MONARCH COMMUNITY BANCORP INC - FORM 10-Q

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file	filename
EXCEL - IDEA: XBRL DOCUMENT - MONARCH COMMUNITY BANCORP INC	Financial_Report.xls
EX-32 - SECTION 1350 CERTIFICATION - MONARCH COMMUNITY BANCORP INC	d351604dex32.htm
EX-31.1 - CERT OF THE CORPORATION'S PRESIDENT & CHIEF EXECUTIVE OFFICER - MONARCH COMMUNITY BANCORP INC	d351604dex311.htm
EX-31.2 - CERTIFICATION OF THE CORPORATION'S CHIEF FINANCIAL OFFICER - MONARCH COMMUNITY BANCORP INC	d351604dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

¨	Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from to

Commission file number: 000-49814

MONARCH COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)


Maryland		04-3627031
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

375 North Willowbrook Road, Coldwater, MI 49036

(Address of principal executive offices)

517-278-4566

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ¨ No: x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: At May 3, 2012, there were 2,049,485 shares of the issuer’s Common Stock outstanding.

Monarch Community Bancorp, Inc.

Index


PART I – FINANCIAL INFORMATION

Item 1 –	Condensed Financial Statements:

	Condensed Consolidated Balance Sheets – March 31, 2012

	Condensed Consolidated Statements of Income – Three Months Ended March 31, 2012	2

	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2012	3

	Notes to Condensed Consolidated Financial Statements	4 - 24

Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24-31

Item 3 –	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4 –	Controls and Procedures	32

PART II – OTHER INFORMATION

Item 1 –	Legal Proceedings	32

Item 1A –	Risk Factors	32

Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3 –	Defaults Upon Senior Securities	32

Item 4 –	[Reserved]	32

Item 5 –	Other Information	32

Item 6 –	Exhibits	32

SIGNATURES		33

CERTIFICATIONS		35-37

PART I-FINANCIAL INFORMATION

Item 1.

CONDENSED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets


	(Unaudited)
	March 31,			December 31,
	2012			2011
	(Dollars in thousands,
	except per share data)

Assets
Cash and due from banks	$	16,058		$	7,701
Federal Home Loan Bank overnight time and other interest bearing deposits		20,618			16,410

Total cash and cash equivalents		36,676			24,111
Securities - Available for sale		13,231			12,536
Other securities		3,370			3,370
Loans held for sale		1,239			653
Loans, net		144,424			148,495
Foreclosed assets, net		3,671			4,433
Premises and equipment		3,929			4,004
Core deposit intangible		213			248
Other assets		8,567			10,256


Total assets	$	215,320		$	208,106


Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	23,767		$	19,683
Interest bearing		160,908			154,502

Total deposits		184,675			174,185
Federal Home Loan Bank advances		17,175			20,175
Accrued expenses and other liabilities		2,846			2,604


Total liabilities		204,696			196,964

Stockholders’ Equity
Preferred stock - $.01 par value, 5,000,000 shares authorized, and 6,785 shares, fixed rate cumulative perpetual preferred stock, series A, $1,000 per share liquidation preference, issued and outstanding as of March 31, 2012		6,765			6,762
Common stock - $0.01 par value, 20,000,000 shares authorized, 2,049,485 shares issued and outstanding at March 31, 2012 and December 31, 2011		20			20
Additional paid-in capital		21,077			21,077
Retained earnings		(16,835	)		(16,334	)
Accumulated other comprehensive income		57			77
Unearned compensation		(460	)		(460	)

Total stockholders’ equity		10,624			11,142

Total liabilities and stockholders’ equity	$	215,320		$	208,106

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Income (Unaudited)


	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
	2012			2011
	(Dollars in thousands, except per share data)

Interest Income
Loans, including fees	$	2,202		$	2,689
Investment securities		93			118
Federal funds sold and overnight deposits		10			1

Total interest income		2,305			2,808

Interest Expense
Deposits		419			684
Federal Home Loan Bank advances		214			349

Total interest expense		633			1,033

Net Interest Income		1,672			1,775
Provision for Loan Losses		28			260

Net Interest Income After Provision for Loan Losses		1,644			1,515

Non-interest Income
Fees and service charges		437			447
Loan servicing fees		106			108
Net gain on sale of loans		288			158
Net gain (loss) on sale of securities		—			—
Other income		9			333

Total non-interest income		840			1,046

Non-interest Expense
Salaries and employee benefits		1,283			1,071
Occupancy and equipment		245			242
Data processing		236			213
Amortization of mortgage servicing rights		119			96
Professional services		203			157
Amortization of core deposit intangible		35			35
NOW account processing		47			50
ATM/Debit card processing		63			59
Foreclosed property expense		242			88
Other general and administrative		412			352

Total non-interest expense		2,885			2,363

Income (Loss) - Before income taxes		(401	)		198
Income Taxes		—			—

Net Income (Loss)	$	(401	)	$	198


Dividends and amortization of discount on preferred stock	$	100		$	88
Net Income (loss) available to common stock	$	(501	)	$	110


Comprehensive Income
Net Income	$	(401	)	$	198
Change in unrealized gain on securities, net of tax and reclassification effects	$	(20	)	$	14

Comprehensive Income	$	(421	)	$	212


Earnings (Loss) Per Share
Basic		(0.25	)	$	0.06

Diluted	$	(0.25	)	$	0.06

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended
	March 31,
	2012			2011
	(Dollars in thousands)
Cash Flows From Operating Activities
Net Income (Loss)	$	(401	)	$	198
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization		279			258
Provision for loan losses		28			260
Stock option expense		—			4
Gain on sale of foreclosed assets		29			(278	)
Mortgage loans originated for sale		(9,393	)		(5,935	)
Proceeds from sale of mortgage loans		8,807			6,338
Gain on sale of mortgage loans		(289	)		(158	)
Earned Stock Compensation		—			15
Net change in:
Deferred loan fees		(17	)		(34	)
Accrued interest receivable		(34	)		220
Other assets		1,605			394
Accrued expenses and other liabilities		187			119

Net cash provided by (used in) operating activities		801			1,401
Cash Flows From Investing Activities
Activity in available for sale securities:
Purchases		(1,008	)		—
Proceeds from maturities of securities		261			824
Loan originations and principal collections, net		4,510			6,890
Proceeds from sale of foreclosed assets		637			763
Purchase of premises and equipment		(26	)		(35	)

Net cash provided by investing activities		4,374			8,442
Cash Flows From Financing Activities
Net increase in deposits		10,490			4,692
Dividends accrued		(100	)		(88	)
Repayment of FHLB advances		(3,000	)		(6,000	)

Net cash provided by financing activities		7,390			(1,396	)

Net Increase (Decrease) in Cash and Cash Equivalents		12,565			8,447
Cash and Cash Equivalents - Beginning		24,111			41,974

Cash and Cash Equivalents - End	$	36,676		$	50,421

Supplemental Cash Flow Information:
Cash paid for:
Interest		615			1,069
Income taxes		—			—
Noncash investing activities:
Loans net of write downs transferred to foreclosed assets		(161	)		1,255

See accompanying notes to condensed consolidated financial statements.

MONARCH COMMUNITY BANCORP, INC.

NOTES TO CONDENSED 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. The Bank converted to a stock savings institution effective August 29, 2002. In connection with the conversion, the Corporation sold 2,314,375 shares of its common stock in a subscription offering.

