate at the dates indicated.
                                                 
    December 31, 2010     December 31, 2009     December 31, 2008  
    Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
Fixed-Rate Loans
                                               
Real Estate Loans:
                                               
One-to-four family
  $ 70,080       36.9 %   $ 80,241       35.3 %   $ 92,644       36.9 %
Multi-family
    4,762       2.5 %     5,396       2.4 %     5,524       2.2 %
Commercial
    55,959       29.5 %     52,495       23.1 %     47,689       19.0 %
Construction or development
    1,942       1.0 %     4,127       1.8 %     8,111       3.3 %
 
                                   
Total real estate loans
    132,743       69.9 %     142,259       62.6 %     153,968       61.4 %
 
                                               
Consumer
    17,985       9.5 %     15,323       6.8 %     19,406       7.7 %
Commercial Business
    6,154       3.2 %     6,244       2.7 %     7,011       2.8 %
 
                                   
Total fixed-rate loans
    156,882       82.6 %     163,826       72.1 %     180,385       71.9 %
 
                                               
Adjustable-Rate Loans
                                               
Real Estate Loans:
                                               
One-to-four family
  $ 23,214       12.2 %   $ 28,113       12.4 %   $ 32,211       12.8 %
Multi-family
    21       0.0 %     25       0.0 %     204       0.1 %
Commercial
    7,039       3.7 %     20,194       8.9 %     28,041       11.2 %
Construction or development
    1,931       1.0 %     5,401       2.4 %     1,388       0.6 %
 
                                   
Total real estate loans
    32,205       16.9 %     53,733       23.7 %     61,844       24.7 %
 
                                               
Consumer
    233       0.1 %     7,557       3.3 %     7,008       2.8 %
Commercial Business
    727       0.4 %     2,022       0.9 %     1,598       0.6 %
 
                                   
Total adjustable-rate loans
    33,165       17.4 %     63,312       27.9 %     70,450       28.1 %
 
                                   
Total loans
    190,047       100 %     227,138       100 %     250,835       100.0 %
Less:
                                               
Allowance for loan losses
    6,850               5,783               2,719          
Net deferred loan fees
    429               480               574          
Loans in process
                                         
 
                                               
 
                                         
Total Loans, net
  $ 182,768             $ 220,875             $ 247,542          
 
                                         

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The following table illustrates the contractual maturity of our loan portfolio at December 31, 2010. 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)
  $ 5,644       6.23 %   $ 11,331       5.44 %   $ 1,295       5.96 %   $ 3,326       7.34 %   $ 959       5.87 %   $ 22,555       5.97 %
After one year through five years
    16,987       6.57 %     42,730       6.10 %           0.00 %     8,191       6.85 %     5,561       7.12 %     73,469       6.37 %
After five years
    70,663       6.16 %     13,720       5.41 %     2,578       6.20 %     6,700       5.03 %     362       5.53 %     94,023       5.97 %
 
  $ 93,294             $ 67,781             $ 3,873             $ 18,217             $ 6,882             $ 190,047          
 
(1)   Includes demand loans.
The total amount of loans due after December 31, 2011 which have predetermined interest rates is $120.0 million while the total amount of loans due after such date which have floating or adjustable rates is $47.5 million.

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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, 2010, one-to-four family residential mortgage loans totaled $93.3 million, or 49.1% 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 borrower’s 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 borrower’s history with the Bank will determine whether or not the loan is classified as sub-prime.
At December 31, 2010, $16.8 million, or 18.0% of our residential mortgage loans were classified as sub-prime loans as compared to $16.3 million, or 15.0% at December 31, 2009. 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 2010, $510,000, or 4.9%, of our total net charge-offs of $10.5 million were due to sub-prime loans as compared to $627,000, or 6.1% of our total net charge-offs of $10.3 million for 2009. During 2010, 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 applicant’s employment and credit history and the appraised value of the subject property. Presently, we lend up to 80% of the lesser of the appraised value or purchase price for one-to-four family residential loans. 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 2010, we originated no one to four family ARM loans. In 2009 we originated $5.2 million of one-to-four family ARM loans. During the years ended December 31, 2010 and 2009, we originated $39.1 million and $28.8 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.

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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 borrower’s 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, 2010, multi-family and commercial real estate loans totaled $67.8 million or 35.7% 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 borrower’s ability to repay the loan may be impaired. See “- Asset Quality — Non-performing Loans.”

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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, 2010 we had $3.9 million in construction and land development loans outstanding, representing 2.04% 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, 2010, our consumer loan portfolio totaled $18.2 million, or 9.6% 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 $14.8 million, and comprised 7.8% of our gross loan portfolio at December 31, 2010. These loans may be originated in amounts, together with the amount of the existing first mortgage, of up to 80% 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 borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

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Commercial Business Lending. At December 31, 2010, commercial business loans comprised $6.9 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, 2010, there was a $150,000 financial standby letter of credit outstanding.
Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s 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 borrower’s ability to make repayment from the cash flow of the borrower’s 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 2010, 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 0% and .5% in 2010 and 2009 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.

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The following table shows the loan origination, sale and repayment activities of Monarch for the periods indicated.
                 
    Years Ended  
    2010     2009  
    (Dollars in thousands)  
Originations by type:
               
Real Estate:
               
One-to-four family
  $ 39,062     $ 104,416  
Multi-family
    469       760  
Commercial
    9,456       9,025  
Construction or development
    1,712       4,943  
 
           
Total real estate loans
    50,699       119,144  
 
               
Consumer Loans:
               
Home Equity
    1,383       5,073  
Other
    367       827  
Commercial business
    693       743  
 
           
Total loans originated
    53,142       125,787  
 
               
Sales and Repayments:
               
 
               
One-to-four family loans sold
    32,614       89,901  
Commercial real estate loans sold
           
Principal repayments
    55,895       59,583  
 
           
Total reductions
    88,509       149,484  
 
               
Increase in other items, net
    2,896       2,970  
 
           
Net increase (decrease)
  $ (38,263 )   $ (26,667 )
 
           
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 contacts 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 forebear 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 45 to 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.

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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, 2010  
    Loans Delinquent For:  
    60-89 Days     90 Days and Over     Total Delinquent Loans  
                    Percent of                     Percent of                        
                    Loan                     Loan                     Percent of Loan  
    Number     Amount     Category     Number     Amount     Category     Number     Amount     Category  
    (Dollars in Thousands)  
Real Estate
                                                                       
One-to-four family
    10     $ 888       0.95 %     12     $ 1,098       1.18 %     22     $ 1,986       2.13 %
Multi-family
                0.00 %     1       339       7.09 %     1       339       7.09 %
Commercial
    2       2,752       4.37 %     10       3,751       5.95 %     12       6,503       10.32 %
Construction or development
                0.00 %                 0.00 %                 0.00 %
 
                                                     
Total real estate loans
    12     $ 3,640       2.21 %     23     $ 5,188       3.15 %     35     $ 8,828       5.35 %
 
                                                                       
Consumer
    1       19       0.10 %     6       192       1.05 %     7       211       1.16 %
Commercial Business
                0.00 %     3       1,118       16.25 %     3       1,118       16.25 %
 
                                                     
 
                                                                       
Total
    13     $ 3,659       1.93 %     32     $ 6,498       3.42 %     45     $ 10,157       5.34 %
 
                                                     
                                                                         
    December 31, 2009  
    Loans Delinquent For:  
    60-89 Days     90 Days and Over     Total Delinquent Loans  
                    Percent of                     Percent of                        
                    Loan                     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 %
 
                                                     

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Non-performing Assets. The table below sets forth the amounts and categories of the Bank’s 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. Foreclosed assets include assets acquired in settlement of loans.
                                         
    December 31,  
    2010     2009     2008     2007     2006  
    (Dollars in Thousands)  
Non-accruing loans:
                                       
One-to-four family
  $ 3,106     $ 3,484     $ 622     $ 607     $ 408  
Multi-family
    803       874       164              
Commercial real estate
    8,288       7,139       459                
Construction or development
          2,507       1,298       153        
Consumer
    253             28             60  
Commercial business
    1,625       1,566                    
 
                             
Total
    14,075       15,570       2,571       760       468  
 
                                       
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)
    1,198       2,577       1,669       1,453       1,580  
Multi-family
    292       122                    
Commercial real estate
    908       140       407       62        
Construction or development
    574                          
Consumer
                            100  
Commercial business
                             
 
                             
Total
    2,972       2,839       2,076       1,515       1,680  
 
                             
Total non-performing assets
  $ 17,047     $ 18,409     $ 4,647     $ 2,380     $ 2,148  
 
                             
 
                                       
Total as a percentage of total assets
    6.64 %     6.50 %     1.59 %     0.85 %     0.74 %
 
                             
 
(1)   Includes $1.4 million, $1.1 million, $1.3 million, $630,000 and $895,000 in real estate in judgment and subject to redemption at December 31, 2010, 2009, 2008, 2007 and 2006 respectively.
For the years ended December 31, 2010, 2009 and 2008, respectively, there was $1.1 million, $611,000 and $116,000 of gross interest income which would have been recorded had non-accruing loans been current in accordance with their original terms.

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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 institution’s 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 management’s review of our assets, at December 31, 2010, we had classified $16.6 million of our assets as substandard, $6.6 million as doubtful and none as loss. The total amount classified as substandard and doubtful represented 193% of the Bank’s equity capital and 9.0% of the Bank’s assets at December 31, 2010. The allowance for loan losses at December 31, 2010 includes $604,000 related to substandard loans and $253,000 related to doubtful loans. At December 31, 2010, $15.9 million and $5.9 million 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 $11.6 million for the year ended December 31, 2010 compared to $13.3 million recorded for the year ended December 31, 2009. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Comparison of Operating Results for the Years Ended December 31, 2010 and 2009 — 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 management’s judgment, affect the collectability of the portfolio as of the evaluation date.

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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 collectability 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, management’s estimate of the effect of this condition may be reflected as a specific allowance applicable to this credit or portfolio segment.
The allowance for loan losses is based on estimates of losses inherent in the loan portfolio. Actual losses can vary significantly from the estimated amounts. Our methodology as described permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management’s judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.
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.

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The following table summarizes activity in the allowance for loan losses for the years ending (000s omitted):
                                         
    December 31,  
    2010     2009     2008     2007     2006  
Balance at beginning of year
  $ 5,783     $ 2,719     $ 1,824     $ 2,024     $ 2,925  
 
                                       
Charge-offs:
                                       
One-to-four family
    3,901       2,288       879       774       223  
Multi-family
    372       10             28        
Commercial real estate
    4,801       4,299       321       197       15  
Construction or development
    1,319       3,075       50             340  
Consumer
    389       533       532       386       494  
Commercial business
    110       352       239       17       113  
 
                             
Total
    10,892       10,557       2,021       1,402       1,185  
 
                                       
Recoveries:
                                       
One-to-four family
    62       20       4       16       4  
Multi-family
    32       1                    
Commercial real estate
    9       14       2              
Construction or development
    36                          
Consumer
    213       215       198       175       275  
Commercial business
    5       22             40       5  
 
                             
Total
    357       272       204       231       284  
 
                             
Net charge-offs:
    10,535       10,285       1,817       1,171       901  
Additions charged to operations
    11,602       13,349       2,712       971        
Balance at end of year
  $ 6,850     $ 5,783     $ 2,719     $ 1,824     $ 2,024  
 
                             
 
                                       
Ratio of net charge-offs during the year to average loans outstanding during the year
    4.91 %     4.24 %     0.75 %     0.49 %     0.39 %
 
                             
 
                                       
Allowance as a percentage of non-performing loans
    48.67 %     37.14 %     105.76 %     210.87 %     432.48 %
 
                             
 
                                       
Allowance as a percentage of total loans (end of year)
    3.60 %     2.55 %     1.08 %     0.81 %     0.93 %
 
                             

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The distribution of our allowance for losses on loans at the dates indicated is summarized as follows:
                                                 
    December 31,  
    2010     2009     2008  
    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
  $ 3,953       57.7 %   $ 2,576       44.5 %   $ 1,618       59.5 %
Multi-family and non-residential real estate
    2,084       30.4 %     903       15.6 %     533       19.6 %
Construction or development
    130       1.9 %     10       0.2 %     75       2.8 %
Consumer
    503       7.3 %     393       6.8 %     305       11.2 %
Commercial business
    180       2.6 %     1,901       32.9 %     188       6.9 %
 
                                   
Total
  $ 6,850       100.0 %   $ 5,783       100.0 %   $ 2,719       100.0 %
 
                                   
                                 
    2007     2006  
    Amount of     Percentage     Amount of     Percentage  
    Loan Loss     of     Loan Loss     of  
    Allowance     Allowance     Allowance     Allowance  
One-to-four family
  $ 979       53.7 %   $ 783       60.3 %
Multi-family and non-residential real estate
    351       19.2 %     809       20.8 %
Construction or development
    154       8.4 %     7       4.1 %
Consumer
    287       15.7 %     302       12.1 %
Commercial business
    53       2.9 %     123       2.7 %
 
                       
 
  $ 1,824       100.0 %   $ 2,024       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 bank 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset and Liability Management and Market Risk.”

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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, 2010     December 31, 2009  
                    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
  $     $       0.0 %   $ 1,055     $ 1,071       6.7 %
U.S. government agency obligations
    1,619       1,682       14.7 %     3,155       3,196       19.9 %
Mortgage-backed securities
    3,914       4,024       35.0 %     5,454       5,536       34.4 %
Obligations of states and political subdivisions
    5,543       5,760       50.2 %     6,061       6,260       38.9 %
 
                                   
Total available-for-sale securities
  $ 11,076     $ 11,466       99.9 %   $ 15,725     $ 16,063       99.9 %
Held-to-maturity securities:
                                               
Municipal security
  $ 10     $ 10       0.1 %   $ 23     $ 23       0.1 %
 
                                   
Total investment securities
  $ 11,086     $ 11,476       100.0 %   $ 15,748     $ 16,086       100.0 %
 
                                   
                         
    December 31, 2008  
                    Percent of  
            Fair     Total  
    Amortized     Market     Fair Market  
    Cost     Value     Value  
Available-for-sale securities:
                       
U.S. government agency obligations
  $ 5,698     $ 5,761       64.4 %
Mortgage-backed securities
    739       734       8.2 %
Obligations of states and political subdivisions
    2,375       2,421       27.0 %
 
                 
Total available-for-sale securities
  $ 8,812     $ 8,916       99.6 %
Held-to-maturity securities:
                       
Municipal security
    37       37       0.4 %
Total investment securities
  $ 8,849     $ 8,953       100.0 %
 
                 

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The maturities of the investment securities portfolio, excluding FHLB stock, as of December 31, 2010 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. government agency obligations
    500       1.63 %     1,119       6.32 %           0 %           0.00 %     1,619       4.87 %
Mortgage-backed securities
    179       4.50 %           0.00 %     1,574       4.31 %     2,161       4.79 %     3,914       4.58 %
Obligations of states and political subdivisions
    400       4.95 %     3,885       4.04 %     1,288       4.46 %           0.00 %     5,543       4.20 %
 
                                                           
Total available-for-sale securities
    1,079       3.34 %     4,974       4.55 %     2,862       4.38 %     2,161       4.79 %     11,076       4.44 %
 
                                                                               
Held-to-maturity securities:
                                                                               
Municipal security
    10       4.45 %           0 %           0.00 %           0.00 %     10       4.45 %
 
                                                           
 
                                                                               
Total investment securities
  $ 1,089       3.35 %   $ 4,974       4.55 %   $ 2,862       4.38 %   $ 2,161       4.79 %   $ 11,086       4.44 %
 
                                                           
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 brokered deposits in the past. At December 31, 2010, we had $17.1 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.