Monarch Community Bank provides a broad range of banking services to its primary market area of Branch, Calhoun and Hillsdale counties in Michigan. The Bank operates five full service offices. The Bank owns 100% of First Insurance Agency. First Insurance Agency is a licensed insurance agency established to allow for the receipt of fees on insurance services provided to the Bank’s customers. The Bank also owns a 24.98% interest in a limited partnership formed to construct and operate multi-family housing units.

BASIS OF PRESENTATION

The condensed consolidated financial statements of the Corporation include the accounts of Monarch Community Bank and First Insurance Agency. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements for interim periods are unaudited; however, in the opinion of the Corporation’s management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Corporation’s financial position and results of operations have been included.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates and assumptions.

The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes required by generally accepted accounting principles in annual consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Corporation’s Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

The results of operations for the three month period ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year period.

ALLOWANCE FOR LOAN LOSSES

The appropriateness of the allowance for loan losses is reviewed by management based upon our evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in delinquencies, nonperforming loans and foreclosed assets expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that these conditions were believed to have had on the collectability of the loan. Senior management reviews these conditions at least quarterly.

To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of this condition may be reflected as a specific allowance applicable to this credit or portfolio segment.

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

RECLASSIFICATIONS

Certain 2011 amounts have been reclassified to conform to the 2012 presentation.

NOTE 2 - SECURITIES

The amortized cost and fair value of securities at period-end were as follows (dollars in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value

March 31, 2012
Available-for-sale securities:
Collateralized Mortgage obligations	$	7,537	$	26	$	—		$	7,563
U.S. government agency obligations		4,431		—		(4	)		4,427
Mortgage-backed securities		851		57					908
Obligations of states and political subdivisions		325		8		—			333

Total available-for-sale securities	$	13,144	$	91	$	(4	)	$	13,231


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value

December 31, 2011
Available-for-sale securities:
Collateralized Mortgage obligations	$	7,732	$	48	$	—		$	7,780
U.S. government agency obligations		3,423		3		—			3,426
Mortgage-backed securities		938		60		—			998
Obligations of states and political subdivisions		326		6		—			332

Total available-for-sale securities	$	12,419	$	117	$	—		$	12,536

Proceeds from sales of securities available for sale were $0 for the three months ended March 31, 2012 and 2011, respectively.

The amortized cost and fair value of securities available for sale at March 31, 2012 by contractual maturity follow (dollars in thousands). The actual maturity may differ from the contractual maturity because issuers may have a right to call or prepay obligations.


	March 31, 2012 Available for Sale Securities
	Amortized		Fair
	Cost		Value
	(Dollars in Thousands)

Due in one year or less	$	—	$	—
Due from one to five years		2,333		2,335
Due from five to ten years		2,423		2,425
Due after ten years		851		908

Total		5,607		5,668
Mortgage-backed securities		—		—
CMO securities		7,537		7,563

Total available-for-sale securities	$	13,144	$	13,231

Other-Than Temporary-Impairment

Our portfolio of available for sale securities is reviewed quarterly for other-than-temporary-impairment (OTTI) in value. In performing this review many factors are considered including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospect of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether management intends to sell the security, or it is more likely than not that management will be required to sell the security at a loss before anticipated recovery.

Management determined that there were no securities with OTTI at March 31, 2012.

NOTE 3 - EARNINGS PER SHARE

A reconciliation of the numerators and denominators used in the computation of the basic earnings per share and diluted earnings per share is presented below (000s omitted except per share data):


	Three Months			Three Months
	Ended			Ended
	March 31, 2012			March 31, 2011
Basic earnings per share
Numerator:
Net Income (Loss)	$	(401	)	$	198
Dividends and amortization of discount on preferred stock		100		$	88

Net Income (Loss) available to common stock		(501	)	$	110


Denominator:
Weighted average common shares outstanding		2,049			2,050
Less: Average unallocated ESOP shares		(46	)		(56	)
Less: Average non-vested RRP shares		—			(1	)

Weighted average common shares outstanding for basic earnings (loss) per share		2,003			1,993

Basic earnings (loss) per share	$	(0.25	)	$	0.06


Diluted earnings per share
Numerator:
Net Income (Loss) available to common stock		(501	)	$	110


Denominator:
Weighted average common shares outstanding for basic earnings per share		2,003			1,993
Add: Dilutive effects of restricted stock, stock options and warrants		—			—

Weighted average common shares and dilutive potential common shares outstanding		2,003			1,993

Diluted earnings (loss) per share	$	(0.25	)	$	0.06

NOTE 4 - 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 presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at March 31, 2012, and December 31, 2011, and the valuation techniques used by the Corporation to determine those fair values. Investment securities with fair value determined by Level 2 inputs include collateralized mortgage obligations, mortgage backed securities, obligations of states and political subdivisions and U.S Government Agency obligations.


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2012
Assets:
March 31, 2012-Investment Securities
Collateralized Mortgage obligations	$	—	$	7,563	$	—	$	7,563
U.S. government agency obligations		—		4,427		—		4,427
Mortgage-backed securities		—		908		—		908
Obligations of states and political subdivisions		—		333		—		333

	$	—	$	13,231	$	—	$	13,231


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2011

Assets:

December 31, 2011-Investment Securities
Collateralized Mortgage obligations		—		7,780		—		7,780
U.S. government agency obligations		—		3,426		—		3,426
Mortgage-backed securities		—		998		—		998
Obligations of states and political subdivisions		—		332		—		332

	$	—	$	12,536	$	—	$	12,536

The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans and foreclosed assets. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Adjustments in 2012 and 2011 to the impaired loans were recorded as additional allocations to the allowance for loan and lease losses. Adjustments in 2012 and 2011 to foreclosed assets were recorded as additional allocations to the allowance for loan and lease losses. The following table presents the Corporation’s assets at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011 (000s omitted):


Assets Measured at Fair Value on a Nonrecurring Basis

	Balance at March 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Impaired Loans accounted for under FASB ASC 310	$	7,751	$	—	$	—	$	7,751
Foreclosed Assets	$	3,671	$	—	$	—	$	3,671

Assets Measured at Fair Value on a Nonrecurring Basis

	Balance at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Impaired Loans accounted for under FASB ASC 310	$	7,975	$	—	$	—	$	7,975
Foreclosed Assets	$	4,433	$	—	$	—	$	4,433

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. Impaired loans where a specific reserve 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 obtained at least annually) and discounted based on internal loan to value limits which typically range from 50% to 80% based on the collateral. Management reviews the impaired loans no less than quarterly for potential additional impairment and when there is little prospect of collecting principal or interest, loans or portions thereof may be charged off to the allowance for loan losses. Losses are recognized in the period a debt becomes uncollectible. The recognition of a loss does not mean that the loan has no recovery or salvage value, but rather it is not practical or desirable to defer writing off the loan even though a partial recovery may occur in the future. During the three months ended March 31, 2012 the Company charged off $319,000 of impaired loans to the allowance for loan losses. The change in fair value of impaired loans is accounted for in the allowance for loan losses (see Note 6).

Foreclosed assets, which include real estate owned and real in estate in judgment and subject to redemption, 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 performed annually 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. The valuations consist of obtaining a broker price opinion or a new appraisal depending on the value of the asset. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Assets held as real estate in judgment may be subject to redemption for a period of six to twelve months depending on the collateral, following the foreclosure sale. Assets may be redeemed by the borrower for the foreclosure sale price, accrued interest and foreclosure costs. Any asset redeemed would be treated as a paid off loan. As of March 31, 2012 the Company held $3.7 million in foreclosed assets owned as a result of foreclosure or the acceptance of a deed in lieu and $4.4 million in foreclosed assets as of December 31, 2011. No assets were redeemed in 2011 or in the three months of 2012.

Fair Value of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC), FASB ASC 820-10-50, Fair Value Measurements and Disclosures, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

The fair value of all financial instruments not discussed below (cash and cash equivalents, federal funds sold, Federal Home Loan Bank stock, accrued interest receivable, federal funds purchased and interest payable) are estimated to be equal to their carrying amounts as of March 31, 2012 and December 31, 2011. The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:

Securities - Fair values for securities, excluding Federal Home Loan Bank stock, are based on 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.

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 flow analyses using current market rates applied to the estimated life. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank Advances - The fair values of the Corporation’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

The estimated fair values, and related carrying or notional amounts, of the Corporation’s financial instruments are as follows (000s omitted):


	March 31, 2012
	Carrying Amount		Level 1		Level 2		Level 3		Total Estimated Fair Value
Assets:
Cash and cash equivalents	$	36,676	$	36,676	$	—	$	—	$	36,676
Securities - Available for sale		13,231		—		13,231		—		13,231
Other securities		3,370		3,370		—		—		3,370
Loans held for sale		1,239		1,262		—		—		1,262
Net loans		144,424		—		148,501		—		148,501
Accrued interest
and late charges receivable		409		409		—		—		409

Liabilities:
Deposits		184,675		—		185,578				185,578
Federal Home Loan Bank
advances		17,175		—		18,494				18,494
Accrued interest payable		194		194		—		—		194

	December 31, 2011
	Carrying Amount		Level 1		Level 2		Level 3		Total Estimated Fair Value

Assets:
Cash and cash equivalents	$	24,111	$	24,111	$	—	$	—	$	24,111
Securities - Available for sale		12,536		—		12,536		—		12,536
Other securities		3,370		3,370		—		—		3,370
Loans held for sale		653		662		—		—		662
Net loans		148,495		—		156,794		—		156,794
Accrued interest										—
and late charges receivable		431		431		—		—		431

Liabilities:
Deposits		174,185		—		175,720		—		175,720
Federal Home Loan Bank										—
advances		20,175		—		20,566		—		20,566
Accrued interest payable		213		213		—		—		213

NOTE 5 - LOANS

The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:


	March 31, 2012					December 31, 2011
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real Estate Loans:
One-to-four family	$	76,328		51.3		$	78,500		51.2
Multi-family		758		0.5			765		0.5
Commercial		54,027		36.3			54,308		35.4
Construction or development		1,806		1.2			1,639		1.1

Total real estate loans		132,919		89.3			135,212		88.2
Other loans:
Consumer loans:
Home equity		9,639		6.5			10,499		6.8
Other		2,317		1.6			2,516		1.6

Total consumer loans		11,956		8.1			13,015		8.4
Commercial Business Loans		3,879		2.6			5,212		3.4

Total other loans		15,835		10.7			18,227		11.8

Total Loans		148,754		100.0	%		153,439		100.0	%


Allowance for loan losses		4,061					4,656
Less: Net deferred loan fees		269					288

Total Loans, net	$	144,424				$	148,495

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. All loan classes on which principal or interest is in default for 90 days or more are put on nonaccrual status, unless there is sufficient documentation to conclude that the loan is well secured and in the process of collection. Loans will also be placed on nonaccrual status if the Bank cannot reasonably expect full and timely repayment. All nonaccrual loans are also deemed to be impaired unless they are residential loans whose status as nonaccrual loans is based solely on having reached 90 days past due, are in the process of collection, but whose status as well secured has not yet been established.

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. All impaired loans are also classified as nonaccrual loans unless they are deemed to be impaired solely due to their status as a troubled debt restructure and, 1) the borrower is not past due or, 2) there is verifiable adequate cash flow to support the restructured debt service or, 3) there is an adequate collateral valuation supporting the restructured loan.

An age analysis of past due loans including nonaccrual loans, segregated by class of loans, as of March 31, 2012 and December 31, 2011 are as follows:


March 31, 2012
	30-59 DaysPast Due		60-89 DaysPast Due		Loans 90 Days or More Past Due		Total Past due Loans		Current Loans		Total Loans

Commercial	$	—	$	—	$	184	$	184	$	3,695	$	3,879
Commercial Real Estate:
Multi-family		—		—		—		—		758		758
Commercial Real Estate - other		7,045		100		2,517		9,662		44,365		54,027
Consumer:
Consumer - other		27		5		—		32		11,823		11,855
Consumer - auto		—		—		—		—		101		101
Residential:
Residential - prime		351		100		445		896		60,468		61,364
Residential - subprime		496		10		47		553		14,411		14,964
Construction:
Construction - prime		—		18		—		18		1,770		1,788
Construction - subprime		—		—		—		—		18		18

Total	$	7,919	$	233	$	3,193	$	11,345	$	137,409	$	148,754


December 31, 2011
	30-59 DaysPast Due		60-89 DaysPast Due		Loans 90 Days or More Past Due		Total Past due Loans		Current Loans		Total Loans

Commercial	$	147	$	—	$	1,166	$	1,313	$	3,899	$	5,212
Commercial Real Estate:
Multi-family		—		—		—		—		765		765
Commercial Real Estate - other		105		246		3,016		3,367		50,941		54,308
Consumer:
Consumer - other		74		—		—		74		12,814		12,888
Consumer - auto		—		—		—		—		127		127
Residential:
Residential - prime		632		105		478		1,215		62,094		63,309
Residential - subprime		216		123		67		406		14,785		15,191
Construction:
Construction - prime		—		—		—		—		1,639		1,639
Construction - subprime		—		—		—		—		—		—

Total	$	1,174	$	474	$	4,727	$	6,375	$	147,064	$	153,439

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.

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.

3.	Two (2) Above Average Quality. Loans to borrowers with a sound financial condition and positive trend in earnings.

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.

4.	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.

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.

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.

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.

8.	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.

The following table represents the risk category of loans by class based on the analysis performed as of March 31, 2012 and December 31, 2011 (in thousands):


			March 31, 2012

Credit Rating	Commercial		Commercial Real Estate Multi-family		Commercial Real Estate Other
	2012		2012		2012
0		—		33		2,430
1-2		—		—		18
3		123		154		2,240
4		3,029		17		28,931
5		245		104		2,468
6		482		450		15,225
7		—		—		2,715

Total		3,879		758		54,027


			December 30, 2011
Credit Rating	Commercial		Commercial Real Estate Multi-family		Commercial Real Estate Other
	2011		2011		2011
0		—		34		2,542
1-2		—		—		—
3		112		154		2,548
4		3,082		18		29,583
5		435		105		2,376
6		466		454		15,551
7		1,117		—		1,708

Total	$	5,212	$	765	$	54,308

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 March 31, 2012 and December 31, 2011.