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The following table sets forth our deposit flows during the periods indicated:
                 
    Year Ended  
    December 31,  
    2010     2009  
    (Dollars in Thousands)  
Opening balance
  $ 213,368     $ 192,156  
Net deposits (withdrawals)
    (10,721 )     16,206  
Interest credited
    3,381       5,006  
 
           
 
               
Ending balance
  $ 206,028     $ 213,368  
 
           
 
               
Net increase (decrease)
  $ (7,340 )   $ 21,212  
 
           
 
               
Percent increase (decrease)
    -3.44 %     11.04 %
 
           
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,  
    2010             2009        
            Percent             Percent  
    Amount     of Total     Amount     of Total  
    (Dollars in Thousands)  
Transaction and Savings Deposits:
                               
Non-interest bearing accounts
  $ 15,394       7.4 %   $ 14,422       6.8 %
Savings accounts
    20,335       9.9 %     20,302       9.5 %
Checking & NOW accounts
    24,452       11.9 %     23,084       10.8 %
Money market accounts
    40,785       19.8 %     57,052       26.7 %
 
                       
 
                               
Total transaction and savings
  $ 100,966       49.0 %   $ 114,860       53.8 %
 
                               
Certificates:
                               
0.00-1.99%
    53,979       26.2 %     26,994       12.7 %
2.00-3.99%
    28,033       13.6 %     36,459       17.1 %
4.00-5.99%
    23,049       11.2 %     35,055       16.4 %
Total certificates
    105,062       51.0 %     98,508       46.2 %
 
                       
 
                               
Total deposits
  $ 206,028       100.0 %   $ 213,368       100.0 %
 
                       

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The following table indicates the amount of our certificates of deposit by time remaining until maturity as of December 31, 2010:
                                         
            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
  $ 6,903     $ 11,216     $ 11,254     $ 23,131     $ 52,504  
 
                                       
Certificates of deposit of $100,000 or more
    3,039       6,530       16,681       26,308       52,558  
 
                             
 
                                       
Total certificates of deposit
  $ 9,942     $ 17,746     $ 27,935     $ 49,439     $ 105,062  
 
                             
The following table shows rate and maturity information for our certificates of deposit as of December 31, 2010:
                                                 
                                            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, 2011
  $ 4,769     $ 1,136     $ 4,038     $     $ 9,943       9.5 %
June 30, 2011
    14,606       1,904       1,236             17,746       16.9 %
September 30, 2011
    7,657       1,526       4,879             14,062       13.4 %
December 31, 2011
    7,941       2,409       3,523             13,873       13.2 %
March 31, 2012
    443       1,303       1,010             2,756       2.6 %
June 30, 2012
    2,232       940       750             3,922       3.7 %
September 30, 2012
    3,346       631       768             4,745       4.5 %
December 31, 2012
    3,909       136       949             4,994       4.8 %
Thereafter
    9,075       18,049       5,897             33,021       31.4 %
 
                                   
 
                                               
Total
  $ 53,978     $ 28,034     $ 23,050     $     $ 105,062       100.0 %
 
                                   
 
                                               
Percent of total
    51.38 %     26.68 %     21.94 %     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, 2010, we had $36.4 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.
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:

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Loan Bank advances and fed funds purchased for the periods indicated:
                 
    Year Ended  
    December 31,  
    2010     2009  
    (Dollars in Thousands)     (Dollars in Thousands)  
Maximum Balance:
               
FHLB advances
  $ 44,518     $ 59,178  
 
           
Fed funds purchased
  $ 1,000     $ 3,000  
 
           
Average Balance:
               
FHLB advances
  $ 43,836     $ 48,564  
 
           
Fed funds purchased
  $ 3     $ 29  
 
           
The following table sets forth certain information concerning our borrowings at the dates indicated.
                 
    December 31,  
    2010     2009  
    (Dollars in Thousands)     (Dollars in Thousands)  
FHLB advances
  $ 36,350     $ 44,518  
 
           
Fed funds purchased
  $     $  
 
           
Weighted average interest rate of FHLB
               
FHLB advances
    4.16 %     4.43 %
 
           
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, 2010, we had a total of 68 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.
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

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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 payer 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 FDIC’s deposit insurance funds and the depositors, rather than the shareholders, of financial institutions.
The Company’s 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 Company’s 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

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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 “Management’s 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, non-operating 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.
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.

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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.
Regulatory Agreement. On September 21, 2010, the Company entered into a written agreement with the Federal Reserve (the “Written Agreement”). Among other things, the Written Agreement requires that the Company obtain the approval of the Federal Reserve prior to paying a dividend; prohibits the Company from purchasing or redeeming any shares of its stock without the prior written approval of the Federal Reserve, and; requires the Company to submit cash flow projections for the Company to the Federal Reserve on a quarterly basis.
Dividends. As described below under the heading “Recent Developments,” as a result of the Company’s 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 Treasury’s 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. As discussed above, the Written Agreement also requires the Company to obtain the approval of the Federal Reserve prior to paying a dividend.
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

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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 Company’s 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 Company’s 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 Company’s 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.
In April 2010, the Company announced that it would defer scheduled dividend payments on the principal outstanding on the Preferred Shares.
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. In addition, if dividends on the Preferred Shares are not paid in full for six dividend periods, the Treasury will have the right to elect two directors to the Company’s Board of Directors. The Treasury’s right to elect directors ends when full dividends have been paid for four consecutive dividend periods. As discussed above, the Company has announced that it would defer scheduled dividend payments on the Preferred Shares.
In June 2010, the Federal Reserve issued final guidance to ensure that incentive compensation arrangements at financial institutions take into account risk and are consistent with safe and sound practices. 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 certain employees and groups of employees that may expose the institution to material amounts of risk.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law on July 21, 2010. The Dodd-Frank Act constitutes one of the most significant efforts in recent history to comprehensively overhaul the financial services industry and will affect large and small financial institutions alike. While some of the provisions of the Dodd-Frank Act take effect immediately, many of the provisions have delayed effective dates and their implementation will require the issuance of numerous new regulations.
The Dodd-Frank Act deals with a wide range of regulatory issues including, but not limited to: mandating new capital requirements that would require certain bank holding companies to be subject to the same

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capital requirements as their depository institutions; eliminating (with certain exceptions) trust preferred securities; codifying the Federal Reserve’s Source of Strength doctrine; creating a Bureau of Consumer Financial Protection which will have the power to exercise broad regulatory, supervisory and enforcement authority concerning both existing and new consumer financial protection laws; permanently increasing federal deposit insurance protection to $250,000 per depositor; extending the unlimited coverage for qualifying non-interest bearing transactional accounts until December 31, 2012; increasing the ratio of reserves to deposits minimum to 1.35 percent; assessing premiums for deposit insurance coverage on average consolidated total assets less average tangible equity, rather than on a deposit base; authorizing the assessment of examination fees; establishing new standards and restrictions on the origination of mortgages; permitting financial institutions to pay interest on business checking accounts; limiting interchange fees payable on debit card transactions; and implementing requirements on boards, corporate governance and executive compensation for public companies.
The complete impact of the Dodd-Frank Act is unknown since many of the substantive requirements will be contained in the many rules and regulations to be implemented. However, the Dodd-Frank Act will have significant and immediate effects on banks and bank holding companies in many areas.
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 Bank’s activities are governed primarily by Michigan’s 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.
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. As a result of the Dodd-Frank Act, interstate branching authority has been expanded. A state or national bank may open a de novo branch in another state if the law of the state where the branch is to be located would permit a state bank chartered by that state to open the branch.
Loans to One Borrower. Under Michigan law, a bank’s total loans and extensions of credit and leases to one borrower is limited to 15% of the bank’s capital and surplus, subject to several exceptions. This limit

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may be increased to 25% of the bank’s 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, 2010, the Bank’s legal lending limit for loans to one borrower was $1.7 million; the Bank’s legal lending limit with approval of two-thirds of the Board of Directors was $3.0 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 2010 was $33,840. 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.
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 institution’s 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.

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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%.
As described below, the Bank is required to meet higher capital requirements due to the existence of the Consent Order (as defined below).
Prompt Corrective Regulatory Action. The FDIC is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s 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 bank’s 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.
Deposit Insurance. The Bank’s 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. Effective October 3, 2008, EESA raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The Dodd-Frank Act permanently raised the basic limit on deposit insurance coverage from $100,000 to $250,000 per depositor. In addition, in November 2010, pursuant to the Dodd-Frank Act, the FDIC issued a final rule to provide temporary unlimited deposit insurance coverage for non-interest bearing accounts from December 31, 2010 through December 31, 2012.
Under the FDIC’s 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.

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Due to a decrease in the reserve ratio of the deposit insurance fund, in October 2008, the FDIC established a restoration plan to restore the reserve ratio to at least 1.15% within five years (the FDIC has extended this time to eight years). However, the Dodd-Frank Act raised the minimum reserve ratio to 1.35% and removed the upper cap. Furthermore, the Dodd-Frank Act requires that the reserve ratio reach 1.35% by September 30, 2020 instead of 1.15% by the end of 2016. Effective January 1, 2011, the FDIC set the reserve ratio at 2%. The FDIC has been directed to offset the effects of increased assessments on depository institutions with less than $10 billion in assets. To achieve these levels, the FDIC is authorized by the Dodd-Frank Act to make special assessments and charge examination fees.
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 institution’s 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 institution’s initial base assessment rate. It also provided for the following adjustments to an institution’s 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 institution’s 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 institution’s 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.
As required by the Dodd-Frank Act, on February 7, 2011, the FDIC adopted a final rule that redefines its deposit insurance premium assessment base to be an insured depository institution’s average consolidated total assets minus average tangible equity. In addition, the FDIC has revised its deposit insurance rate schedules as a consequence of the changes to the assessment base. The proposed rate schedule and other revisions become effective on April 1, 2011.
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, it was extended to December 31, 2010 for those participating institutions that did not opt out. The Dodd-Frank Act provides unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions. There is no additional surcharge related to this coverage.

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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.
Bank Regulatory Agreement. On May 6, 2010, the Bank entered into a stipulation and consent to the issuance of a consent order with the FDIC and OFIR (the “Consent Order”). The Consent Order, among other things, requires the Bank to increase the Bank’s level of Tier 1 capital as a percentage of total assets to at least 9% and its total capital as a percentage of risk-weighted assets at a minimum of 11% and to retain an independent third party to develop an analysis of the Bank’s management needs for the purpose of providing qualified management for the Bank.
Payment of Dividends by the Bank. There are state and federal requirements limiting the amount of dividends which the Bank may pay. Generally, a bank’s 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 Bank’s ability to pay dividends. As discussed above, the Consent Order requires the Bank to obtain the prior written consent of the FDIC and OFIR for the payment of dividends. During 2011, the Bank is not expected to pay dividends.
Loans to Directors, Executive Officers, and Principal Shareholders. Under FDIC regulations, the Bank’s 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 Bank’s 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.

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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 $58.8 million, a reserve of 3%; and
 
    for transaction accounts totaling in excess of $58.8 million, a reserve requirement of $1.443 million plus 10% of that portion of the total transaction accounts greater than $58.8 million.
The dollar amounts and percentages reported here are all subject to adjustment by the Federal Reserve.
ITEM 1A. Risk Factors
This item is not required for smaller reporting companies.
ITEM 1B. Unresolved Staff Comments — None
ITEM 2. Properties
At December 31, 2010, we had five full service offices. At December 31, 2010, we owned all of our offices and the net book value of our investment in premises and equipment, excluding computer equipment, was $3.9 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
       
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
       
 
       
87 Marshall Street
  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.

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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
PART II
ITEM 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s 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, 2010 and 2009, the Company paid dividends of $0.0 and $0.25 per share, respectively.
                                 
Year             Quarter ending   High   Low   Dividends
  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     $  
  2010    
March 31
  $ 2.25     $ 2.16     $  
       
June 30
  $ 1.27     $ 1.08     $  
       
September 30
  $ 1.54     $ 1.30     $  
       
December 31
  $ 1.23     $ 1.15     $  
Please refer to Note 13 to the Financial Statements for a discussion of certain restrictions which impact the Company’s 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 March 25, 2011, there were 2,049,825 shares of the Company’s common stock issued and outstanding and approximately 338 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 SECURITIES
                                 
                (d)  
    (a)     (b)     (c)     Maximum Number (or Approximate Dollar  
    Total Number of             Total Number of Shares (or Unit)     Value) of Shares (or Units) that may yet  
    Shares (or Units)     Average Price paid     Purchased as Part of Publicly     Be Purchased Under the Plans or  
Period   Purchased     per Share (or Unit)     Anounced Plans or Programs     Program  
10/01/10-10/31/10
                       
11/01/10-11/30/10
        $              
12/01/10-12/31/10
        $              
 
                       
Total
                       
 
                       
The Company does not currently have a stock repurchase program.

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The Performance Graph required by item 201 (e) of Regulation S-K is not applicable to smaller reporting companies.
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,
    2010   2009   2008   2007   2006
    (In Thousands)
Selected Financial Condition Data:
                                       
 
                                       
Total Assets
  $ 256,868     $ 283,204     $ 291,807     $ 279,208     $ 289,987  
Loans receivable, net
    182,768       220,875       247,542       224,797       230,247  
Investment securities, at carrying value
    11,476       16,086       8,953       11,322       13,934  
Fed Funds sold and overnight deposits
    34,909       10,723       677       6,151       7,864  
Deposits
    206,028       213,368       192,156       177,936       192,572  
Federal Home Loan Bank Advances
    36,350       44,518       60,178       59,330       54,476  
Equity
    12,018       23,163       36,270       39,086       39,986  
                                         
    December 31,  
    2010     2009     2008     2007     2006  
    (In Thousands)  
Selected Operations Data:
                                       
 
                                       
Total interest income
  $ 12,837     $ 15,836     $ 17,196     $ 17,545     $ 17,287  
Total interest expense
    5,372       7,339       8,536       9,222       8,607  
 
                             
Net interest income
    7,465       8,497       8,660       8,323       8,680  
Provision for loan losses
    11,602       13,349       2,712       971        
 
                             
Net interest income after provision for loan losses
    (4,137 )     (4,852 )     5,948       7,352       8,680  
Fees and service charges
    2,496       2,682       2,757       2,921       2,642  
Gains on sales of loans, mortgage-backed securities and investment securities
    1,082       2,100       629       651       342  
Other non-interest income
    119       211       217       374       138  
 
                             
Total non-interest income
    3,697       4,993       3,603       3,946       3,122  
Total non-interest expense
    10,237       20,085       9,152       8,992       9,710  
 
                             
Income (loss) before taxes
    (10,677 )     (19,944 )     399       2,306       2,092  
Income tax provision
    205       (548 )     101       561       544  
 
                             
Net income (loss)
  $ (10,882 )   $ (19,396 )   $ 298     $ 1,745     $ 1,548  
 
                             

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ITEM 6. Selected Financial Data, continued
                                         
    December 31,
    2010   2009   2008   2007   2006
Selected Financial Ratios and Other Data:
                                       
Performance Ratios:
                                       
Return on assets (ratio of net income (loss) to average total assets)
    -4.00 %     -6.41 %     0.10 %     0.61 %     0.54 %
Return on Equity (ratio of net income (loss) to average equity)
    -59.86 %     -46.88 %     0.78 %     4.30 %     3.85 %
Interest rate spread information:
                                       
Average during period
    2.96 %     2.94 %     3.11 %     3.05 %     3.26 %
Net interest margin
    2.96 %     3.10 %     3.32 %     3.27 %     3.42 %
Ratio of operating expense to average total assets
    3.77 %     6.64 %     3.20 %     3.17 %     3.41 %
Ratio of average interest-earning assets to average interest-bearing liabilities
    1.00       1.06       1.06       1.06       1.05  
Efficiency ratio *
    85.84 %     71.67 %     73.25 %     72.62 %     80.44 %
 
                                       
Asset Quality Ratios:
                                       
Non-performing assets to total assets at end of period
    6.64 %     6.50 %     1.59 %     0.81 %     0.74 %
Non-performing loans to total loans,net
    7.70 %     7.05 %     1.04 %     0.33 %     0.20 %
Allowance for loan losses to non-performing loans
    48.67 %     37.14 %     105.76 %     240.00 %     432.48 %
Allowance for loan losses to loans receivable, net
    3.75 %     2.62 %     1.10 %     0.81 %     0.88 %
 
                                       
Capital ratios:
                                       
Equity to total assets at end of period
    4.67 %     8.19 %     12.43 %     14.00 %     13.79 %
 
                                       
Other data:
                                       
Number of full-service offices
    5       6       6       6       6  
 
*   Amounts do not include the one time non cash charge for goodwill impairment

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s 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.
Monarch Community Bancorp, “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. The Company, however, has no significant assets other than the Bank. It is typically dependent upon dividends from the Bank for revenue.
Following Monarch Community Bank’s 2010 Safety and Soundness examination, the Board of Directors of Monarch Community Bank stipulated to the terms of a formal enforcement action (“Consent Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”). The Consent Order, which was effective May 6, 2010, requires among other things, that the Bank obtain the approval of the FDIC prior to paying a dividend.
Monarch Community Bancorp’s ability to pay dividends, is also currently also prohibited by the Written Agreement entered into the Federal Reserve Bank of Chicago (the “FRB”). For details regarding the Written Agreement, refer to Note 14 in the financial statements. Effective February 2010, the Corporation deferred regularly scheduled dividend payments on the $6.7 million in principal outstanding on its Series A fixed rate, cumulative perpetual preferred stock (aggregate liquidation preference of $6.8 million) which was issued to the U.S. Treasury in February 2009. The suspension of dividend payments is permissible under the terms of the TARP Capital Purchase Program, but the dividend is a cumulative dividend and failure to pay dividends for six dividend periods would trigger board of director appointment rights for the holder of the Series A Preferred Stock.
The discussion and analysis does not include any comments relating to Monarch Community Bancorp since Monarch Community Bancorp has no significant operations. As mentioned in Notes 13 and 14 the Monarch Community Bank and Monarch Community Bancorp are restricted from paying dividends without prior consent from respective regulatory agencies. The information contained in this section should be read in conjunction with the consolidated financial statements.
Monarch’s 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. Monarch’s 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 to be the accounting estimate that is the most subjective or judgmental.