	March 31, 2012
	Residential - Prime		Residential - Subprime

Grade
Pass		60,637		14,395
Substandard		727		569

Total		61,364		14,964


	Consumer - Other		Consumer - Auto
Performing		11,757		101
Nonperforming		98		—

Total		11,855		101


			Construction - Prime
Performing				1,788
Nonperforming				18

Total				1,806


	December 30, 2011
	Residential - Prime		Residential - Subprime

Grade
Pass		62,895		15,027
Substandard		414		164

Total	$	63,309	$	15,191


	Consumer - Other		Consumer - Auto
Performing		12,798		127
Nonperforming		90		—

Total	$	12,888	$	127


			Construction - Prime
Performing				1,639
Nonperforming				—

Total			$	1,639

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011 (in thousands).


March 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance

With no related allowance recorded:
Commercial	$	401	$	453	$	—
Commercial Real Estate:

Commercial Real Estate - Multi-family		—		—		—
Commercial Real Estate - other		8,743		14,429		—
Consumer:
Consumer - other		253		253		—
Consumer - auto		—		—		—
Residential:
Residential - prime		2,316		2,494		—
Residential - subprime		4,937		4,937		—

With an allowance recorded:
Commercial		—		—		—
Commercial Real Estate:

Commercial Real Estate - Multi-family		450		464		54
Commercial Real Estate - other		6,059		6,580		294
Consumer:
Consumer - other		—		—		—
Consumer - auto		—		—		—
Residential:
Residential - prime		467		487		123
Residential - subprime		—		—		—

Total
Commercial	$	15,653	$	21,926	$	348

Consumer	$	253	$	253	$	—

Residential	$	7,720	$	7,918	$	123


	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance

With no related allowance recorded:
Commercial	$	404	$	454	$	—
Commercial Real Estate:

Commercial Real Estate - Multi-family		—		—		—
Commercial Real Estate - other		8,783		14,052		—
Consumer:
Consumer - other		260		260		—
Consumer - auto		—		—		—
Residential:
Residential - prime		2,469		2,478		—
Residential - subprime		4,879		4,879		—

With an allowance recorded:
Commercial		—		—		—
Commercial Real Estate:

Commercial Real Estate - Multi-family		454		467		35
Commercial Real Estate - other		6,445		6,958		480
Consumer:
Consumer - other		—		—		—
Consumer - auto		—		—		—
Residential:
Residential - prime		131		149		81
Residential - subprime		—		—		—

Total
Commercial	$	16,086	$	21,931	$	515

Consumer	$	260	$	260	$	—

Residential	$	7,479	$	7,506	$	81

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012 and March 31, 2011 (in thousands).


March 31, 2012
	Average Recorded Investment		Interest Income

With no related allowance recorded:
Commercial	$	453	$	—
Commercial Real Estate:

Commercial Real Estate - Multi-family		—		—
Commercial Real Estate - other		14,102		166
Consumer:
Consumer - other		253		14
Consumer - auto		—		—
Residential:
Residential - prime		2,383		125
Residential - subprime		4,900		335

With an allowance recorded:
Commercial		—		—
Commercial Real Estate:

Commercial Real Estate - Multi-family		450		23
Commercial Real Estate - other		6,581		228
Consumer:
Consumer - other		—		—
Consumer - auto		—		—
Residential:
Residential - prime		489		24
Residential - subprime		—		—

Total
Commercial	$	21,586	$	417

Consumer	$	253	$	14

Residential	$	7,772	$	484


March 31, 2011
	Average Recorded Investment		Interest Income

With no related allowance recorded:
Commercial	$	1,648	$	—
Commercial Real Estate:

Commercial Real Estate - Multi-family		793		23
Commercial Real Estate - other		21,331		399
Consumer:
Consumer - other		454		22
Consumer - auto		—		—
Residential:
Residential - prime		3,510		137
Residential - subprime		4,744		340

With an allowance recorded:
Commercial		225		—
Commercial Real Estate:

Commercial Real Estate - Multi-family		—		—
Commercial Real Estate - other		611		—
Consumer:
Consumer - other		—		—
Consumer - auto		—		—
Residential:
Residential - prime		714		—
Residential - subprime		—		—

Total
Commercial	$	24,608	$	422

Consumer	$	454	$	22

Residential	$	8,968	$	477

Payments received on loans in nonaccrual status are typically applied to reduce the recorded investment in the asset. While a loan is in nonaccrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining recorded investment in the asset (i.e., after charge-off of identified losses, if any) is deemed to be fully collectible. The following presents by class, the recorded investment in loans and leases on non-accrual status as of March 31, 2012 and December 31, 2011.

Financing Receivables on Nonaccrual Status


	March 31, 2012
Commercial	$	401
Commercial real estate:
Commercial Real Estate - multi-family		—
Commercial Real Estate - other		7,081
Consumer:
Consumer - other		—
Consumer - auto		—
Residential:
Residential - prime		640
Residential - subprime		150
Construction
Construction - prime		—
Construction - subprime		—

Total	$	8,272

Financing Receivables on Nonaccrual Status


	December 31, 2011
Commercial	$	1,521
Commercial real estate:
Commercial Real Estate - multi-family		—
Commercial Real Estate - other		6,278
Consumer:
Consumer - other		—
Consumer - auto		—
Residential:
Residential - prime		786
Residential - subprime		180
Construction
Construction - prime		—
Construction - subprime		—

Total	$	8,765

Loans in which the Bank elects to grant a concession, providing terms more favorable than those prevalent in the market (e.g., rate, amortization term), and are formally restructured due to the weakening credit status of a borrower are reported as trouble debt restructure ( TDR). All other modifications in which the new terms are at current market conditions and are granted to clients due to competitive pressures and because of the customer’s favorable past and current performance and credit risk do not constitute a TDR loan and are not monitored.

In order to maximize the collection of loan balances, we evaluate troubled loans on a case-by-case basis to determine if a loan modification would be appropriate. We pursue loan modifications when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt. For loans secured by either commercial or residential real estate, if the client demonstrates a loss of income such that the client cannot reasonably support even a modified loan, we may pursue foreclosure, short sales and/or deed-in-lieu arrangements. For all troubled loans, we review a number of factors, including cash flows, loan structures, collateral values, and guarantees. Based on our review of these factors and our assessment of overall risk, we evaluate the benefits of renegotiating the terms of the loans so that they have a higher likelihood of continuing to perform. To date, we have restructured loans in a variety of ways to help our clients service their debt and to mitigate the potential for additional losses. The primary restructuring methods being offered to our clients are reductions in interest rates and extensions in terms. Loans that, after being restructured, remain in compliance with their modified terms and whose modified interest rate yielded a market rate at the time the loan was restructured, are reviewed annually and may be reclassified as non-TDR, provided they conform with the prevailing regulatory criteria. As of March 31, 2012 there have been no loans in which the TDR designation has been removed.

The following table represents the modifications completed during the first quarter of 2012.


			Modifications
			As of March 31 2012
			As of March 31 2012

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Troubled Debt Restructurings
Commercial		—		—		—
Commercial real estate:
Commercial Real Estate - multi-family		—		—		—
Commercial Real Estate - other		—		—		—
Consumer:
Consumer - other		—		—		—
Consumer - auto		—		—		—
Residential:
Residential - prime		3		546		558
Residential - subprime		—		—		—
Construction
Construction - prime		—		—		—
Construction - subprime		—		—		—

Total		3	$	546	$	558


	Number of Contracts		Recorded Investment

Troubled Debt Restructurings That Subsequently Defaulted
Commercial		—		—
Commercial real estate:
Commercial Real Estate - multi-family		—		—
Commercial Real Estate - other		—		—
Consumer:
Consumer - other		—		—
Consumer - auto		—		—
Residential:
Residential - prime		2		98
Residential - subprime		—		—
Construction
Construction - prime		—		—
Construction - subprime		—		—

		2	$	98

All TDR loans are considered impaired. When individually evaluating loans for impairment, we may measure impairment using (1) the present value of expected future cash flows discounted at the loan’s effective interest rate (i.e., the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan), (2) the loan’s observable market price, or (3) the fair value of the collateral. If the present value of expected future cash flows discounted at the loan’s effective interest rate is used as the means of measuring impairment the change in the present value attributable to the passage time is recognized as bad-debt expense. As previously mentioned all impaired loans are also classified as nonaccrual loans unless they are deemed to be impaired solely due to their status as a troubled debt restructure and, 1) the borrower is not past due or, 2) there is verifiable adequate cash flow to support the restructured debt service or, 3) there is an adequate collateral valuation supporting the restructured loan. Nonaccruing TDR loans that demonstrate a history of repayment performance in accordance with their modified terms are reclassified to accruing restructured status, typically after six months of repayment performance and are supported by a current credit evaluation of the borrower’s financial condition and expectations for repayment under the revised terms.

NOTE 6 - ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses was $4.1 million at March 31, 2012 representing 2.8% of total loans, compared to $4.7 million at December 31, 2011 or 3.14% of total loans and $6.5 million at March 31, 2011 or 3.72% of total loans. The allowance for loan losses to non-performing loans ratio was 49.1% at March 31, 2012 compared to 53.1% at December 31, 2011 and 51.3% at March 31, 2011. At March 31, 2012 we believe that our allowance appropriately considers incurred losses in our loan portfolio.

Analysis related to the allowance for credit losses (in thousands) as of March 31, 2012 is as follows:


March 31, 2012

	Commercial			Commercial Real Estate Other			Multi Family		Consumer			Residential - Prime			Residential - Subprime			Construction			Total

ALLOWANCE FOR CREDIT LOSSES:

Beginning Balance		45			1,262			45		259			2,280			664			101			4,656
Charge-Offs		—			(172	)		—		(57	)		(398	)		(75	)		—			(702	)
Recoveries		3			14			—		58			4			—			—			79
Provision		(13	)		280			29		(55	)		(257	)		90			(46	)		28

Ending Balance		35			1,384			74		205			1,629			679			55			4,061


Ending Balance: individually evaluated for impairment		—			294			54		—			123			—			—			471


Ending Balance: collectively evaluated for impairment		35			1,090			20		205			1,506			679			55			3,590


FINANCING RECEIVABLES:

Ending Balance		3,879			54,027			758		11,956			61,364			14,964			1,806			148,754


Ending Balance: individually evaluated for impairment		401			14,802			450		253			2,783			4,937			—			23,626


Ending Balance: collectively evaluated for impairment		3,478			39,225			308		11,703			58,581			10,027			1,806			125,128

The Company’s charge-off policy which meets regulatory minimums has not required any revisions during the first quarter of 2012. Losses on unsecured consumer loans are recognized at or before 120 days past due. Secured consumer loans, including residential real estate, are typically charged-off between 120 and 180 days past due, depending on the collateral type, in compliance with the FFIEC guidelines. Specific loan reserves are established based on credit and or collateral risks on an individual loan basis. When the probability for full repayment of a loan is unlikely the Bank will initiate a full charge-off or a partial write down of a loan based upon the status of the loan. Impaired loans or portions thereof are charged-off when deemed uncollectible. Loans that have been partially charged-off remain on nonperforming status, regardless of collateral value, until specific borrower performance criteria are met. Total impaired loans as reported above were $23.6 million as of March 31, 2012 and $26.9 million as of March 31, 2011.


March 31, 2011

	Commercial			Commercial Real Estate Other			Multi Family			Consumer			Residential - Prime			Residential - Subprime			Construction			Total

ALLOWANCE FOR CREDIT LOSSES:

Beginning Balance	$	71		$	1,790		$	474		$	503		$	3,495		$	458		$	59		$	6,850
Charge-Offs		(3	)		(18	)		(177	)		(100	)		(413	)		(189	)		(13	)		(913	)
Recoveries		7			228			—			69			4			6			—			314
Provision		55			(396	)		(8	)		(93	)		508			183			11			260

Ending Balance		130			1,604			289			379			3,594			458			57			6,511


Ending Balance: individually evaluated for impairment		57			191			—			—			301			—			—			549


Ending Balance: collectively evaluated for impairment		73			1,413			289			379			3,293			458			57			5,962


FINANCING RECEIVABLES:

Ending Balance		7,169			61,367			4,579			16,842			72,533			16,617			2,587			181,694


Ending Balance: individually evaluated for impairment		1,844			15,320			620			449			3,465			4,827			331			26,856


Ending Balance: collectively evaluated for impairment		5,325			46,047			3,959			16,393			69,068			11,790			2,256			154,838

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements of the Corporation and the accompanying notes.

FORWARD-LOOKING STATEMENTS

In addition to historical information, the following discussion contains “forward-looking statements” that involve risks and uncertainties. All statements regarding the expected financial position, business and strategies are forward-looking statements and the Corporation intends for them to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to the Corporation or management, are intended to identify forward-looking statements. The Corporation believes that the expectations reflected in these forward-looking statements are reasonable based on our current beliefs and assumptions; however, these expectations may prove to be incorrect.

Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, changes in the relative difference between short and long-term interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, including levels of non-performing assets, demand for loan products, deposit flows, competition, demand for financial services in our market area, our operating costs and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not place undue influence on these statements.

CRITICAL ACCOUNTING POLICIES

The nature of the financial services industry is such that, other than described below, the use of estimates and management judgment is not likely to present a material risk to the financial statements. In cases where estimates or management judgment are required, internal controls and processes are established to provide assurance that such estimates and management judgments are materially correct to the best of management’s knowledge.

Allowance for Loan Losses. Accounting for loan classifications, accrual status, and determination of the allowance for loan losses is based on regulatory guidance. This guidance includes, but is not limited to, generally accepted accounting principles, the uniform retail credit classification and account management policy issued by the Federal Financial Institutions Examination Council, the joint policy statement on the allowance for loan losses methodologies issued by the Federal Financial Institutions Examination Council and guidance issued by the Securities and Exchange Commission. Accordingly, the allowance for loan losses includes a reserve calculation based on an evaluation of loans determined to be impaired, risk ratings, historical losses, loans past due, collateral values and cost of disposal and other subjective factors.

Foreclosed Assets. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated selling expenses, which consist primarily of commissions that will be paid to an independent real estate agent upon sale of the property. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Income Taxes - Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

OVERVIEW

Following Monarch Community Bank’s Safety and Soundness examination which was completed in early 2010, 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. Following Monarch Community Bank’s most recent Safety and Soundness examination, there were no changes to the existing formal enforcement action (“Consent Order”).

Since stipulating to the terms of the Consent Order, we have complied with all of the required actions, with the exception of fully raising our capital levels to the required levels. Management continues to work toward the achievement of the required capital levels through:

Returning the Bank to profitability - As the bank returns to profitability, net income increases the level of capital in the Bank, resulting in improved capital ratios.