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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 5 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 11 to the Consolidated Financial Statements for more information on income taxes.
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 valuation allowance may be reversed to income in future periods to the extent that the related deferred tax assets are realized or the valuation allowance is no longer required. The realization of our deferred tax assets is largely dependent upon our ability to generate future taxable income. The Company had a $7.3 million tax valuation allowance as of December 31, 2010 and $3.1 million tax valuation allowance as of December 31, 2009.
Management Strategy
Our primary focus is on increasing market share and profitability by incorporating the mission of making banking fun and easy and by helping our customers retire wealthy. Primary areas of growth will be residential mortgage origination, wealth management and core deposits. Commercial lending will center on loans guaranteed by the US Small Business Administration.
Continued emphasis will be placed on; 1) the development of a dynamic customer service and relationship model, 2) the reduction of non-performing and classified loans, 3) the prudent reduction of non-interest expenses, 4) the implementation of enhanced banking controls, policies and procedures and, 5) the raising of capital sufficient to comply with regulatory requirements.

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Changes in Financial Condition from December 31, 2009 to December 31, 2010
General. Monarch’s total assets decreased $26.6 million, or 9.4%, to $256.9 million at December 31, 2010 compared to $283.5 million at December 31, 2009. The decline in assets is largely attributable to the decrease in loans which decreased from $220.9 million at December 31, 2009 to $182.8 at December 31, 2010.
Loans. Loans remain our largest category of interest earning assets and the largest source of revenue. The net loan portfolio decreased $38.1 million, or 17.3%. Gross loans decreased $37.1 million, or 16.3%, from $227.1 million at December 31, 2009 to $190.0 million at December 31, 2010.
Commercial business loans decreased $1.4 million in 2010 as compared to 2009. Commercial real estate loans including multi family loans decreased $10.3 million largely as a result of charge offs in the amount of $5.2 million. Construction loans decreased by $5.7 million, which was primarily due to the reclassification of a large relationship in the amount of $4.1 million to commercial real estate.
Residential loans decreased $15.1 million in 2010, 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 throughout 2010. The decline in the residential portfolio is also attributable to the increased level of charge off activity. The decrease in Home Equity loans of $3.4 million from 2009 to 2010 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 5 include primarily automobile and recreational vehicle loans. Other loans decreased $1.3 million in 2010 mainly due to normal repayments. Please refer to Note 5 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, banker’s acceptances, standby and commercial letters of credit, and deposit account overdrafts. Our overall credit risk position is reflective of the continued weak economy in 2010, with increased levels of net charge offs, non-performing assets and provision for loan and lease losses compared to periods prior to the recession.
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 $10.5 million for 2010, compared to $10.6 million for 2009 and $2.0 million for 2008. The increase in charge-offs in 2010 and 2009 was primarily due to charge offs related to commercial relationships and an increased level of 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 $11.6 million for 2010, compared to the provision for loan and lease losses of $13.3 million for 2009 and the provision for loan and lease losses of $2.7 million for 2008. The increased provision for loan and lease losses in 2010 and 2009 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 borrower’s 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.

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Nonperforming assets decreased to $17.1 million as of December 31, 2010 from $18.4 million as of December 31, 2009, mainly due to decreases in nonaccrual loans. Total nonaccrual loans were $14.1 million as of December 31, 2010 compared to $15.6 million as of December 31, 2009. The decrease in nonaccrual loans was primarily due to several large commercial loan relationships returning to an accruing status. The elevated levels of nonaccrual loans seen during 2009 and 2010 are 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 $15.2 million during 2010 compared to $10.0 million during 2009. At year end, impaired loans were $27.8 million compared to $26.4 million as of December 31, 2009. Given the present state of the economy, we have determined that it is necessary to work with some borrowers to reduce potential losses to the Bank. At December 31, 2010, we had $22.2 million in restructured loans. $17.8 million of the restructured loans were in compliance with the terms of agreement or delinquent less than 90 days.
Securities. The Bank’s securities portfolio decreased $4.6 million, or 28.6%, to $11.5 million at December 31, 2010 from $16.1 million at December 31, 2009. Securities were 4.6% of total assets at December 31, 2010 as compared to 5.7% at December 31, 2009. The decrease was attributable to the sale or maturity of $8.8 million in securities, which was offset by purchases totaling $4.2 million. The Bank invested mainly in short term treasuries. The yield on investment securities has decreased to 3.12% at December 31, 2009 from 3.41% 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.
Liabilities. Monarch’s deposits decreased $7.3 million, or 3.4%, to $206.0 million at December 31, 2010 compared to $213.4 million at December 31, 2009. This decrease was primarily in money market accounts which decreased $16.3 million. Brokered CDs decreased $9.8 million from $25.7 million at December 31, 2009 to $17.1 million at December 31, 2010. 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. Retail CD deposits increased $16.3 million. Other interest bearing checking accounts increased $1.4 million. Non-interest bearing deposit accounts increased $1.0 million. 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.
Due to the fact that the Bank’s regulatory capital ratios are less than the levels necessary to be considered “well capitalized”, it may not obtain new brokered funds as a funding source without prior approval of the FDIC and is subject to rate restrictions that limit the amount that can be paid on all types of retail deposits (See Note 13 for further discussion on the requirements of the Consent Order). The maximum rates the Bank can pay on all types of retail deposits are limited to the national average rate, plus 75 basis points. We have compared the Bank’s current rates with the national rate caps and reduced any rates over the rate cap to fall within those caps. There has been no material impact to our deposit balances resulting from the rate caps.
Federal Home Loan Bank advances decreased $8.2 million, or 18.4%, to $36.45 million at December 31, 2010 from $44.5 million at December 31, 2009. We have used brokered certificates of deposit to diversity our sources of funds and improve pricing at certain terms compared to the local market and advances available from Federal Home Loan Bank of Indianapolis. 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 $12.0 million at December 31, 2010 and $23.2 million at December 31, 2009, or 4.7 and 8.2%, respectively, of total assets at both dates. The decrease in equity resulted from the net loss for 2010 of $10.9 million and dividend payments of $343,000, which consisted of dividends accrued but not paid on the Preferred stock. The

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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.
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,  
    2010     2009  
    Average     Interest             Average     Interest        
    Outstanding     Earned/     Yield/     Outstanding     Earned/     Yield/  
    Balance     Paid     Rate     Balance     Paid     Rate  
    (dollars in thousands)  
Fed Funds and overnight deposits
  $ 18,380     $ 4       0.02 %   $ 11,392     $ 6       0.05 %
Investment securities
    14,927       466       3.12       16,591       565       3.41  
Other securities
    4,142       97       2.34       4,174       74       1.77  
Loans receivable
    214,488       12,270       5.72       242,289       15,191       6.27  
 
                                       
Total earning assets
  $ 251,937     $ 12,837       5.10     $ 274,446     $ 15,836       5.77  
 
                                       
 
                                               
Demand and NOW accounts
  $ 40,655     $ 94       0.23     $ 34,045     $ 98       0.29  
Money market accounts
    49,963       412       0.82       47,923       789       1.65  
Savings accounts
    20,955       50       0.24       19,113       71       0.37  
Certificates of deposit
    95,831       2,848       2.97       104,275       3,952       3.79  
Fed Funds Purchased
    3                   28              
Federal Home Loan Bank advances
    43,843       1,968       4.49       53,966       2,429       4.50  
 
                                       
Total interest bearing liabilities
  $ 251,250       5,372       2.14     $ 259,350       7,339       2.83  
 
                                       
Net interest income
          $ 7,465                     $ 8,497          
 
                                           
Net interest spread
                    2.96 %                     2.94 %
 
                                           
Net interest margin
                    2.96 %                     3.10 %
 
                                           
                         
    2008  
    Average     Interest        
    Outstanding     Earned/     Yield/  
    Balance     Paid     Rate  
    (dollars in thousands)  
Fed Funds and overnight deposits
  $ 8,170     $ 102       1.25 %
Investment securities
    9,951       428       4.30  
Other securities
    4,174       209       5.01  
Loans receivable
    238,838       16,457       6.89  
 
                   
Total earning assets
  $ 261,133     $ 17,196       6.59  
 
                   
 
                       
Demand and NOW accounts
  $ 32,032     $ 95       0.30  
Money market accounts
    35,497       1,041       2.93  
Savings accounts
    19,123       81       0.42  
Certificates of deposit
    103,569       4,644       4.48  
Fed Funds Purchased
    56              
Federal Home Loan Bank advances
    55,106       2,675       4.85  
 
                   
Total interest bearing liabilities
  $ 245,383       8,536       3.48  
 
                   
Net interest income
          $ 8,660          
 
                   
Net interest spread
                    3.11 %
 
                     
Net interest margin
                    3.32 %
 
                     
 
(1)   Calculated net of deferred loan fees, loan discounts and loans in process. Nonaccrual loans are included in the average outstanding balance.

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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,
    2010 vs. 2009   2009 vs. 2008
                            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
  $ (4 )   $ 4       (2 )     (2 )   $ (98 )   $ 40     $ (39 )   $ (96 )
Investment securities
  $ (47 )   $ (57 )     5       (99 )     (89 )     286       (59 )     137  
Other securities
  $ 24     $ (1 )     (0 )     23       (135 )                 (135 )
Loans receivable
  $ (1,331 )   $ (1,743 )     153       (2,921 )     (1,482 )     238       (21 )     (1,266 )
         
Total interest-earning assets
  $ (1,357 )   $ (1,797 )   $ 155     $ (2,999 )   $ (1,804 )   $ 564     $ (119 )   $ (1,360 )
         
 
                                                               
Interest-bearing liabilities
                                                               
Demand and NOW accounts
  $ (19 )   $ 19       (4 )     (4 )     (3 )     6       (0 )     3  
Money market accounts
  $ (394 )   $ 34       (17 )     (377 )     (457 )     364       (160 )     (252 )
Savings accounts
  $ (25 )   $ 7       (2 )     (21 )     (10 )     (0 )     0       (10 )
Certificates of deposit
  $ (853 )   $ (320 )     69       (1,104 )     (719 )     32       (5 )     (692 )
Fed Funds Purchased
  $     $     $                                
Federal Home Loan Bank advances
  $ (7 )   $ (456 )     1       (461 )     (195 )     (55 )     4       (246 )
         
Total interest-bearing liabilities
  $ (1,298 )   $ (716 )   $ 47     $ (1,967 )   $ (1,383 )   $ 347     $ (161 )   $ (1,197 )
         
Net interest income
                          $ (1,032 )                           $ (163 )
 
                         
 
                           
 
 
Comparison of Results of Operations for the Years Ended December 31, 2010, 2009, and 2008
General. Monarch reported a net loss of $10.9 million for the year ended December 31, 2010 compared to net loss of $19.4 million for the year ended December 31, 2009 and net income of $298,000 million in 2008. The Bank recorded $9.6 million in goodwill impairment in 2009. 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 $7.5 million for 2010 compared to $8.5 million in 2009, following a decrease from $8.7 million in 2008.
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 2.96% in 2010. The decrease from 2008 to 2010 is

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primarily due to the declining interest rate environment consistent throughout 2008, 2009 and 2010 and declining balances on earning assets. The elevated level of non-performing loans has also has a significant impact on the yield generated by the loan portfolio.
Interest Income. Total interest income in 2010 decreased $3.0 million primarily due to the low interest rates consistent since 2009 and the impact of the nonaccrual interest adjustment on nonperforming loans. This followed a $1.3 million decrease in 2009 compared to 2008 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 $2.0 million in 2010 compared to 2009. This followed a decrease of $1.2 million in 2009 compared to 2008. The decrease in 2010 was primarily the result of a reduction in the rates we paid on deposits, principally reflecting a 65 basis point decrease in the cost of time deposits between the periods, due to continuing low market interest rates. As a result, our average cost of funds, including the effect of interest-free demand deposits, decreased to 2.14% in 2010 from 2.83% in 2009. While the decrease in 2009 was also 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. The increase in average deposits in 2008 and 2009 was primarily due to an increase in average money market accounts of $12.4 million from 2008 to 2009. In the past the Bank has had difficulty in reducing its cost of funds because of increased market rates for CDs and further competition for money market deposits which has also resulted in higher rates being paid. 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.
Provision for Loan Losses. The Bank recorded a provision for loan losses of $11.6 million for the year ended December 31, 2010 compared to $13.3 million in 2009 and $2.7 million for the same periods in 2008.
The continued high level of provision for 2010 was necessitated by net charge-offs of $10.5 million in 2010 and increased loan delinquencies at December 31, 2010 as compared to December 31, 2009. Nonperforming assets increased to 6.64% of assets at December 31, 2010 compared to 6.5% at December 31, 2009. 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 decreased to $3.7 million for the year ended December 31, 2010 compared to $5.0 million for the same period in 2009. Non-interest income increased to $5.0 million in 2009 compared to $3.6 million for 2008.
Fees and service charges were $2.0 million for 2010, $2.2 million for 2009, and $2.3 million for 2008. 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 $1.4 million in 2008 to $1.2 million in 2010 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 that became effective July 1, 2010.
Income from brokering residential mortgage loans decreased to $65,000 in 2010 from $83,000 in 2009. 2009 increased to $83,000 compared to $42,000 in 2008. 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 $130,000 in 2008 to $66,000 in 2010 due to competitive pressures as well as lower originations of construction and consumer loans.
Gain on sale of loans decreased to $1.0 million in 2010 from $2.1 million in 2009 compared to an increase in 2009 from $627,000 in 2008. The increase in 2009 was largely due to the falling rate environment which generated a significant amount of one to four family residential mortgage refinancing. Loan servicing income also increased from $443,000 in 2008 to $477,000 in 2010. Our strategy, which began in 2007, has been to sell as many of the residential mortgage originations as possible to manage the Bank’s interest rate risk, credit risk and liquidity
Other income decreased $99,000 in 2010 compared to 2009 primarily due to an impairment charge of $335,000 taken against an investment in a low cost housing that provided tax credits. An increase in gain on the sale of foreclosed assets of $190,000 in 2010 compared to 2009 offset the impairment charge. Other income remained relatively stable in 2009 from 2008. Gain on the sale of foreclosed properties decreased $54,000 in 2009 compared to 2008. These