Reducing the size of the Bank. - With a decrease in the assets and liabilities of the Bank, capital as a percent of assets increases. This contributes to the improvement of the capital ratios.

Conducting a formal capital raise - the Bank is working with investment banking firms to develop a strategy for a formal capital raise. The timing of the capital raise will be affected by the status of the economy and the private equity markets. Based on current conditions, the Bank anticipates initiating the formal capital raise no earlier than the second quarter of 2012.

Management continues to focus on the improvement of credit quality at the Bank, and has completed four comprehensive external loan reviews over the last twenty four months, with no recommendations for additional loan loss provisions or charge-offs, and no identification of material weaknesses in the credit approval or administration processes. Likewise, the Bank retained the services of Rehmann Consulting to conduct the Bank’s internal audit function, a task which had previously been performed by a Bank employee. Since retaining Rehmann, the firm has performed three comprehensive internal audits, in compliance with Sarbanes Oxley standards, and has found no material weaknesses in the Bank’s policies and procedures.

In addition to the enhanced loan review and audit functions, the Bank has continued to focus on the reduction of problem loans. As a result, the Bank’s total non-performing assets have declined from $16.4 million at March 31, 2011 to $11.9 million at March 31, 2012. This constitutes a 27.4% drop in non-performing assets over a 12 month period.

While continuing the focus on the reduction in problem loans, the Bank has also pursued the development of additional sources of fee income. Since January of 2011, the Bank has opened new residential loan production offices in Portage, Okemos, St. Joseph, Battle Creek, Grand Rapids, and Jackson, Michigan, with an additional loan production office in Angola, Indiana. Management has identified a number of additional markets in Michigan and Indiana where residential loan production offices will be opened over the next six to twelve months. Each of these offices also has the potential to add commercial lenders and investment advisors as the market conditions may merit. Commercial lenders have been added to the Grand Rapids and Okemos, Michigan offices.

Improved growth and profitability will be derived from the following ongoing initiatives:

1. The reduction in non-performing assets and classified loans. As demonstrated in the aforementioned data, non-performing assets have declined significantly over the past 12 months. Our intent is to continue our disciplined, aggressive approach to further reducing non-performing and classified loans.

2. Organic growth, focusing on commercial lending, residential mortgage lending in existing markets and the expansion of our wealth management revenue. We recently established a new relationship with Investment Professionals, Inc., (IPI) replacing our previous relationship with Prudential. IPI will provide compliance, sales, research and clearing support for investment advisors that will be employed by the Bank and will provide investment services under the name of Monarch Investment Services. This will provide for enhanced branding of the Monarch name and increased fee income potential from investment services.

3. De novo LPO’s, opened in markets across the state and across state lines that have strong demographic features. The offices are opened with at least two residential mortgage originators. This can be followed by the addition of a commercial lender and, where appropriate, a Monarch Investment Services Advisor.

4. A continued exploration of acquisition opportunities, where markets and synergies combine for the potential of enhanced shareholder value.

FINANCIAL CONDITION

Summary

Our total assets increased by $7.2 million, or 3%, to $215.3 million at March 31, 2012 compared to $208.1 million at December 31, 2011. Loans, excluding loans held for sale, totaled $144.4 million at March 31, 2012, down 2.74% from $148.5 million at December 31, 2011.

Securities

Securities increased to $13.2 million at March 31, 2012 compared to $12.5 million at December 31, 2011. The increase was attributable to the purchase of $1.0 million in U.S. agency securities. The yield on investment securities has decreased to 1.90% during the three months ended March 31, 2012 from 3.57% for the same period a year ago. Management has continued to maintain a diversified securities portfolio, which includes obligations of U.S. government-sponsored agencies, securities issued by states and political subdivisions and mortgage-backed securities. Management regularly evaluates asset/liability management needs and attempts to maintain a portfolio structure that provides sufficient liquidity and cash flow.

Loans

The Bank’s net loan portfolio decreased by $4.1 million, or 2.74%, from $148.5 million at December 31, 2011 to $144.4 million at March 31, 2012. The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:


	March 31, 2012					December 31, 2011
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real Estate Loans:
One-to-four family	$	76,328		51.3		$	78,500		51.2
Multi-family		758		0.5			765		0.5
Commercial		54,027		36.3			54,308		35.4
Construction or development		1,806		1.2			1,639		1.1

Total real estate loans		132,919		89.4			135,212		88.1
Other loans:
Consumer loans:
Home equity		9,639		6.5			10,499		6.8
Other		2,317		1.6			2,516		1.6

Total consumer loans		11,956		8.0			13,015		8.5
Commercial Business Loans		3,879		2.6			5,212		3.4

Total other loans		15,835		10.6			18,227		11.9

Total Loans		148,754		100.0	%		153,439		100.0	%


Allowance for loan losses		4,062					4,656
Less: Net deferred loan fees		268					288

Total Loans, net	$	144,424				$	148,495

One-to-four family loans decreased $2.2 million from year end 2011 as a result of the Bank’s continued strategy to sell a greater portion of new one- to-four family loan originations. Commercial real estate loans and construction loans decreased $114,000 or .20%.

The allowance for loan losses was $4.1 million at March 31, 2012 compared to $4.7 million at December 31, 2011, a decrease of $600,000. Net charge offs totaled $623,000 compared to $599,000 for the same period a year ago. Net charge offs year to date consisted of primarily one-to-four family residential mortgages. See “Provision for Loan Losses” below for further explanation regarding charge-offs and non-performing loans. The current level of the allowance for loan losses is the result of management’s assessment of the risks within the portfolio based on the information revealed in credit monitoring processes.

The allowance balance is established after considering past loan loss experience, current economic conditions, composition of the loan portfolio, delinquencies, and other relevant factors. We continue to be diligent in reviewing our loan portfolios for problem loans and believe that early detection of troubled credits is critical. We maintain the allowance for loan losses at a level considered adequate to cover losses within the loan portfolio.

Deposits

Total deposits increased $10.5 million, or 6.0%, from $174.2 million at December 31, 2011 to $184.7 million at March 31, 2012. The rise in deposits included increases of $6.1 million in demand checking and savings accounts, $673,000 in certificates of deposits and $3.8 million in interest bearing checking and money market accounts.

We have used brokered certificates of deposit to diversify our sources of funds and improve pricing at certain terms compared to the local market and advances available from Federal Home Loan Bank of Indianapolis. Due to the fact that 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. The maximum rates the Bank can pay on all types of retail deposits are limited to the national average rate, plus 75 basis points. We have compared the Bank’s current rates with the national rate caps and reduced any rates over the rate cap to fall within those caps. There has been no material impact to our deposit balances resulting from the rate caps.

Federal Home Loan Bank Advances

Total Federal Home Loan Bank (FHLB) advances decreased $3.0 million to $17.2 million during the three months ended March 31, 2012 compared $20.2 million at December 31, 2011. Management is attempting to reduce its reliance on borrowed funds through the growth of low cost core deposits. Should this strategy not succeed, management anticipates the need for future borrowings to fund loan growth. See “Net Interest Income” below, and also see “Liquidity” later in this report regarding available borrowings.

Equity

Total equity was $10.6 million at March 31, 2012 compared to $11.1 million at December 31, 2011. This represents 4.93% and 5.35% of total assets at March 31, 2012 and December 31, 2011, respectively. Decreases in equity for the three months ended March 31, 2012 included net losses of $401,000 and $100,000 in accrued dividend payments and accrued interest on dividend payments on the Preferred stock. The annual 5% dividend on the Preferred Stock with the amortization of the discount will reduce net income (or increase the net loss) applicable to common stock by approximately $350,000 annually. Effective February 2010, the Corporation deferred regularly scheduled dividend payments on the $6.7 million in par 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. At March 31, 2012 the dividend payable to the Treasury Department totaled $816,000. 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, (see further discussion under “Capital Resources”).

RESULTS OF OPERATIONS

Net Interest Income

Net interest income before any provision for loan losses decreased $103,000 for the quarter ended March 31, 2012 compared to the same period in 2011.

The net interest margin for the first quarter of 2012 increased 38 basis points to 3.35% compared to 2.97% for the same period in 2011. The improvement in the margin is largely due to reduction in wholesale funding. The bank has focused on repaying Federal Home Loan Bank Advances and allowing Brokered Certificates of Deposit to mature. The increased level of nonperforming loans and the associated nonaccrual interest adjustment have also significantly impacted the margin. The yield on loans has decreased to 5.75% for the quarter compared to 5.85% for the same period in 2011.

The Bank’s ability to maintain its net interest margin is heavily dependent on reduction of non-performing loans, future loan demand and its ability to attract core deposits to offset the effect of higher cost certificates of deposits and borrowings. The Bank continues to be challenged in its efforts to increase lower costing core deposits. Management continues to put its efforts towards meeting this challenge.

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.


	Three Months Ended March 31, 2012							Three Months Ended March 31, 2011
	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate
	(dollars in thousands)
Fed Funds and overnight deposits	$	27,866	$	10		0.14	%	$	38,120	$	1		0.01	%
Investment securities		14,775		70		1.90			11,023		97		3.57
Other securities		3,346		23		2.76			3,802		21		2.24
Loans receivable		153,662		2,202		5.75			186,362	$	2,689		5.85

Total earning assets	$	199,649	$	2,305		4.63		$	239,307	$	2,808		4.76


Demand and NOW Accounts		48,132		2		0.02		$	42,407	$	9		0.09
Money market accounts		35,740		32		0.36			40,139		49		0.50
Savings accounts		21,747		5		0.09			21,081		6		0.12
Certificates of deposit		76,687		379		1.98			101,519		619		2.47
Federal Home Loan Bank Advances		18,594		214		4.62			32,716		349		4.33

Total interest bearing liabilities	$	200,900	$	632		1.26		$	237,862	$	1,032		1.76

Net interest income			$	1,673						$	1,776

Net interest spread						3.37	%						3.00	%

Net interest margin						3.35	%						2.97	%

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.


	Three Months Ended March 31, 2012 vs. 2011
	Increase (Decrease) Due to									Total Increase (Decrease)
	Rate			Volume			Mix			Total Increase (Decrease)
	(in thousands)
Interest-earning assets
Fed funds and overnight deposits	$	51		$	(1	)		(41	)		9
Investment securities	$	(166	)	$	134			11			(21	)
Other securities	$	20		$	(10	)		(7	)		2
Loans receivable	$	(223	)	$	(1,914	)		1,643			(493	)

Total interest-earning assets	$	(318	)	$	(1,791	)	$	1,606		$	(503	)


Interest-bearing liabilities
Demand and NOW accounts	$	(29	)	$	5			18			(7	)
Money market accounts	$	(55	)	$	(22	)		59			(17	)
Savings accounts	$	(5	)	$	1			3			(1	)
Certificates of deposit	$	(498	)	$	(614	)		872			(240	)
Federal Home Loan Bank advances	$	95		$	(611	)		381			(135	)

Total interest-bearing liabilities	$	(492	)	$	(1,241	)	$	1,333		$	(400	)

Net interest income										$	(103	)

Provision for Loan Losses

The provision for loan losses was $28,000 in the first quarter of 2012 compared to $260,000 for the first quarter of 2011. The reduced level of provision is reflective of management’s efforts in previous periods to identify potential problem loans and establish adequate reserves and/or charge-offs to address those problems. The Company continues to monitor real estate dependent loans and focus on asset quality. Non-performing loans totaled $8.3 million at the end of the first quarter of 2012, decreasing from $8.8 million at December 31, 2011. Net charge offs for the quarter ended March 31, 2012 were $623,000 compared to $599,000 for the same period in 2011.

Nonperforming assets including the amount of real estate in judgment and foreclosed and repossessed properties, decreased from $13.2 million at the end of 2011 to $11.9 million as of March 31, 2012. This decrease was largely due to a decrease in real estate in judgment and foreclosed and repossessed properties as the bank focuses on the disposition of properties.

The following table presents non-performing assets and certain asset quality ratios at March 31, 2012 and December 31, 2011.


	March 31,2012			December 31,2011
	(In thousands)
Non-performing loans	$	8,271		$	8,765
Real estate in judgement		1,486			1,915
Foreclosed and repossessed assets		2,185			2,518

Total non-performing assets	$	11,942		$	13,198


Non-performing loans to total loans		5.73	%		5.90	%
Non-performing assets to total assets		5.55	%		6.34	%
Allowance for loan losses to non-performing loans		49.10	%		53.10	%
Allowance for loan losses to net loans receivable		2.81	%		3.14	%

Non-interest Income

Non-interest income for the quarter ended March 31, 2012 decreased $206,000, or 20%, from $1.04 million to $840,000 compared to the same period a year ago. This decrease is attributable to a decrease in other income, which was largely due to the decrease in the gain on sale of repossessed of property.

Net gain on sale of loans increased $130,000 for the quarter ended March 31, 2012 from $158,000 to $288,000 compared to the same period a year ago. The increase is largely due to the increase in one-to-four family residential mortgage refinancing activity. Fees and Service charges decreased $10,000 for the three months ended March 31, 2012 compared to the same period a year ago primarily due to a decrease in fees from overdraft protection program which decreased $12,300, to $236,800 as of March 31, 2012 from $249,000 for the same period a year ago. Management expects income from this program to be less in 2012 than in 2011 due to the regulatory changes that became effective August 15, 2010 with the amendment to Regulation E and the need for customers to “opt in” to the Overdraft Program.

Non-interest Expense

Noninterest expense increased $522,000 for the quarter ended March 31, 2012 compared to the same period a year ago. Salaries and employee benefits increased $212,000. The increase in personnel expense was primarily attributable to the addition of loan originators for new offices opened. Foreclosed property expense increased $154,000, mainly due to an increase in repossessed properties. Professional services increased $46,000 primarily due to increases in consulting services for hiring staff. All other expenses increased $110,000.

Federal Income Tax Expense

An income tax benefit was not recognized for the first three months of 2012. A $138,500 tax benefit for the three months of 2012, primarily associated with the $401,000 net losses before income taxes, was offset by a corresponding increase in the valuation allowance on deferred tax assets. A significant component of income tax expense is made up of general tax credits generated each year. Our 2009 tax return is under audit, however there were no findings as of March 31, 2012.

LIQUIDITY

The Bank’s liquidity, represented by cash, overnight funds and investments, is a product of our operating, investing, and financing activities. The Bank’s primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans, and funds provided from operations. While scheduled payments from the amortization of loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank also generates cash through borrowings. The Bank utilizes Federal Home Loan Bank advances to leverage its capital base and provide funds for its lending and investment activities, and to enhance its interest rate risk management.