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fluctuations in the outcome of the disposition of foreclosed assets were created by changes in the housing market. 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 2011 to be similar to 2010 in terms of foreclosure activity and thus potential gains or losses on subsequent sales of the foreclosed properties.
Non-interest Expense. Non-interest expense decreased $9.8 million in 2010 from $20.1 million in 2009 to $10.3 million in 2010, following an increase of $11.1 million in 2009 compared to 2008. The increase in non-interest expense in 2009 was primarily due to the impairment charge of $9.6 million on goodwill.
Salaries and employee benefits expense decreased to $4.3 million in 2010 as a result of a reduction in force taken in the third quarter in 2010. Salaries and employee benefits expense increased from slightly from $4.5 million in 2008 to $4.8 million in 2009 as a result of normal increases in salaries and wages. Retaining qualified staff continues to be a priority of Management.
Repossessed property expense has decreased from $822,000 in 2009 to $631,000 in 2010 primarily due to a decrease in impairment charges taken year over year on foreclosed properties. Repossessed property expense has increased from $219,000 in 2008 to $822,000 in 2009 due to increased collection and repossession activity as our nonperforming assets increased. 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 $809,000 in 2010 compared to $530,000 in 2009 primarily due to increases in legal fees associated with non-performing assets. 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 with the issuance of preferred stock and common stock warrants as part of the Capital Purchase Program transaction completed in 2009. We expect professional services expenses to remain elevated in 2011 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 Company’s financial statements, this expense will continually decline over the remaining life of the related asset.
Mortgage banking expense has decreased $122,000 to $424,000 in 2010 compared to $546,000 in 2009. This was a result of the slowdown in residential mortgage refinancing. Mortgage banking increased $140,000 compared to $406,000 in 2008. 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.
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 bank’s 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 $1.8 million in 2010 from $1.5 million in 2009, following an increase from $1.2 million in 2008. The increases in 2008, 2009 and 2010 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.
Federal Income Taxes. Our effective tax rate for purposes of the tax provision was -1.92% in 2010 compared to 2.75% in 2009 and 25.3% in 2008. For 2009, the reduced effective tax rate was the non-deductible write-off 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.

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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, 2010, 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 25.7%. 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 Bank’s liquidity needs.
Monarch’s liquidity, represented by cash and cash equivalents, is a product of our operating, investing and financing activities. Monarch’s 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, 2010, totaled $55.5 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. Based on current collateral levels, at December 31, 2010, Monarch could borrow an additional $13.3 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, 2010, Monarch had a net increase in cash and cash equivalents of $18.6 million as compared to a net decrease of $17.1 million for the year ended December 31, 2009.
The Company’s primary sources of funds during 2010 were operations of $2.1 million, proceeds from the sale and maturities of securities of $8.8 million, and $24.8 million in principal loan collections in excess of loan originations The primary uses of funds in 2010 were the repayment of $8.2 million of FHLB advances and purchases of securities of $4.2 million and a decrease in deposits of $7.3 million.
The Company’s primary sources of funds during 2009 were operations of $1.7 million, increase in deposits of $21.0 million and $6.8 million increase generated by the issuance of preferred stock. The primary uses of cash in 2009 were the repayment of $15.7 million of FHLB advances and purchase of securities of $17.8 million.
Off-Balance Sheet Arrangements
At December 31, 2010, the total unused commercial and consumer lines of credit were $14.7 million and there were outstanding commitments under letters of credit of $150,000. At December 31, 2009, the total unused commercial and consumer lines of credit were $17.9 million and there were outstanding commitments under letters of credit of $160,000. The Company has no arrangements with any other entities that have or are reasonably likely to have a material effect on

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financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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 4.7%. See also “Regulatory Orders” below.
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.
Regulatory Orders
On September 21, 2010 the Company entered into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”). Among other things, the Written Agreement requires that the Company obtain the approval of the FRB prior to paying a dividend; prohibits the Company from purchasing or redeeming any shares of its stock without the prior written approval of the FRB, and; requires the Company to submit cash flow projections for the Company to the FRB on a quarterly basis. A Form 8-K was issued with the complete details of the Written Agreement. In response to these requirements, no preferred stock dividends or common stock dividends were made in 2010 and we have begun submitting cash flow projections quarterly.
Following Monarch Community Bank’s most recent Safety and Soundness examination, the Board of Directors of Monarch Community Bank stipulated to the terms of a formal enforcement action (“Consent Order”) with Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”). The Consent Order, which was effective May 6, 2010, contains specific actions needed to address certain findings from their examination and to address our current financial condition. The Consent Order, among other things, requires the following:
    The Bank is required to have and retain qualified management.
 
    The Bank is required to retain an independent third party to develop an analysis and assessment of the Bank’s management needs for the purpose of providing qualified management for the Bank.
 
    The board of directors is required to assume responsibility for the supervision of all of the Bank’s activities.
 
    The Bank must increase the Bank’s level of Tier 1 capital as a percentage of total assets to at least nine percent and its total capital as a percentage of risk-weighted assets at a minimum of eleven percent.
 
    The Bank is required to charge off any loans classified as loss.
 
    The Bank may not extend credit to borrowers that have had loans with the Bank that were classified substandard, doubtful or special mention without prior board approval.
 
    The Bank may not extend credit to borrowers that have had loans charged off or classified as loss.
 
    The Bank is required to adopt a plan to reduce the Bank’s risk position in each asset in excess of $250,000 which

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      is more than sixty days delinquent or classified substandard or doubtful.
 
    The Bank may not declare or pay any cash dividend without prior written consent of the FDIC and OFIR.
 
    Prior to submission or publication of all Reports of Condition, the board is required to review the adequacy of the Bank’s allowance for loan and lease losses.
 
    The Bank is required to adopt written lending and collection policies to provide effective guidance and control over the Bank’s lending function.
 
    The Bank is required to implement revised comprehensive loan grading review procedures.
 
    Within sixty days of the Consent Order, the Bank is required to adopt a written profit plan and comprehensive budget.
 
    Within sixty days of the Consent Order, the Bank is required to adopt a written plan to manage concentrations of credit in a safe and sound manner.
 
    Within sixty days of the Consent Order, the Bank is required to formulate a written plan to reduce the Bank’s reliance on brokered deposits.
 
    While the Consent Order is in effect, the Bank is required to prepare and submit quarterly progress reports the FDIC and OFIR.
Following Monarch Community Bank’s most recent Safety and Soundness examination, the Board of Directors of Monarch Community Bank stipulated to the terms of a formal enforcement action (“Consent Order”) with Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”). The Consent Order, which was effective May 6, 2010, contains specific actions needed to address certain findings from their examination and to address our current financial condition.
Since stipulating to the terms of the Consent Order, we have made substantive progress in implementation of provisions identified within the Consent Order. Our progress includes;
  1.   Hiring a new President and CEO
 
  2.   Hiring a new Chief Lending Officer
 
  3.   Implementing a Reduction-In-Staff program that decreased the Bank’s Full Time Equivalent (FTE) by 21 and reduced expenses by approximately $825,000 on an annualized basis.
 
  4.   Appointing a Chief Risk Management Officer.
 
  5.   Purchasing and implementing advanced credit analysis software and document tracking system to enhance credit analysis and credit monitoring functions
 
  6.   The development and initial execution of plans to reduce classified assets and concentrations of credit. This includes the completion of a loan review by an outside consulting firm. The firm reviewed approximately 79% of the total loan portfolio and made no recommendations for charge-offs or special reserves on the loans they reviewed. In addition, they reviewed the methodology and adequacy of the Allowance for Loan and Lease Losses and found them to be reasonable.
 
  7.   The formation of an executive level committee to review the status of all substandard and doubtful loans on a weekly basis and to review all special mention loans on at least a monthly basis.
 
  8.   The initiation of multiple dialogues with investment bankers regarding the raising of additional capital. No substantive plans have been developed to date. The Bank continues to evaluate options.
 
  9.   The enhancement of loan policies and procedures.
 
  10.   The evaluation of initiatives to enhance non-interest income for the bank
The Bank believes that it is in compliance with all of the terms of the Consent Order with the exception of the requirement that the Bank increase the Bank’s level of Tier 1 capital as a percentage of total assets to at least nine percent and its total capital as a percentage of risk-weighted assets at a minimum of eleven percent. The Board of Directors and management remain committed to reaching the capital requirements and continue to evaluate different capital raising alternatives.

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Item 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.

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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 Monarch’s 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 2010 and 2009 we sold $32.6 million and $90.2 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 Bank’s 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 Monarch’s net portfolio value at December 31, 2010 that would occur upon an immediate change in interest rates.
                                         
                           
Change in Interest Rates                           Net Portfolio Value as %
Basis Points (“bp”)   Net Portfolio Value   of Present Value of Assets
(Rate Shock in Rates) (1)   $ Amount   $ Change   % Change   NPV Ratio   Change
+ 300 bp
    21,718       2,991       16 %     8.57 %     145 bp
+ 200 bp
    21,077       2,350       13 %     8.20 %     108 bp
+100 bp
    19,822       1,095       6 %     7.62 %     50 bp
0 bp
    18,727       0               7.12 %       0
-100 bp
    18,170       -577       -3 %     6.83 %     -29 bp
-200 bp
    19,495       769       4 %     7.24 %     +12 bp
-300 bp
    21,678       2,951       16 %     7.97 %     +85 bp

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(1)   Assumes an instantaneous uniform change in interest rates at all maturities.
Based on the data from the model, management believes that the Bank’s IRR level remains minimal.
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 Bank’s net interest margin. However, management has the ability, through its asset/liability management and pricing policies to affect the Bank’s net interest margin notwithstanding the level of market interest rates. The preceding table indicates the Bank’s 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 Bank’s 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 Bank’s net interest margin.
The following table provides information about the Company’s financial instruments that are sensitive to changes to interest rates as of December 31, 2010. 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.

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Principal Amount Maturing In:
                                                                 
                                            2015 and           Fair Value
    2010   2011   2012   2013   2014   beyond   Total   12/31/2010
Rate-sensitive assets
                                                               
Fed funds and overnight deposits
  $ 34,909     $     $     $     $     $     $ 34,909     $ 34,909  
Average interest rate
    0.05 %                                                        
 
                                                               
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     $     $     $     $     $     $ 100,438     $ 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 %                                

50


Table of Contents

ITEM 8. Financial Statements and Supplementary Data
Monarch Community Bancorp, Inc. and Subsidiaries
Contents
         
    3  
 
       
Consolidated Financial Statements
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    8-51  

 


Table of Contents

Monarch Community Bancorp, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Board of Directors
Monarch Community Bancorp, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Monarch Community Bancorp, Inc. and Subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each year in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards established by 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 Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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. 2010 and 2009 and the consolidated results of their operations and their cash flows for each year in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Corporation has suffered recurring losses from operations and as of December 31, 2010 did not meet the minimum capital requirements as established by the regulators which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Plante & Moran, PLLC
Auburn Hills, Michigan
March 31, 2011

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Table of Contents

Monarch Community Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheet
(000s omitted, except per share data)
                 
    December 31,     December 31,  
    2010     2009  
Assets
               
Cash and due from banks
  $ 7,065     $ 12,631  
Federal Home Loan Bank overnight time and other interest bearing deposits
    34,909       10,723  
 
           
 
               
Total cash and cash equivalents
    41,974       23,354  
 
               
Securities — Available for sale (Note 4)
    11,466       16,063  
Securities — Held to maturity (Note 4)
    10       23  
Other securities (Note 4)
    3,865       4,237  
Loans held for sale
    693       809  
Loans, net (Note 5)
    182,768       220,875  
Foreclosed assets, net (Note 7)
    2,972       2,839  
Premises and equipment (Note 8)
    4,122       4,467  
Core deposit (Note 3)
    390       532  
Other assets (Notes 6 and 11)
    8,608       10,005  
 
           
Total assets
  $ 256,868     $ 283,204  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities
               
Deposits
               
Noninterest-bearing
  $ 15,394     $ 14,422  
Interest-bearing (Note 9):
    190,634       198,946  
 
           
 
               
Total deposits
    206,028       213,368  
 
               
Federal Home Loan Bank advances (Note 10)
    36,350       44,518  
Accrued expenses and other liabilities (Note 16)
    2,472       2,155  
 
           
 
               
Total liabilities
    244,850       260,041  
 
               
Stockholders’ Equity (Notes 13, 14, 15 and 20)
               
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, 2010 and 2009
    6,750       6,739  
Common stock — $0.01 par value, 20,000,000 shares authorized, 2,049,485 shares issued and outstanding at December 31, 2010 and 2,044,606 issued and outstanding at December 31, 2009
    20       20  
Additional paid-in capital
    21,146       21,212  
(Accumulated deficit)
    (15,591 )     (4,355 )
Accumulated other comprehensive income
    257       223  
Unearned compensation
    (564 )     (676 )
 
           
Total stockholders’ equity
    12,018       23,163  
 
           
Total liabilities and stockholders’ equity
  $ 256,868     $ 283,204  
 
           
See Notes to Consolidated Financial Statements.

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Table of Contents

Monarch Community Bancorp, Inc. and Subsidiaries
Consolidated Statement of Operations
(000s omitted)
                         
    Year Ended December 31,  
    2010     2009     2008  
Interest Income
                       
Loans, including fees
  $ 12,270     $ 15,191     $ 16,457  
Investment securities
    563       639       637  
Federal funds sold and overnight deposits
    4       6       102  
 
                 
Total interest income
    12,837       15,836       17,196  
Interest Expense
                       
Deposits
    3,404       4,910       5,861  
Federal Home Loan Bank advances
    1,968       2,429       2,675  
 
                 
Total interest expense
    5,372       7,339       8,536  
 
                 
Net Interest Income
    7,465       8,497       8,660  
Provision for Loan Losses (Note 5)
    11,602       13,349       2,712  
 
                 
Net Interest Income (Loss) After Provision for Loan Losses
    (4,137 )     (4,852 )     5,948  
Noninterest Income
                       
 
                       
Fees and service charges
    2,019       2,224       2,314  
Loan servicing fees
    477       458       443  
Net gain on sale of loans
    1,006       2,090       627  
Net gain (loss) on sale of investment securities (Note 4)
    76       10       2  
Net gain (loss) on disposal of premises and equipment
          (7 )      
Other income (Note 7)
    119       218       217  
 
                 
Total noninterest income
    3,697       4,993       3,603  
Noninterest Expense
                       
Salaries and employee benefits (Note 16, 20 and 21)
    4,274       4,818       4,584  
Occupancy and equipment (Note 8)
    914       1,044       1,032  
Data processing
    807       700       777  
Mortgage banking
    424       546       406  
Professional services
    809       530       401  
Amortization of intangible assets (Note 3)
    142       149       181  
NOW account processing
    209       149       176  
ATM/Debit card processing
    235       232       200  
Repossessed property expense (Note 7)
    631       822       219  
Other general and administrative
    1,792       1,488       1,176  
Goodwill Impairment (Note 3)
          9,607        
 
                 
Total noninterest expense
    10,237       20,085       9,152  
 
                 
Income (Loss) - Before income taxes
    (10,677 )     (19,944 )     399  
Income Taxes (Note 11)
    205       (548 )     101  
 
                 
 
                       
Net Income (Loss)
  $ (10,882 )   $ (19,396 )   $ 298  
 
                 
Dividends and accretion of discount on preferred stock
  $ 354     $ 315     $  
Net Income (Loss) available to common stockholders
  $ (11,236 )   $ (19,711 )   $ 298  
 
                 
 
                       
Earnings (Loss) Per Share
                       
Basic
  $ (5.68 )   $ (10.03 )   $ 0.14  
Diluted
  $ (5.68 )   $ (10.03 )   $ 0.14  
See Notes to Consolidated Financial Statements.


Table of Contents

Monarch Community Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholder’s Equity
(000s omitted)
                                                                         
    Preferred                                     (Accumulated     Accumulated              
    Stock             Common             Additional     deficit)     Other              
    Number of             Stock Number             Paid in     Retained     Comprehensive     Unearned        
    Shares     Amount     of Shares     Amount     Capital     Earnings     Income (Loss)     Compensation     Total  
Balance - January 1, 2008
          $       2,321,585     $ 23     $ 23,828     $ 16,341     $ 52     $ (1,158 )   $ 39,086  
 
                                                                       
Vesting of 17,289 restricted shares
                                                            227       227  
Allocation of ESOP shares (Note 20)
                                    15                       93       108  
 
Repurchase of 275,483 shares at average price of $9.81/share
                    (275,483 )     (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
                2,046,102     $ 20     $ 21,152     $ 15,867     $ 69     $ (838 )   $ 36,270  
 
                                                     
 
                                                                       
Vesting of 4,978 restricted shares
                                                          $ 65       65  
Allocation of ESOP shares (Note 20)
                                  $ (39 )                     93       54  
400 of forfeited shares at an average price of $11.17/share
                    (400 )             (5 )                     5        
 
Repurchase of 3,013 shares at average price of $3.90/share
                    (1,096 )             (3 )                             (3 )
Issuance of 6,785 shares of preferred stock and 260,962 of common stock warrants through the U.S. Treasury’s 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       2,044,606     $ 20     $ 21,212     $ (4,355 )   $ 223     $ (676 )   $ 23,163  
 
                                                     
 
                                                                       
Issuance of 8,333 shares of common stock at an average price of $1.20/share in connection with employment of CEO
                    8,333             $ 10                               10  
Vesting of 1,178 restricted shares
                                                          $ 14       14  
Allocation of ESOP shares (Note 20)
                                    (77 )                     93       16  
400 of forfeited shares at an average price of $11.50/share
                    (400 )             (5 )                     5        
Repurchase of 3,054 shares at average price of $1.20/share
                    (3,054 )             (4 )                             (4 )
Stock option expenses
                                    10                               10  
Comprehensive Loss:
                                                                       
Net (Loss)
                                          $ (10,882 )                     (10,882 )
Change in unrealized loss on
                                                                     
securities available-for-sale, net of tax
                                                  $ 34               34  
 
                                                                     
Total comprehensive (loss)
                                                                    (10,848 )
Dividends on preferred stock and accretion of discount
          11                         (354 )                 (343 )
 
                                                     
Balance - December 31, 2010
    6,785     $ 6,750       2,049,485     $ 20     $ 21,146     $ (15,591 )   $ 257     $ (564 )   $ 12,018  
 
                                                     
See Notes to Consolidated Financial Statements.

6


Table of Contents

Monarch Community Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(000s omitted)
                         
    Year Ended December 31,  
    2010     2009     2008  
Cash Flows From Operating Activities
                       
Net (loss) income
  $ (10,882 )   $ (19,396 )   $ 298  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                       
Depreciation and amortization
    1,133       1,297       1,082  
Provision for loan loss
    11,602       13,349       2,712  
Stock option expense
    10       50       10  
(Gain) on sale of foreclosed assets
    (203 )     (13 )     (68 )
Deferred income taxes
    338       237       (270 )
Mortgage loans originated for sale
    (33,504 )     (90,197 )     (28,273 )
Proceeds from sale of mortgage loans
    33,620       92,337       28,464  
Gain on sale of mortgage loans
    (1,006 )     (2,090 )     (627 )
Gain on sale of available for sale securities
    (76 )     (10 )     (2 )
Loss on sale of premises and equipment
          7        
Earned stock compensation
    40       119       335  
Goodwill Impairment
          9,607        
Net change in:
                       
Accrued interest receivable
    798       146       64  
Other assets
    (458 )     (3,721 )     341  
Accrued expenses and other liabilities
    317       (72 )     (390 )
 
                 
Net cash provided by operating activities
    1,729       1,650       3,676  
Cash Flows From Investing Activities
                       
Activity in available-for-sale securities:
                       
Purchases
    (4,217 )     (17,815 )     (3,519 )
Repurchase of FHLB Stock
    372              
Proceeds from sale of securities
    4,808       10,774       5,691  
Proceeds from maturities of securities
    4,000             208  
Activity in held-to-maturity securities:
                       
Purchases
                (7 )
Proceeds from maturities of securities
    13       14        
Loan originations and principal collections, net
    24,763       10,846       (27,672 )
Proceeds from sale of foreclosed assets
    2,753       1,579       1,715  
Purchase of premises and equipment
    (89 )     (484 )     (254 )
 
                 
Net cash provided by (used in) investing activities
    32,403       4,914       (23,838 )
Cash Flows From Financing Activities
                       
Net (decrease)increase in deposits
    (7,340 )     21,212       14,220  
Repurchases of common stock
    (4 )     (3 )     (2,704 )
Dividends paid
          (816 )     (772 )
Proceeds from FHLB advances
    (8,168 )           44,500  
Repayment of Fed Funds Purchased
          (1,000 )      
Repayment of FHLB advances
          (15,660 )     (42,652 )
Issuance of Preferred Stock
          6,785        
 
                 
Net cash (used in) provided by financing activities
    (15,512 )     10,518       12,592  
 
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    18,620       17,082       (7,570 )
Cash and Cash Equivalents - Beginning
    23,354       6,272       13,842  
 
                 
 
Cash and Cash Equivalents - End
  $ 41,974     $ 23,354     $ 6,272  
 
                 
See Notes to Consolidated Financial Statements.


Table of Contents

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 five 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, and the valuation of the foreclosed assets.
Significant Group Concentrations of Credit Risk — Most of the Corporation’s 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, 2010 and 2009, these reserve balances amounted to approximately $732,000 and $461,000, respectively.

 


Table of Contents

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 management’s 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 borrower’s 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.

 


Table of Contents

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 management’s 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 cassified 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 borrower’s 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 loan’s effective interest rate, the loan’s 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.

 


Table of Contents

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):
                         
    2010     2009     2008  
Change in unrealized holding gain on available-for-sale securities
  $ 128     $ 234     $ 25  
Reclassification adjustment for (gains) losses realized in income
    (76 )     (10 )     (2 )
 
                 
Net unrealized gains (losses)
  $ 52     $ 224     $ 23  
Tax effect
    (18 )     (70 )     (6 )
 
                 
Net-of-tax amount
  $ 34     $ 154     $ 17  
 
                 

 


Table of Contents

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):
                         
    2010     2009     2008  
Basic earnings (loss) per share
                       
Numerator:
                       
Net income (loss)
  $ (10,882 )   $ (19,396 )   $ 298  
Dividends and accretion of discount on preferred stock
  $ 354     $ 315     $  
 
                 
Net Income (loss) available to common stockholders
  $ (11,236 )   $ (19,711 )   $ 298  
Denominator:
                       
Weighted average common shares outstanding
    2,045       2,046       2,159  
Less: Average unallocated ESOP shares
    (65 )     (74 )     (83 )
Less: Average non-vested RRP shares
    (1 )     (6 )     (11 )
 
                 
Weighted average common shares outstanding for basic earnings per share
    1,979       1,966       2,065  
 
                 
 
                       
Basic earnings (loss) per share
  $ (5.68 )   $ (10.03 )   $ 0.14  
 
                 
 
                       
Diluted earnings (loss) per share
                       
Numerator
                       
Net Income (loss) available to common stockholders
  $ (11,236 )   $ (19,711 )   $ 298  
 
                 
 
                       
Denominator:
                       
 
                       
Weighted average common shares outstanding
    1,979       1,966       2,065  
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
    1,979       1,966       2,065  
 
                 
 
                       
Diluted earnings (loss) per share
  $ (5.68 )   $ (10.03 )   $ 0.14  
 
                 

 


Table of Contents

Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 — Summary of Significant Accounting Policies (Continued)
At December 31, 2010, stock options and warrants not considered in computing diluted earnings per share because they were antidilutive totaled 423,124 and 772 non-vested RRP shares not considered in computing diluted earnings per share because they were antidilutive. At December 31, 2009, there were 455,324 antidilutive stock options and 2,150 non-vested RRP shares. At December 31, 2008, there were 162,262 antidilutive stock options and 7,528 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 Corporation’s 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 is applied prospectively to new transfers of financial assets and was effective for the first annual period beginning after November 15, 2009 and interim periods within that first annual period. The Company has adopted this standard.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers into and out of Levels 1, 2, and 3, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of the valuation technique (e.g., market approach, income approach, or cost approach) and inputs used to measure fair value was required for recurring, nonrecurring, and Level 2 and 3 fair value measurements. These provisions of the ASU were effective for the Company’s reporting period ending March 31, 2010. The ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted. This provision of the ASU is effective for the Company’s reporting period ending March 31, 2011. As this provision amends only the disclosure requirements related to Level 3 activity, the adoption will have no impact on the Company’s statements of income and condition.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 — Summary of Significant Accounting Policies (Continued)
July 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which requires that the Company provide a greater level of disaggregated information about the credit quality of the Company’s loans and leases and the allowance for loan and lease losses (the “Allowance”). This ASU also requires the Company to disclose on a prospective basis, additional information related to credit quality indicators, non-accrual loans and leases, and past due information. The Company adopted the provisions of this ASU in preparing the Consolidated Financial Statements as of and for the year ended December 31, 2010. As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption had no impact on the Company’s statements of income and condition. See Note 5 to the Consolidated Financial Statements for the required disclosures.
Supplemental Cash Flow Information (000s omitted)
                         
    December 31,
    2010   2009   2008
Cash paid for:
                       
Interest
  $ 5,428     $ 7,468     $ 8,553  
Income taxes
  $     $ 210     $ 400  
 
                       
Noncash investing activities -
                       
Loans transferred to real estate in judgement
  $ 5,033     $ 2,380     $ 1,715  
Real estate in judgement transferred to real estate owned
  $ 3,671     $ 4,240     $ 2,528  
Reclassifications — Certain prior year amounts have been reclassified to conform with current year presentation.
Note 2 — Management’s Plan (Unaudited)
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described below create uncertainty about the Company’s ability to continue as a going concern.
The Company recorded net losses to common shareholders of $11.2 million in 2010 and $19.7 million in 2009. These results were largely due to losses from the loan portfolio. During 2010 and 2009 the Company recorded provisions for loan losses of $11.6 million and $13.3 million, respectively. Total nonperforming assets amounted to $17.0 million at December 31, 2010 compared to $18.4 million as of December 31, 2009. The levels of nonperforming assets remained elevated throughout 2010 and 2009 as the persistently weak economic conditions continued to impact many of the Company’s commercial and residential loan customers. The local economy remains weak as evidenced by elevated unemployment levels.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 — Management’s Plan (Unaudited) (Continued)
Other items impacting the 2010 and 2009 results included a cumulative $10.4 million charge to establish a valuation allowance on the entire balance of the Company’s deferred tax assets and a $9.6 million charge in 2009 to record goodwill impairment, after which no goodwill remained on the Company’s balance sheet.
As a result of losses during 2010 and 2009 and the level of non-performing assets, the Board of Directors of the Company has significantly changed the strategic direction and focus of the Bank to improve its internal operations and to work out of its problem loans and assets. During the second quarter of 2010, the Board of Directors elected a new President of the Bank. The Company has since worked closely with its regulators at the FRB and the Bank’s regulators at the FDIC and OFIR to put in place improved controls and procedures. The Board has implemented additional corporate governance practices and disciplined business and banking principles, including additional Board oversight, specific plans to reduce substandard assets and credit concentrations, more conservative lending principles that comply with regulatory standards, the appointment of experienced and disciplined lending and compliance personnel, the engagement of a third party loan review and the replacement of the existing internal audit function with a comprehensive internal audit performed by an external CPA firm. The focus of our management team turned from growth in our business to executing these disciplined business and banking procedures and policies designed to limit future losses, preserve capital and improve operational efficiencies.
As discussed in Note 12, in May 2010 Monarch Community Bank entered into a Consent Order with the FDIC and OFIR. The Consent Order covers various aspects of the Bank’s financial condition and performance; loan administration; and capital planning. The Bank has already addressed or taken steps to address the requirements of the Consent Order and manages its comprehensive plan to address all of the requirements of the Consent Order. We believe we have complied with all the provisions of the Consent Order, except with respect to the capital requirements.
The Consent Order required the Bank, within 90 days, to have and maintain a Tier 1 Leverage Capital Ratio of at least 9% and a Total Risk Based Capital Ratio of at least 11%. At December 31, 2010, the Bank’s Tier 1 Leverage Ratio was 4.36% and the Total Risk Based Ratio was 8.08%, which would qualify the Bank as “adequately capitalized” under the regulatory capital standards, absent the Consent Order. The Bank would need a capital injection of approximately $12.5 million as of December 31, 2010 in order to comply with the Tier 1 Ratio requirement and would need a capital injection of approximately $6.0 million in order to comply with the Total Risk Based Ratio requirement of the Consent Order.
The Company has developed a capital plan including evaluation of alternatives to reach and maintain the capital levels required by the Consent Order. Achievement of these capital levels could be impacted, positively or negatively by a variety of uncertainties including, but not limited to, earnings levels, changing economic conditions, asset quality, property values and the receptiveness of capital markets to new capital offerings of Monarch Community Bancorp, Inc.
Strategies to increase the Bank’s regulatory capital ratios in order to comply with the capital requirements of the Consent Order include improving earnings, improving asset quality, preserving capital through suspension of dividends, and raising additional capital. Following is more information regarding these strategies:

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 — Management’s Plan (Unaudited) (Continued)
Earnings improvements. Steps to reduce expenses have already resulted in the elimination of approximately $800,000 from the Bank’s annualized operating costs. The reduction in wholesale funding has improved the Bank’s net interest margin in 2010, improving its capacity to generate net interest income and enhancing franchise value. We also have implemented strategies to improve non interest income sources including mortgage banking and investment advisory and referral services.
Improving asset quality. Management has focused significant resources toward improving asset quality over 2010. This included utilizing an external loan review company to conduct two independent reviews of the bank’s commercial loan portfolio. All loans greater than $500,000 were reviewed, along with a selection of loans with balances less than $500,000. No additional charge-offs or loan loss provisions were recommended by the loan review company.
Likewise, in 2010 management replaced the internal audit function, previously performed by bank employees. Management now utilizes an external CPA firm to provide this service. As part of the 2010 internal audit function, the CPA firm assisted the bank In developing a new, comprehensive Sarbanes Oxley Key Control Matrix. They then performed an internal audit based on, among other things, these key controls. No material weaknesses were identified through this audit process.
During 2010, non-accrual loans declined from $15.6 million at December 31, 2009 to $14.1 million at December 31, 2010. This reflects the implementation of weekly problem loan meetings that focus on the development and execution of detailed plans for each problem loan in the portfolio. It also reflects the restructuring and additional Staffing in our credit administration department, which provides support for the commercial lenders.
Preserving capital. The Bank did not pay dividends to the Company during 2010. In previous periods, dividends from the Bank to the Company were primarily utilized by the Company to pay dividends on its common and preferred stock and to repurchase common stock. To preserve Bank capital, the Company has suspended payment of dividends on common and preferred stock.
Asset Reduction. Total assets were reduced by $26 million to $257 million at December 31, 2010, from $283 million at December 31, 2009. The decrease in total assets was largely from a reduction of $38 million in the Company’s loan portfolio from efforts to reduce concentration in certain loan types. We implemented a concentration reduction plan to measure and monitor concentrations of credit on an ongoing basis. Execution of that plan included curtailing the origination of hospitality and land development loans, the portfolios primarily responsible for loan losses in 2010 and 2009. Increased emphasis has been placed on obtaining updated property valuations and “right- sizing” of loan balances either through pay downs or by obtaining additional collateral in order to protect the Bank. Further asset reductions in these areas are expected in 2011 as we continue to execute this plan.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 — Management’s Plan (Unaudited) (Continued)
The Company also remains active at exploring alternatives to raising new capital. During the fourth quarter of 2010, the Company engaged an independent consulting firm to assess the risk in the Company’s loan portfolio, an important step in supporting its capital planning efforts. The extent and timing of capital raising initiatives in 2011 will consider this assessment as well as the results of the other strategies noted above.
These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 3 — Goodwill and Intangible Assets
                         
    (In thousands of Dollars)  
    Gross     Accumulated     Net  
2010
                       
Amortized intangible assets:
                       
Core deposit premium resulting from bank and branch acquistions
                       
Total
  $ 2,081     $ 1,691     $ 390  
 
                 
 
                       
2009
                       
Amortized intangible assets:
                       
Core deposit premium resulting from bank and branch acquistions
                       
Total
  $ 2,081     $ 1,549     $ 532  
 
                 
Aggregate amortization expense was $142,000, $149,000, and $181,000 for 2010, 2009, and 2008 respectively.
         