At March 31, 2012, the Bank was considered “adequately capitalized” under regulatory guidelines which subjects the Bank to restrictions under the FDIC. These restrictions prohibit the Bank from accepting, renewing, or rolling over brokered deposits without a waiver from the FDIC. This act also subjects the Bank to restrictions on the interest rates that can be paid on deposits.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, the Bank maintains a strategy of investing in various investments and lending products. The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. Certificates of deposit scheduled to mature in one year or less at March 31, 2012 totaled $35.6 million. Management believes that a significant portion of these certificates of deposit will remain with the Bank provided the Bank pays a rate of interest that is competitive both in the local and national markets.

If necessary, additional funding sources include additional local core deposits, certificates of deposit gathered via the internet, Federal Home Loan Bank advances and securities available for sale. At March 31, 2012 and based on current collateral levels, the Bank could borrow an additional $13.2 million from the Federal Home Loan Bank at prevailing interest rates. This borrowing capacity can be increased in the future if the Bank pledges additional collateral to the Federal Home Loan Bank. The Corporation anticipates that it will continue to have sufficient funds, through deposits, and borrowings, to meet its current commitments.

The Bank’s total cash and cash equivalents increased by $12.6 million during the three months ended March 31, 2012 compared to an $8.4 million increase for the same period in 2011. The primary sources of cash for the three months ended March 31, 2012 were $8.8 million in proceeds from the sale of mortgage loans, $261,000 maturities of available-for-sale investment securities and $4.5 million of principal loan collections in excess of loan originations and an increase in deposits of $10.5 million compared to $4.7 million increase in deposits, $6.3 million in proceeds from the sale of mortgage loans, $6.9 million of principal loan collections in excess of loan originations and $824,000 in the sale and maturities of available-for-sale investment securities for the three months ended March 31, 2011. The primary uses of cash for the three months ended March 31, 2012 were $9.4 million of mortgage loans originated for sale, and $3.0 million in repayments of FHLB advances, compared to $5.9 million of mortgage loans originated for sale.

Effective February 2010, the Corporation deferred regularly scheduled dividend payments on the $6.7 million in principal outstanding on its Series A fixed rate, cumulative perpetual preferred stock (aggregate liquidation preference of $6.8 million) which was issued to the U.S. Treasury in February 2009. By taking this action, the Corporation expects to save approximately $339,250 in annual cash payments.

CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS

The Corporation has certain obligations and commitments to make future payments under contracts. At March 31, 2012, the aggregate contractual obligations and commitments are:


	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
	(Dollars in Thousands)
Certificates of deposit	$	75,136	$	35,587	$	32,617	$	6,932	$	—
FHLB advances		17,175		10,116		7,059		—		—


Total	$	92,311	$	45,703	$	39,676	$	6,932	$	—


	Amount of commitment expiration per period
	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
	(Dollars in Thousands)
Commitments to grant loans	$	6,481	$	6,481	$	—	$	—	$	—
Unfunded commitments under HELOCs		9,452		1,414		2,472		1,302		4,264
Unfunded commitments under Construction loans		179		160		13		1		5
Unfunded commitments under Commercial LOCs		146		142		4		—		—
Letters of credit		—		—		—		—		—


Total	$	16,258	$	8,197	$	2,489	$	1,303	$	4,269

Commitments to grant loans are governed by the Bank’s credit underwriting standards, as established by the Bank’s Loan Policy. The Bank’s policy is to grant Home Equity Lines of Credits (HELOCs) for periods of up to 15 years.

CAPITAL RESOURCES

The Bank is subject to various regulatory capital requirement administered by federal and state banking agencies. The Bank’s regulatory capital ratios as of March 31, 2012 were as follows: Tier 1 leverage ratio 5.26%, Tier 1 risk-based capital ratio 8.16%; and total risk-based capital 9.43%.

In May 2010, the Bank agreed with the FDIC to increase the Bank’s Tier 1 risk-based capital ratio to at least 9%, and its total risk-based capital ratio to at least 11.0%. At March 31, 2011, these capital ratio requirements had not been met. The Board of Directors and management remain committed to reaching the capital requirements and continue to evaluate different capital raising alternatives. For additional information, please refer to Note 2 to the company’s financial statements included in it’s Form 10-K for the year ended December 31, 2011 in connection with uncertainty about the company’s ability to continue as a going concern.

RECENT DEVELOPMENTS

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 on May 12, 2010 with the complete details of the Written Agreement.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation’s primary market risk exposure is interest rate risk (“IRR”). Interest rate risk refers to the risk that changes in market interest rates might adversely affect the Corporation’s net interest income or the economic value of its portfolio of assets, liabilities, and off-balance sheet contracts. Interest rate risk is primarily the result of an imbalance between the price sensitivity of the Corporation’s assets and its liabilities (including off-balance sheet contracts). Such imbalances can be caused by differences in the maturity, repricing and coupon characteristics of assets and liabilities, and options, such as loan prepayment options, interest rate caps and floors, and deposit withdrawal options. These imbalances, in combination with movement in interest rates, will alter the pattern of the Corporation’s cash inflows and outflows, affecting the earnings and economic value of the Corporation.

The Corporation’s primary tool for assessing IRR is a model that uses scenario analysis to evaluate the IRR exposure of the Bank by estimating the sensitivity of the Bank’s portfolios of assets, liabilities, and off-balance sheet contracts to changes in market interest rates. To measure the sensitivity of the Bank’s Net Portfolio Value (NPV) to changes in interest rates, the (NPV) model estimates what would happen to the economic value of each type of asset, liability, and off-balance sheet contract under six different interest rate scenarios. The model estimates the NPV that would result following instantaneous, parallel shifts in the Treasury yield curve of -300, -200, -100, +100, +200, +300 basis points. Management then compares the resulting NPV and the magnitude of change in NPA to regulatory and industry guidelines to determine if the Corporation’s IRR is acceptable.

ITEM 4.

CONTROLS AND PROCEDURES

An evaluation of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2012 was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer, Chief Financial Officer and several other members of the Corporation’s senior management. The Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Corporation intends to continually review and evaluates the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Corporation’s business. While the Corporation believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Corporation to modify its disclosure controls and procedures.

PART II-OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

The Corporation and the Bank are from time-to-time involved in legal proceedings arising out of, and incidental to, their business. Management, based on its review with counsel of all actions and proceedings affecting the Corporation and the Bank, has concluded that the aggregate loss, if any, resulting from the disposition of these proceedings should not be material to the Corporation’s financial condition or results of operations.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

Item 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable

Item 4.

[RESERVED]

Item 5.

OTHER INFORMATION

Not applicable

Item 6.

EXHIBITS

See the index to exhibits.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	MONARCH COMMUNITY BANCORP, INC.

Date: May 14, 2012	By:	/s/ Richard J. DeVries

		Richard J. DeVries
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: May 14, 2012	And:	/s/ Rebecca S. Crabill

		Rebecca S. Crabill
		Senior Vice President, Chief Financial Officer
		(Principal Financial Officer)

INDEX TO EXHIBITS


Exhibit No.		Description of Exhibit

31.1		Rule 13a-14(a) Certification of the Corporation’s President and Chief Executive Officer.

31.2		Rule 13a-14(a) Certification of the Corporation’s Chief Financial Officer.

32		Section 1350 Certification.

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller reporting company