          Year Ending        
          December 31        
2011
  $ 142  
2012
    142  
2013
    106  
 
     
Total
  $ 390  
 
     
In 2009, Management evaluated goodwill for impairment and recorded a valuation allowance of $9.6 million.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 — 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  
2010
                               
Available-for-sale securities:
                               
U.S. government agency obligations
  $ 1,619     $ 63     $     $ 1,682  
Mortgage-backed securities
    3,914       110               4,024  
Obligations of states and political subdivisions
    5,543       217             5,760  
 
                       
Total available-for-sale securities
  $ 11,076     $ 390     $     $ 11,466  
 
                       
Held-to-maturity securities:
                               
Municipal securities
  $ 10     $     $     $ 10  
 
                       
                                 
            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  
 
                       

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 — Securities (Continued)
The amortized cost and estimated market values of securities at December 31, 2010, 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     Market     Amortized     Market  
    Cost     Value     Cost     Value  
Due in one year or less
  $ 10     $ 10     $ 900     $ 910  
Due in one through five years
                4,974       5,183  
Due after five years through ten years
                1,288       1,349  
Due after ten years
                       
 
                       
Total
  $ 10     $ 10       7,162       7,442  
 
                           
Mortgage-backed securities
                    3,914       4,024  
 
                           
Total available-for-sale securities
                  $ 11,076     $ 11,466  
 
                           
For the years ended December 31, 2010, 2009 and 2008, proceeds from sales of securities available for sale amounted to $4,808,000, $10,774,000 and $5,691,000, respectively. Gross realized gains amounted to $76,000, $10,000, and $2,000, respectively. There were no gross realized losses recognized in 2010, 2009 or 2008.
The Corporation had no gross unrealized losses as of December 31, 2010 and 2009.
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 $5.7 and $7.3 million in pledged securities as collateral for Federal Home Loan Bank Advances at December 31, 2010 and 2009 respectively.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss
A summary of the balances of loans follows (000s omitted):
                 
    December 31,  
    2010     2009  
Mortgage loans on real estate:
               
One-to-four family
  $ 93,294     $ 108,354  
Multi-family
    4,783       5,421  
Commercial
    62,998       72,689  
Construction or land development
    3,873       9,528  
 
           
 
               
Total real estate loans
    164,948       195,992  
 
               
Consumer loans:
               
Home equity
    14,814       18,174  
Other
    3,403       4,706  
 
           
 
               
Total consumer loans
    18,217       22,880  
 
               
Commercial business loans
    6,882       8,266  
 
           
 
               
 
    190,047       227,138  
Subtotal
               
 
               
Less: Allowance for loan losses
    6,850       5,783  
Net deferred loan fees
    429       480  
 
           
Loans, net
  $ 182,768     $ 220,875  
 
           

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Our delinquent loans consist largely of commercial real estate loans. An age analysis of past due loans including nonaccrual loans, segregated by class of loans, as of December 31, 2010 is as follows:
                                                 
    30-69     60-89     Loans 90                    
    DaysPast     DaysPast     Days or More     Total Past     Current        
    Due     Due     Past Due     due Loans     Loans     Total Loans  
Commercial
  $ 89     $     $ 1,118     $ 1,207     $ 5,675     $ 6,882  
Commercial Real Estate:
                                               
Multi-family
                339       339       4,444       4,783  
Commercial Real Estate — other
    125       2,752       3,751       6,628       56,370       62,998  
Consumer:
                                               
Consumer — other
    239       19       192       450       17,437       17,887  
Consumer — auto
    7                   7       323       330  
Residential:
                                               
Residential — prime
    1,090       797       935       2,822       73,729       76,551  
Residential — subprime
    284       91       163       538       16,205       16,743  
Construction:
                                               
Construction — prime
    169                   169       3,704       3,873  
Construction — subprime
                                   
 
                                   
Total
  $ 2,003     $ 3,659     $ 6,498     $ 12,160     $ 177,887     $ 190,047  
 
                                   
All commercial loans will be assigned a risk rating by the Credit Analyst at inception. The risk rating system is composed of eight levels of quality and utilizes the following definitions.
Risk Rating Scores by definition:
  1.   Zero (0) Unclassified. Any loan which has not been assigned a classification.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
  2.   One (1) Excellent. A well structured credit relationship to an established borrower. Loans to entities with a strong financial condition and solid earnings history, characterized by:
    High liquidity, strong cash flow, low leverage.
 
    Unquestioned ability to meet all obligations when due.
 
    Experienced management, with management succession in place.
 
    Debt to worth ratio of 1:1 or less.
 
    Steady and above average earnings history.
 
    If loan is secured, collateral is of high quality and readily marketable.
 
    Readily accessible to capital markets and alternative financing.
 
    Industry is mature with favorable outlook.
 
    Loan structure within policy guidelines.
 
    Loan is performing as agreed.
 
    The probability of serious, rapid financial deterioration is extremely small.
 
    Outstanding primary and secondary sources of repayment.
  3.   Two (2) Above Average Quality. Loans to borrowers with a sound financial condition and positive trend in earnings supplemented by:
    Favorable liquidity and leverage and strong cash flow.
 
    Ability to meet all obligations when due.
 
    Management has successful track record.
 
    Debt to worth ratio of 1.5:1 or less.
 
    Steady and satisfactory earnings history.
 
    If loan is secured, collateral is of high quality and readily marketable.
 
    Access to alternative financing.
 
    Excellent prospects for continued growth.
 
    Industry outlook is favorable.
 
    Loan structure is within policy guidelines.
 
    Loan is performing to terms.
 
    Probability of serious financial deterioration is unlikely.
 
    Well defined primary and secondary source of repayment.
 
    If supported by a guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
  4.   Three (3) Acceptable. Loans to entities with a satisfactory financial condition and further characterized by:
    Working capital adequate to support operations.
 
    Cash flow sufficient to pay debts as scheduled.
 
    Management experience and depth appear favorable.
 
    Debt to worth ratio of 2.50:1 or less.
 
    Acceptable sales and steady earning history.
 
    Industry outlook is stable.
 
    Loan structure within policy guidelines.
 
    Loan performing according to terms.
 
    If loan is secured, collateral is acceptable and loan is fully protected.
  5.   Four (4) Average. Loans to entities which are considered bankable risks, although some signs of weaknesses are shown:
    Marginal liquidity and working capital.
 
    Short or unstable earnings history.
 
    Would include most start-up businesses.
 
    Would be enrolled in Small Business Administration or Michigan Strategic Fund programs.
 
    Occasional instances of trade slowness or repayment delinquency — may have been 10-30 days slow within the past 12 months.
 
    Management abilities are apparent yet unproven.
 
    Debt to worth ratio of 3.50 or less.
 
    Weakness in primary source of repayment with adequate secondary source of repayment.
 
    If secured, loan is protected but collateral is marginal.
 
    Industry outlook is uncertain; may be cyclical or highly competitive.
 
    Loan structure generally in accordance with policy.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
  6.   Five (5) Special Mention. Special Mention loans have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. Loans to entities that constitute an undue and unwarranted credit risk but not to the point of justifying or classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan. The following characteristics may apply:
    Downward trend in sales, profit levels and margins.
 
    Impaired working capital positions.
 
    Cash flow is strained in order to meet debt repayment.
 
    Loan delinquency (30-60 days) and overdrafts may occur.
 
    Management abilities are questionable.
 
    Highly leveraged, debt to worth ratio over 3.50:1.
 
    Industry conditions are weak.
 
    Inadequate or outdated financial information.
 
    Litigation pending against borrower.
 
    Loan may need to be restructured to improve collateral position and/or reduce payment amount.
 
    Collateral / guaranty offers limited protection.
  7.   Six (6) Substandard. A substandard loan is inadequately protected by the current sound worth and repayment capacity of the borrower. Loans so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. There is a distinct possibility that the Bank will implement collection procedures if the loan deficiencies are not corrected. The following characteristics may apply:
    Sustained losses have severely eroded the equity and cash flow.
 
    Deteriorating liquidity.
 
    Serious management problems.
 
    Chronic trade slowness; may be placed on COD by vendors.
 
    Likelihood of bankruptcy.
 
    Inability to access other funding sources.
 
    Reliance on secondary source of repayment.
 
    Interest non-accrual may be warranted.
 
    Collateral provided is of little or no value.
 
    Repayment dependent upon the liquidation of non-current assets.
 
    Repayment may require litigation.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
  8.   Seven (7) Doubtful. A doubtful loan has all the weakness inherent in a substandard loan with the added characteristic that collection and/or liquidation is pending. Loans or portions of loans with one or more weaknesses which, on the basis of currently existing facts, conditions, and values, makes ultimate collection of all principal highly questionable. The possibility of loss is high and specific loan loss reserve allocations should be made or charge offs taken on anticipated collateral shortfalls. However, the amount or the certainty of eventual loss may not allow for a specific reserve or charge off because of specific pending factors. Pending factors include proposed merger or acquisition, completion or liquidation in progress, injection of new capital in progress, refinancing plans in progress, etc. “Pending Factors” not resolved after six months must be disregarded. The following characteristics may apply:
    Normal operations are severely diminished or have ceased.
 
    Seriously impaired cash flow.
 
    Secondary source of repayment is inadequate.
 
    Survivability as a “going concern” is impossible.
 
    Placement on interest non-accrual
 
    Collection process has begun.
 
    Bankruptcy petition has been filed.
 
    Judgments have been filed.
 
    Portion of the loan balance has been charged-off.
9.   Eight (8) Loss. Loans classified loss are considered uncollectible and of such little value that their continuance as bankable asset is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. Further characterized by:
    Liquidation or reorganization under bankruptcy, with poor prospects of collection.
 
    Fraudulently overstated assets and/or earnings.
 
    Collateral has marginal or no value.
 
    Debtor cannot be located.

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Monarch Community Bancorp, inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
The following table represents the risk category of loans by class based on the most recent analysis performed as of December 31, 2010 (in thousands):
                         
            Commercial Real Estate     Commercial Real Estate  
    Commercial     Multi-family     Other  
    2010     2010     2010  
  0-2           37       3,509  
3
    14       209       4,993  
4
    3,698       131       17,537  
5
    1,533       3,603       18,849  
6
    427       464       13,741  
7
    1,210       339       4,369  
 
                 
Total
  $ 6,882     $ 4,783     $ 62,998  
 
                 
For consumer residential real estate, and other, the Company also evaluates credit quality based on the aging status of the loan which was previously stated, and by payment activity. The following tables present the recorded investment in those classes based on payment activity and assigned grades as of December 31, 2010.
                 
    Residential - Prime     Residential - Subprime  
    2010  
Grade
               
Pass
    75,616       16,580  
Substandard
    935       163  
 
           
Total
  $ 76,551     $ 16,743  
 
           
                 
    Consumer - Other     Consumer- Auto  
    2010  
Performing
    17,695       330  
Nonperforming
    192        
 
           
Total
  $ 17,887     $ 330  
 
           
         
    Construction - Prime  
    2010  
Performing
    3,873  
Nonperforming
     
 
     
Total
  $ 3,873  
 
     

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010 (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.
                                         
            Unpaid             Average        
    Recorded     Principal     Related     Recorded     Interest  
    Investment     Balance     Allowance     Investment     Income  
With no related allowance recorded:
                                       
Commercial
  $ 1,463     $ 1,492     $     $ 1,486     $  
Commercial Real Estate:
                                       
Commercial Real Estate — Mulit-family
                             
Commercial Real Estate — other
    15,862       22,183             15,689       403  
Consumer:
                                       
Consumer — other
    346       346             350       15  
Consumer — auto
                             
Residential:
                                       
Residential — prime
    3,367       3,965             3,665       139  
Residential — subprime
    4,993       4,993             4,586       358  
 
                                       
With an allowance recorded:
                                       
Commercial
    162       165       109       173        
Commercial Real Estate:
                                       
Commercial Real Estate — Multi-family
    803       808       366       765        
Commercial Real Estate — other
    341       354       147       357        
Consumer:
                                       
Consumer — other
                             
Consumer — auto
                             
Residential:
                                       
Residential — prime
    502       643       236       575        
Residential — subprime
                             
 
                             
 
                                       
Total
                                       
Commercial
  $ 18,631     $ 25,002     $ 622     $ 18,470     $ 403  
 
                             
Consumer
  $ 346     $ 346     $     $ 350     $ 15  
 
                             
Residental
  $ 8,862     $ 9,601     $ 236     $ 8,826     $ 497  
 
                             

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
The following presents by class, the recorded investment in loans and leases on non-accrual status as of December 31, 2010.
         
    December 31, 2010  
Commercial
  $ 1,625  
Commercial real estate:
       
Commercial Real Estate — mulit-family
    803  
Commercial Real Estate — other
    7,949  
Consumer:
       
Consumer — other
    253  
Consumer — auto
     
Residential:
       
Residential — prime
    2,849  
Residential — subprime
    257  
Construction
       
Construction — prime
    339  
Construction — subprime
     
 
     
Total
  $ 14,075  
 
     

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
Analysis related to the allowance for credit losses (in thousands) as of December 31, 2010 is as follows:
                                                                 
            Commercial                                        
            Real Estate     Multi             Residential -     Residential -              
    Commercial     Other     Family     Consumer     Prime     Subprime     Construction     Total  
ALLOWANCE FOR CREDIT LOSSES:
                                                               
 
                                                               
Beginning Balance
  $ 1,901     $ 573     $ 330     $ 393     $ 2,037     $ 539     $ 10     $ 5,783  
Charge-Offs
    (110 )     (4,801 )     (372 )     (389 )     (3,401 )     (500 )     (1,319 )     (10,892 )
Recoveries
    5       9       32       213       53       9       36       357  
Provision
    (1,616 )     5,829       483       286       4,807       410       1,403       11,602  
 
                                               
Ending Balance
  $ 180     $ 1,610     $ 473     $ 503     $ 3,496     $ 458     $ 130     $ 6,850  
 
                                               
 
                                                               
Ending Balance: individually evaluated for impairment
  $ 109     $ 147     $ 366     $     $ 236     $     $     $ 858  
 
                                               
 
                                                               
Ending Balance: collectively evaluate for impairment
  $ 71     $ 1,463     $ 108     $ 503     $ 3,259     $ 458     $ 130     $ 5,992  
 
                                               
 
                                                               
Ending Balance: loans acquired with deteriorated credit quality
  $     $     $     $     $     $     $     $  
 
                                               
 
                                                               
FINANCING LOANS:
                                                               
Ending Balance
  $ 6,882     $ 62,998     $ 4,783     $ 18,217     $ 77,079     $ 16,215     $ 3,873     $ 190,047  
 
                                               
 
                                                               
Ending Balance: individually evaluated for impairment
  $ 1,625     $ 16,203     $ 803     $ 346     $ 3,869     $ 4,993     $     $ 27,839  
 
                                               
 
                                                               
Ending Balance: collectively evaluate for impairment
  $ 5,257     $ 46,795     $ 3,980     $ 17,871     $ 73,210     $ 11,222     $ 3,873     $ 162,208  
 
                                               
 
                                                               
Ending Balance: loans acquired with deteriorated credit quality
  $     $     $     $     $     $     $     $  
 
                                               

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 — Loans And Allowance For Loan Loss (Continued)
The following is an analysis of the allowance for loan losses (000s omitted):
                 
    December 31,  
    2009     2008  
Balance — Beginning
  $ 2,719     $ 1,824  
Provision for loan losses
    13,349       2,712  
Loans charged-off
    (10,557 )     (2,021 )
Recoveries of loans previously charged off
    272       204  
 
           
 
               
Balance — Ending
  $ 5,783     $ 2,719  
 
           
The following is a summary of information pertaining to impaired loans (000s omitted):
                 
    December 31,  
    2009     2008  
Impaired loans with a valuation allowance
  $ 26,423     $ 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  
Average investment in impaired loans
  $ 9,994     $ 1,661  
 
           
Interest income recognized on impaired loans was not significant for the years ended December 31, 2009, and 2008. No additional funds are committed to be advanced in connection with impaired loans. Troubled debt restructured loans totaled $22.2 million and $17.6 million as of December 31, 2010 and 2009 respectively.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 6 — 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 $183,237,000 and $194,029,000 at December 31, 2010 and 2009, respectively.
The fair value of mortgage servicing rights approximates $1,791,000 and $2,099,000 at December 31, 2010 and 2009, respectively. The fair value in 2010 was determined by discounting estimated net future cash flows from mortgage servicing activities using a 7.76% discount rate and estimated prepayment speeds of 7.5 to 33.6 based on current Freddie Mac experience. In 2009 the discount rate of 8.0% and estimated prepayment speeds of 4.1 to 17.0 were used. The impairment valuation allowance is $0 as of December 31, 2010, 2009, and 2008. There has been no activity in the impairment valuation allowance during the years ended December 31, 2010, 2009, and 2008.
The following summarizes mortgage servicing rights capitalized and amortized (000s omitted):
                 
    December 31,  
    2010     2009  
Mortgage servicing rights — Beginning
  $ 1,156     $ 862  
Mortgage servicing rights capitalized
    335       840  
Mortgage servicing rights scheduled amortization and direct writedown for loan payoffs
    (425 )     (546 )
 
           
 
               
Mortgage servicing rights — Ending
  $ 1,066     $ 1,156  
 
           
Note 7 — Foreclosed Assets
Foreclosed assets consisted of the following (000s omitted):
                 
    December 31,  
    2010     2009  
Real estate owned
  $ 1,542     $ 1,713  
Real estate in judgment and subject to redemption
    1,430       1,126  
 
           
Total
  $ 2,972     $ 2,839  
 
           

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 — Foreclosed Assets (Continued)
Expenses applicable to foreclosed and repossessed assets include the following (000s omitted):
                         
    December 31,  
    2010     2009     2008  
Net (gain) on sales of real estate
  $ (203 )   $ (13 )   $ (68 )
Operating expenses
    631       822       219  
 
                 
 
                       
Total
  $ 428     $ 809     $ 151  
 
                 
The following table summarizes the activity associated with other real estate owned (000s omitted):
                         
    2010     2009     2008  
Balance at beginning of year
  $ 1,713     $ 749     $ 885  
Properties transferred into OREO
    3,671       4,240       2,528  
Valuation impairments recorded
    (1,116 )     (1,684 )     (882 )
Proceeds from Sale of Properties
    (2,523 )     (1,579 )     (1,714 )
(Gain) or Loss on sale of properties
    (203 )     (13 )     (68 )
 
                 
 
  $ 1,542     $ 1,713     $ 749  
 
                 
Note 8 — Premises and Equipment
A summary of the cost and accumulated depreciation of premises and equipment follows (000s omitted):
                     
                    Depreciable
    December 31,     Life
    2010     2009     (in Years)
Land
  $ 566     $ 566      
Buildings and improvements
    5,754       5,727     5-40
Furniture, fixtures and equipment
    2,899       2,837     2-15
 
               
 
                   
Total bank premises and equipment
    9,219       9,130      
 
Less accumulated depreciation and amortization
    5,097       4,663      
 
               
 
                   
Net carrying amount
  $ 4,122     $ 4,467      
 
               
Depreciation expense totaled $433,000, $464,000, and $473,000 in 2010, 2009, and 2008, respectively.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9 — Deposits
The following is a summary of interest bearing deposit accounts (000s omitted):
                 
    December 31,  
    2010     2009  
Balances by account type:
               
Demand and NOW accounts
  $ 24,453     $ 23,084  
Money market
    40,785       57,052  
Passbook and statement savings
    20,334       20,302  
 
           
 
               
Total transactional accounts
    85,572       100,438  
 
               
Certificates of deposit:
               
$100,000 and over
    52,558       41,150  
Under $100,000
    52,504       57,358  
 
           
 
               
Total certificates of deposit
    105,062       98,508  
 
           
 
               
Total
  $ 190,634     $ 198,946  
 
           
The remaining maturities of certificates of deposit outstanding are as follows (000s omitted):
                 
    December 31, 2010  
    Less than     $100,000 &  
    $100,000     greater  
Less than one year
  $ 29,373     $ 26,250  
One to two years
    7,295       9,122  
Two to three years
    9,292       10,514  
Three to four years
    4,855       3,168  
Four to five years
    1,689       3,504  
 
           
 
               
Total
  $ 52,504     $ 52,558  
 
           
Note 10 — Federal Home Loan Bank Advances
The Bank has Federal Home Loan Bank advances of $36,350,000 and $44,518,000 at December 31, 2010 and 2009, respectively, which mature through 2013. At December 31, 2010, the interest rates on fixed rate advances ranged from 2.53% to 5.98%. At December 31, 2009, the interest rates on fixed rate advances ranged from 2.53% to 6.21%.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 — Federal Home Loan Bank Advances(Continued)
At December 31, 2010 and 2009, the Bank had no floating rate advances. The weighted average interest rate of all advances was 4.16% and 4.43% at December 31, 2010 and 2009, respectively.
At December 31, 2010 and 2009, 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 Bank’s eligible residential mortgage loans and certain securities as collateral for all FHLB debt. The amount of the residential loans totaled $67,528,000 and $86,422,000 as of December 31, 2010 and 2009, respectively.
The contractual maturities of advances are as follows (000s omitted):
         
Year Ending  
December 31  
2011
  $ 16,175  
2012
    13,116  
2013
    7,059  
 
     
 
       
Total
  $ 36,350  
 
     
Note 11 — Income Taxes
Allocation of income taxes between current and deferred portions is as follows (000s omitted):
                         
    December 31,  
    2010     2009     2008  
Current expense (benefit)
  $ (133 )   $ (785 )   $ 371  
Deferred expense (benefit)
    (3,886 )     (2,858 )     (270 )
Valuation allowance
    4,224       3,095        
 
                 
Total tax expense
  $ 205     $ (548 )   $ 101  
 
                 

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 — 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,
    2010   2009   2008
Statutory federal tax rate
    34.00 %     34.00 %     34.00 %
Increase (decrease) resulting from:
                       
Nondeductible expenses
    -6.00 %     -0.04 %     2.50 %
Tax exempt income
    2.76 %     0.53 %     -18.70 %
Goodwill impairment
    0.00 %     -16.38 %     0.00 %
Valuation allowance
    -32.68 %     -15.52 %     0.00 %
Low income housing credit
    0.00 %     0.00 %     -20.40 %
Other
    0,00 %     0.16 %     27.90 %
 
                       
 
Reported tax expense
    -1.92 %     2.75 %     25.30 %
 
                       

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Table of Contents

Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 — Income Taxes (Continued)
The components of the net deferred tax asset are as follows (000s omitted):
                 
    December 31,  
    2010     2009  
Deferred tax assets:
               
Provision for loan losses
  $ 1,021     $ 880  
Net deferred loan fees
    126       164  
Deferred compensation
    311       321  
General business tax credit carryforward
    1,289       1,097  
Depreciation
    337       285  
Net NOL Carryforward
    4,025       1,147  
Other Real Estate
    494       500  
Other
    888       314  
 
           
 
               
Total deferred tax assets
    8,491       4,708  
 
               
Deferred tax liabilities:
               
Mortgage servicing rights
  $ 350     $ 377  
Original issue discount
    49       60  
Net purchase premiums
    528       596  
Unrealized gain on available for sale securities
    133       115  
Other
    112       89  
 
           
 
               
Total deferred tax liabilities
    1,172       1,237  
 
           
 
               
Valuation allowance
    (7,319 )     (3,095 )
 
           
 
               
Net deferred tax asset
  $     $ 376  
 
           
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 2030.
The Corporation has recorded an estimate of the tax credit through December 31, 2009. The Corporation’s share of tax credits generated by the investee partnership approximated $191,000, in 2010, 2009, and 2008.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 — 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 Corporation’s 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,
    2010   2009
Commitments to grant loans
  $ 1,411     $ 1,660  
Unfunded commitments under lines of credit
    14,721       17,787  
Unfunded commitments under letters of credit
    150       160  
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, 2010, and 1.25% and 11.50% at December 31, 2009.
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 management’s 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 Corporation’s credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant, and equipment and real estate.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 — Regulatory Matters
Following Monarch Community Bank’s most recent Safety and Soundness examination, the Board of Directors of Monarch Community Bank stipulated to the terms of a formal enforcement action (“Consent Order”) with Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”). The Consent Order, which was effective May 6, 2010, contains specific actions needed to address certain findings from their examination and to address our current financial condition. The Consent Order, among other things, requires the following:
    The Bank is required to have and retain qualified management.
 
    The Bank is required to retain an independent third party to develop an analysis and assessment of the Bank’s management needs for the purpose of providing qualified management for the Bank.
 
    The board of directors is required to assume responsibility for the supervision of all of the Bank’s activities.
 
    The Bank must increase the Bank’s level of Tier 1 capital as a percentage of total assets to at least nine percent and its total capital as a percentage of risk-weighted assets at a minimum of eleven percent.
 
    The Bank is required to charge off any loans classified as loss.
 
    The Bank may not extend credit to borrowers that have had loans with the Bank that were classified substandard, doubtful or special mention without prior board approval.
 
    The Bank may not extend credit to borrowers that have had loans charged off or classified as loss.
 
    The Bank is required to adopt a plan to reduce the Bank’s risk position in each asset in excess of $250,000 which is more than sixty days delinquent or classified substandard or doubtful.
 
    The Bank may not declare or pay any cash dividend without prior written consent of the FDIC and OFIR.
 
    Prior to submission or publication of all Reports of Condition, the board is required to review the adequacy of the Bank’s allowance for loan and lease losses.
 
    The Bank is required to adopt written lending and collection policies to provide effective guidance and control over the Bank’s lending function
 
    The Bank is required to implement revised comprehensive loan grading review procedures.
 
    Within sixty days of the Consent Order, the Bank is required to adopt a written profit plan and comprehensive budget.
 
    Within sixty days of the Consent Order, the Bank is required to adopt a written plan to manage concentrations of credit in a safe and sound manner.
 
    Within sixty days of the Consent Order, the Bank is required to formulate a written plan to reduce the Bank’s reliance on brokered deposits.
 
    While the Consent Order is in effect, the Bank is required to prepare and submit quarterly progress reports the FDIC and OFIR.
The Bank’s regulatory capital ratios as of December 31, 2010 were as follows: Tier 1 leverage ratio 4.36%, Tier 1 risk-based capital ratio 6.79%; and total risk-based capital, 8.08%.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13— Regulatory Matters (Continued)
A reconciliation of the Bank’s equity to major categories of capital is as follows (000s omitted):
                 
    December 31,  
    2010     2009  
Equity per consolidated bank balance sheet
  $ 12,132     $ 21,204  
Less: intangible and disallowed assets
    (646 )     (1,057 )
 
           
 
               
Tier 1 Capital
    11,486       20,147  
Plus: Allowance for loan losses **
    2,172       2,740  
 
           
Total Capital
  $ 13,658     $ 22,887  
 
           
 
**   Limited to 1.25% of risk weighted assets
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.
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, 2010
                                               
Total Capital
(to Risk-Weighted Assets)
  $ 13,658       8.08 %   $ 13,526       8.00 %   $ 16,908       10.00 %
Tier 1 Capital
(to Risk-Weighted Assets)
  $ 11,486       6.79 %   $ 6.763       4.00 %   $ 10,145       6.00 %
Tier 1 Capital
(to Average Assets)
  $ 11,486       4.36 %   $ 13,167       5.00 %   $ 13,167       5.00 %
 
                                               
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 %

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Table of Contents

Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14— 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. On September 21, 2010, Monarch Community Bancorp, Inc. (the “Company”) entered into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”). Among other things, the Written Agreement requires that the Company obtain the approval of the FRB prior to paying a dividend.
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 Bank’s capital to be reduced below applicable minimum standards. At December 31, 2010, the Bank had no retained earnings available for the payment of dividends. Accordingly, $12,132,000 of the Corporation’s investment in the Bank was restricted at December 31, 2010.
Loans or advances made by the Bank to the Corporation are generally limited to 10 percent of the Bank’s capital stock and surplus. Accordingly, at December 31, 2010, Bank funds available for loans or advances to the Corporation amounted to $1,261,000.
Note 15— 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.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15— Shareholders’ Equity (continued)
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. Treasury’s prior consultation with the Federal Reserve Board. In April 2010, the Corporation announced the suspension of the dividend on the Preferred Stock in order to preserve capital. At December 31, 2010 $386,000 dividends have been accrued but not paid.
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.
Note 16 — 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 2010, 2009 and 2008, the Corporation recognized expense for this plan of $88,000, $86,000, and $166,000, respectively.
The Corporation has a Defined Contribution Retirement plan for all eligible employees. The Corporation had a matching contribution agreement to match 25% of the first 6% of an employee’s salary (reduced from a 50% match effective October 1, 2006), this was discontinued in 2010. During 2010, 2009 and 2008, the Corporation recognized expense for this plan of $0, $35,000, and $30,000, 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 Company’s return on average equity or 5.0%. The value of benefits accrued to participants was $428,000 and $426,000 at December 31, 2010 and 2009, respectively. The expense for the plan, including the increase due to the annual earnings credit was $21,000, $21,000, and $21,000, for 2010, 2009, and 2008, 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 5.05% as of December 31, 2010. The present value of benefits accrued to participants (also included as part of the other liabilities section of the balance sheet) is $485,000 and $520,000 at December 31, 2010 and 2009, respectively.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 — Related Party Transactions
Extensions of credit to principal officers, directors and their affiliates totaled $2,868,000 and $2,872,000 for the years ending December 31, 2010 and 2009, respectively. During the year ending December 31, 2010, total principal additions were $275,000 and total principal payments were $279,000, and during the year ending December 31, 2009, total principal additions were $142,000 and total principal payments were $509,000. Deposits from related parties and their affiliates held by the Bank at December 31, 2010 and 2009 amounted to $296,000 and $810,000 respectively.
Note 18 — Fair Value of Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument, FASB ASC 825 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.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 — Fair Value of Financial Instruments (Continued)
Deposit Liabilities — The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances — The fair values of the Corporation’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.
Accrued Interest — The carrying amounts of accrued interest approximate fair value.
The estimated fair values, and related carrying or notional amounts, of the Corporation’s financial instruments are as follows (000s omitted):
                                 
    December 31,  
    2010     2009  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
Assets:
                               
Cash and cash equivalents
  $ 41,974     $ 41,974     $ 23,354     $ 23,354  
Securities — Held to maturity
    10       10       23       23  
Securities — Available for sale
    11,466       11,466       16,063       16,063  
Other securities
    3,865       3,865       4,237       4,237  
Loans held for sale
    693       703       809       827  
Net loans
    182,768       185,268       220,875       230,866  
Accrued interest and late charges receivable
    264       264       1,154       1,154  
 
                               
Liabilities:
                               
Deposits
    206,028       206,400       213,368       214,581  
Federal Home Loan Bank advances
    36,350       38,532       44,518       48,260  
Accrued interest payable
    341       341       397       397  

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 — 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.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
The following table present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at December 31, 2010 and December 31, 2009, and the valuation techniques used by the Corporation to determine those fair values (000s omitted);
                                 
    Quoted Prices in Active     Significant Other     Significant     Balance at  
    Markets for Identical     Observable Inputs     Unobservable Inputs     December 31,  
    Assets (Level 1)     (Level 2)     (Level 3)     2010  
Assets:
                               
December 31, 2010
                               
U.S. government agency obligations
  $     $ 1,682     $     $ 1,682  
Mortgage-backed securities
          4,024             4,024  
Obligations of states and political subdivisions
          5,760             5,760  
 
                       
 
  $     $ 11,466     $     $ 11,466  
 
                       
                                 
    Quoted Prices in Active     Significant Other     Significant     Balance at  
    Markets for Identical     Observable Inputs     Unobservable Inputs     December 31,  
    Assets (Level 1)     (Level 2)     (Level 3)     2009  
Assets:
                               
December 31, 2009
                               
U.S. Treasury
  $ 1,071     $     $     $ 1,071  
U.S. government agency obligations
          3,196             3,196  
Mortgage-backed securities
          5,536             5,536  
Obligations of states and political subdivisions
          6,260             6,260  
 
                       
 
  $ 1,071     $ 14,992     $     $ 16,063  
 
                       

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 — 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 Corporation’s assets at fair value on a nonrecurring basis as of December 31, 2010 and December 31, 2009 (000s omitted):
Assets Measured at Fair Value on a Nonrecurring Basis
                                 
                    Significant    
            Quoted Prices in   Other   Significant
    Balance at   Active Markets for   Observable   Unobservable
    December 31,   Identical Assets   Inputs (Level   Inputs (Level
    2010   (Level 1)   2)   3)
Impaired Loans
  $ 11,433     $     $     $ 11,433  
Foreclosed Assets
    2,972                   2,972  
Assets Measured at Fair Value on a Nonrecurring Basis
   
                                 
                    Significant    
            Quoted Prices in   Other   Significant
    Balance at   Active Markets for   Observable   Unobservable
    December 31,   Identical Assets   Inputs (Level   Inputs (Level
    2009   (Level 1)   2)   3)
Impaired Loans
  $ 18,653     $     $     $ 18,653  
Foreclosed Assets
    2,839                   2,839  
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, 2010 and December 31, 2009, 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 5).

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20— 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 Corporation’s 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,  
2011
  $ 98  
2012
    103  
2013
    108  
2014
    113  
2015
    118  
Thereafter
    124  
 
     
Total
  $ 664  
 
     
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.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 — Employee Stock Ownership Plan (ESOP) (Continued)
The ESOP shares as of December 31 were as follows (000s omitted except shares):
                 
    2010     2009  
Allocated shares
    120,348       111,090  
Shares released for allocation
    9,258       9,258  
Shares distributed
    (61,072 )     (38,827 )
Unreleased shares
    55,544       64,802  
 
           
 
               
Total ESOP shares
    124,078       146,323  
 
           
 
               
Fair value of unallocated shares
  $ 67     $ 175  
 
           
Total compensation expense applicable to the ESOP amounted to approximately $15,000, $35,000, and $108,000 for the years ended December 31, 2010, 2009, and 2008, respectively.
Note 21 — 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 2010 and 400 in 2009. No shares of restricted stock were issued in 2009 or 2010. During 2010, 978 shares vested and are no longer restricted for a total of 84,881 vested shares as of December 31, 2010. During 2009, 4,978 shares vested and are no longer restricted for a total of 83,903 vested shares as of December 31, 2009. Compensation expense applicable to the RRP amounted to $10,000, $57,000 and $229,000 for the years ended December 31, 2010, 2009 and 2008 respectively.
The Company’s 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 Company’s 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 Company’s 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.

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 — Stock Compensation Plans (continued)
There were no options granted in 2010. The fair value of each option granted in 2009 was $1.02. There were no options granted in 2008. 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
Dividend yield
    2.7 %
Expected life
  5 years
Expected volatility
    37.9 %
Risk-free interest rate
    2.5 %
A summary of changes of the status of the Corporation’s stock option plan is presented below (000s omitted except per share data):
                                 
    2010     2009  
            Weighted             Weighted  
            Average             Average  
            Exercise             Exercise  
    Shares     Price     Shares     Price  
Outstanding at beginning of year
    194,562       11.27       162,262       13.22  
Granted
                40,000       3.60  
Forfeited/expired
    37,250       13.55       7,700       12.69  
 
                       
 
                               
Outstanding at end of year
    157,312       10.72       194,562       11.27  
 
                       
 
                               
Exercisable at year-end
    157,312       10.72       194,362       11.25  
 
                       

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 — Stock Compensation Plans (continued)
A summary of outstanding and exercisable stock options at December 31, 2010 is as follows:
                         
Outstanding   Exercisable
Exercise Price   Number   Remaining   Number
Per share   Outstanding   Life (in Months)   Exercisable
$14.00
    19,836       45       19,836  
$13.00
    96,476       28       96,476  
$11.15
    1,000       72       1,000  
$  3.60
    40,000       103       40,000  
Note 22 — 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 Corporation’s consolidated financial statements.
Condensed Balance Sheet (000s omitted)
                 
    December 31,     December 31,  
    2010     2009  
Assets
               
Cash
  $ 568     $ 626  
Investments
    93       1,611  
Investment in Monarch Community Bank
    12,132       21,204  
Other assets
    27       99  
 
           
 
               
Total assets
  $ 12,820     $ 23,540  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Accrued expenses
  $ 802     $ 377  
Stockholders’ equity
    12,018       23,163  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 12,820     $ 23,540  
 
           

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22 — Condensed Financial Statements of Parent Company (Continued)
Condensed Income Statement (000s omitted)
                         
    December 31,     December 31,     December 31,  
    2010     2009     2008  
Income — Interest on investments
  $ 8     $ 24       15  
Dividends from Monarch Community Bank
                2,638  
Operating expense
    270       234       217  
 
                 
Income (loss) — Before equity in undistributed net income (loss) of subsidiary
    (262 )     (210 )     2,436  
 
                       
Equity in undistributed net income (loss) of subsidiary
    (10,620 )     (19,186 )     (2,138 )
 
                 
 
                       
Net income
  $ (10,882 )   $ (19,396 )   $ 298  
 
                 

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Monarch Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22 — Condensed Financial Statements of Parent Company (Continued)
Condensed Statement of Cash Flows (000s omitted)
                         
    December 31,     December 31,     December 31,  
    2010     2009     2008  
Cash flows from operating activities:
                       
 
                       
Net income (loss)
  $ (10,882 )   $ (19,396 )   $ 298  
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
                       
Amortization and depreciation
    11       58       1  
Allocation of ESOP and RRP
    40       119       335  
(Increase) decrease in other assets
    72       41       (112 )
(Increase) decrease in accrued expenses
    81       (271 )     326  
Undistributed net (income) loss of subsidiary
    10,620       19,186       2,138  
 
                 
 
                       
Net cash (used in) provided by operating activities
    (58 )     (263 )     2,986  
 
                       
Cash flows from investing activities:
                       
Purchase of securities
          (2,560 )     (7 )
Investment in subisidary
    (1,500 )     (4,000 )      
Proceeds from sales and maturities of securities
    1,504       1,014       208  
 
                 
Net cash (used in) provided by investing activities
    4       (5,546 )     201  
 
                       
Cash flows from financing activities:
                       
Issuance of Preferred Stock
          6,785        
Repurchase of Common Stock
    (4 )     (3 )     (2,704 )
Dividends paid
          (816 )     (772 )
 
                 
Net cash (used in) provided by financing activities
    (4 )     5,966       (3,476 )
 
                 
 
                       
Net increase (decrease) in cash
    (58 )     157       (289 )
Cash at beginning of year
    626       469       758  
 
                 
 
                       
Cash at end of year
  $ 568     $ 626     $ 469  
 
                 

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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, 2010  
    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr  
    (Dollars in thousands, except per share data)  
Interest income
  $ 3,488     $ 3,235     $ 3,099     $ 3,015  
Interest expense
    1,458       1,385       1,291       1,238  
 
                       
Net interest income
    2,030       1,850       1,808       1,777  
Provision for loan losses
    1,845       7,040       2,724       (107 )
 
                       
Net interest income after provision for loan losses
    185       (5,190 )     (916 )     1,884  
 
                               
Noninterest income
    1,072       854       880       891  
Noninterest expense
    2,493       2,480       2,482       2,782  
 
                       
 
                               
Income before income taxes
    (1,236 )     (6,816 )     (2,518 )     (107 )
Income tax expense
                      205  
 
                       
Net Income
  $ (1,236 )   $ (6,816 )   $ (2,518 )   $ (312 )
 
                       
 
                               
Dividends and amortization of discount on preferred stock
    88       88     $ 90       89  
Net Income available to common stock
  $ (1,324 )   $ (6,904 )   $ (2,608 )   $ (401 )
 
                       
 
                               
Earnings per share:
                               
Basic
  $ (0.67 )   $ (3.49 )   $ (1.32 )   $ (.20 )
 
                       
Diluted
  $ (0.67 )   $ (3.49 )   $ (1.32 )   $ (.20 )
 
                       
 
                               
Cash dividends declared per share
  $     $     $     $  
                                 
    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 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 before income taxes
    239       (2,431 )     (473 )     (17,279 )
Income tax expense
    60       (608 )     (121 )     121  
 
                       
Net Income
  $ 179     $ (1,823 )   $ (352 )   $ (17,400 )
 
                       
 
                               
Dividends and amortization of discount on preferred stock
    51       87     $ 88       89  
Net Income available to common stock
  $ 128     $ (1,910 )   $ (440 )   $ (17,489 )
 
                       
 
                               
Earnings 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     $  
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
     None

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ITEM 9A. Controls and Procedures
An evaluation of the Registrant’s 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, 2010 was carried out under the supervision and with the participation of the Registrant’s Chief Executive Officer, Chief Financial Officer and several other members of the Registrant’s senior management. The Registrant’s Chief Executive Officer and Chief Financial Officer concluded that the Registrant’s 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 Registrant’s 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 Commission’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2010 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 Registrant’s 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 Management’s 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 Company’s 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 Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we believe that, as of December 31, 2010, the Company’s internal control over financial reporting is effective based on those criteria.
         
     
Dated: March 31, 2011  /s/ Richard J. DeVries    
  Richard J. DeVries   
  President and Chief Executive Officer   
 
         
     
  /s/ Rebecca S. Crabill    
  Rebecca S. Crabill   
  Senior Vice President and Chief Financial Officer   
 

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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 May 2011, 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 May 2011, 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 May 2011, 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, 2010:
                         
    Number of securities        
    to be issued upon   Weighted-average   Number of securities
    exercise of   exercise price of   remaining available for
    outstanding options   outstanding options   future issuance under
Plan Category   warrants and rights   warrants and rights   equity compensation plans
Equity compensation plans approved by security holders (1)
    157,312       10.72       74,126  
 
                       
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

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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 May 2011, 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 May 2011, 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.

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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: April 4, 2011  By:   /s/ Richard J. DeVries   
    Richard J. DeVries, President    
    and Chief Executive Officer   
 

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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/ Richard J. DeVries
 
Richard J. DeVries
  President and Chief Executive Officer 
(Principal Executive Officer)
  April 4, 2011
 
       
/s/ Stephen M. Ross
 
Stephen M. Ross
  Chairman of the Board    April 4, 2011
 
       
/s/ Rebecca S. Crabill
 
Rebecca S. Crabill
  Senior Vice President and Chief Financial Officer 
(Principal Financial and Accounting Officer)
  April 4, 2011
 
       
/s/ Harold A. Adamson
 
Harold A. Adamson
  Director    April 4, 2011
 
       
/s/ Karl F. Loomis
 
Karl F. Loomis
  Director    April 4, 2011
 
       
/s/ James W. Gordon
 
James W. Gordon
  Director    April 4, 2011
 
       
/s/ Martin L. Mitchell
 
Martin L. Mitchell
  Director    April 4, 2011
 
       
/s/ Gordon L. Welch
 
Gordon L. Welch
  Director    April 4, 2011
 
       
/s/ Craig W. Dally
 
Craig W. Dally
  Director    April 4, 2011
 
       
/s/ Richard L. Dobbins
 
Richard L. Dobbins
  Director    April 4, 2011

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Exhibit Index
             
        Reference to
        Prior Filing or
Exhibit       Exhibit Number
Number   Document   Attached Hereto
3.1 (i)
  Registrant’s Articles of Incorporation     *  
 
           
3.1 (ii)
  Articles Supplementary (Incorporated by reference from Form 8-K filed 2/9/09)        
 
           
3.2 (i)
  Registrant’s Bylaws ( Incorporated by reference from Form 8-K filed on 12/23/09)        
 
           
4.1
  Registrant’s 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
  Management Continuity Agreement between Monarch Community Bancorp, Inc. and Andrew J. Van Doren (incorporated by reference from Form 8-K filed on 12/21/2004)        
 
           
10.2
  Registrant’s Employee Stock Ownership Plan     *  
 
           
10.3
  Registrant’s 2003 Stock Option and Incentive Plan     **  
 
           
10.4
  Registrant’s Recognition and Retention Plan     **  
 
           
10.5
  Form of Stock Option Agreement     ***  
 
           
10.6
  Management Continuity Agreement with Rebecca S. Crabill (Incorporated by reference from Form 8-K filed on 02/27/08)        
 
           
10.7
  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)        
 
           
10.8
  Form of Waiver of Senior Executive Officers (incorporated by reference from Form 8-K, filed on 2/12/09)        
 
           
10.9
  Form of Amendment Agreement (incorporated by reference from Form 8-K filed on 2/12/09)        
 
           
10.10
  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)        
 
           
10.11
  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)        
 
           
10.12
  Consent Order with OFIR and the FDIC (incorporated by reference from Form 8-K filed on 5/2/10).        
 
           
10.13
  Employment term sheet with Richard J. DeVries (incorporated by reference from Form 8-K filed on 7/16/10).        
 
           
10.14
  Written agreement with the FRB (incorporated by reference from Form 8-K filed on 9/27/10).        
 
           
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
  Registrant’s 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 Company’s President and Chief Executive Officer     31.1  
 
           
31.2
  Rule 13a-14(a) Certification of the Company’s Chief Financial Officer     31.2  
 
           
32   Section 1350 Certification.     32  
 
           
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  

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*   Filed on March 27, 2002 as an exhibit to the Registrant’s Registration Statement on Form SB-2 (File No. 333-85018), and incorporated herein by reference.
 
**   Filed on March 19, 2003 as part hyRegistrant’s 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

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