Monarch Community Bancorp (MCBF) 10-Q 2011 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

or

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

For the transition period from ________ to ________

Commission file number: 000-49814

MONARCH COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

375 North Willowbrook Road, Coldwater, MI 49036
(Address of principal executive offices)

517-278-4566
(Registrant’s telephone number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ Noo

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 Filero	Accelerated Filero	Non-Accelerated Filero	Smaller reporting companyþ
		(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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: At July 27, 2011, 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 — June 30, 2011 and December 31, 2010
Condensed Consolidated Statements of Income — Three and Six Months Ended June 30, 2011 and 2010	2
Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2011 and 2010	3
Notes to Condensed Consolidated Financial Statements	4-20
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-27
Item 3 — Quantitative and Qualitative Disclosures about Market Risk	27
Item 4 — Controls and Procedures	27
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings	28
Item 1A — Risk Factors	28
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3 — Defaults Upon Senior Securities	28
Item 4 — [Reserved]	28
Item 5 — Other Information	28
Item 6 — Exhibits	28
SIGNATURES	29
CERTIFICATIONS	31-33
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I—FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

	(Unaudited)
	June 30,			December 31,
	2011			2010
	(Dollars in thousands,
	except per share data)
Assets
Cash and due from banks	$	7,253		$	7,065
Federal Home Loan Bank overnight time and other interest bearing deposits		37,027			34,909
Total cash and cash equivalents		44,280			41,974
Securities — Available for sale		10,410			11,466
Securities — Held to maturity		—			10
Other securities		3,370			3,865
Loans held for sale		1,055			693
Loans, net		168,149			182,768
Foreclosed assets, net		3,994			2,972
Premises and equipment		3,967			4,122
Core deposit intangible		319			390
Other assets		7,469			8,608
Total assets	$	243,013		$	256,868
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	19,762		$	15,394
Interest bearing		177,992			190,634
Total deposits		197,754			206,028
Federal Home Loan Bank advances		30,350			36,350
Accrued expenses and other liabilities		2,757			2,472
Total liabilities		230,861			244,850
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 at June 30, 2011 and December 31, 2010		6,756			6,750
Common stock — $0.01 par value, 20,000,000 shares authorized, 2,049,485 shares issued and outstanding at June 30, 2011 and December 31, 2010		20			20
Additional paid-in capital		21,151			21,146
Accumulated deficit		(15,550	)		(15,591	)
Accumulated other comprehensive income		335			257
Unearned compensation		(560	)		(564	)
Total stockholders’ equity		12,152			12,018
Total liabilities and stockholders’ equity	$	243,013		$	256,868

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Income (Unaudited)

	Three Months			Three Months			Six Months		Six Months
	Ended			Ended			Ended		Ended
	June 30,			June 30,			June 30,		June 30,
	2011			2010			2011		2010
	(Dollars in thousands, except per share data)
Interest Income
Loans, including fees	$	2,622		$	3,092		$	5,306	$	6,428
Investment securities		113			143			231		294
Federal funds sold and overnight deposits		8			—			14		1
Total interest income		2,743			3,235			5,551		6,723
Interest Expense
Deposits		639			886			1,323		1,851
Federal Home Loan Bank advances		338			499			687		992
Total interest expense		977			1,385			2,010		2,843
Net Interest Income		1,766			1,850			3,541		3,880
Provision for Loan Losses		3			7,040			263		8,884
Net Interest Income After Provision for Loan Losses		1,763			(5,190	)		3,278		(5,004	)
Non-interest Income
Fees and service charges		455			563			902		1,108
Loan servicing fees		110			122			218		239
Net gain on sale of loans		272			149			430		349
Net gain on sale of securities		—			—			—		37
Other income		(109	)		20			224		193
Total non-interest income		728			854			1,774		1,926
Non-interest Expense
Salaries and employee benefits		1,033			1,099			2,104		2,205
Occupancy and equipment		206			224			448		465
Data processing		209			199			422		407
Amortization of mortgage servicing rights		93			81			189		169
Professional services		186			245			343		396
Amortization of core deposit intangible		36			35			71		71
NOW account processing		49			53			99		104
ATM/Debit card processing		63			60			122		117
Foreclosed property expense		145			59			233		265
Other general and administrative		452			425			804		775
Total non-interest expense		2,472			2,480			4,835		4,974
Income (Loss) — Before income taxes		19			(6,816	)		217		(8,052	)
Income Taxes		—			—			—		—
Net Income (Loss)	$	19		$	(6,816	)	$	217	$	(8,052	)
Dividends and amortization of discount on preferred stock	$	89		$	88		$	177	$	176
Net Income (loss) available to common stock	$	(70	)	$	(6,904	)	$	40	$	(8,228	)
Income (Loss) Per Share
Basic	$	(0.04	)	$	(3.49	)	$	0.02	$	(4.16	)
Diluted	$	(0.04	)	$	(3.49	)	$	0.02	$	(4.16	)

See accompanying notes to condensed consolidated financial statements.

2

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended
	June, 30
	2011			2010
	(Dollars in thousands)
Cash Flows From Operating Activities
Net Income (Loss)	$	217		$	(8,052	)
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization		499			542
Provision for loan losses		263			8,884
Stock option expense		5			5
Gain on sale of foreclosed assets		(100	)		(105	)
Mortgage loans originated for sale		(15,570	)		(10,868	)
Proceeds from sale of mortgage loans		15,208			10,923
Gain on sale of mortgage loans		(430	)		(349	)
(Gain) Loss on sale of available for sale securities		—			(37	)
Earned Stock Compensation		19			—
Net change in:
Deferred loan fees		(48	)		49
Accrued interest receivable		193			(53	)
Other assets		759			(129	)
Accrued expenses and other liabilities		132			140
Net cash provided by (used in) operating activities		1,147			950
Cash Flows From Investing Activities
Activity in available for sale securities:
Purchases of available for sale securities		—			(4,216	)
Proceeds from maturities of securities		1,149			2,288
Proceeds from sale of securities		—			1,566
Activity in held-to-maturity securities:
Proceeds from maturities of securities		10			13
Loan originations and principal collections, net		12,476			5,408
Proceeds from sale of foreclosed assets		1,354			1,850
Proceeds from sale of FHLB Stock		495			—
Purchase of premises and equipment		(51	)		(59	)
Net cash provided by investing activities		15,433			6,850
Cash Flows From Financing Activities
Net decrease in deposits		(8,274	)		(11,883	)
Repayment of FHLB advances		(6,000	)		—
Net cash provided by financing activities		(14,274	)		(11,883	)
Net Increase (Decrease) in Cash and Cash Equivalents		2,306			(4,083	)
Cash and Cash Equivalents— Beginning		41,974			23,354
Cash and Cash Equivalents —End	$	44,280		$	19,271
Supplemental Cash Flow Information:
Cash paid for:
Interest		2,077			2,886
Noncash investing activities:
Loans transferred to foreclosed assets		2,358			2,558

See accompanying notes to condensed consolidated financial statements.

3

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, 2010 filed with the Securities and Exchange Commission.

The results of operations for the six month period ended June 30, 2011 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 which cover a twenty —four month historical period and are carried at a weighted average with the most recent twelve months weighted 60% and the later weighted 40%, can vary 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. Management estimates probable losses by evaluating quantitative and qualitative factors for each loan portfolio segment, including net charge-off trends, internal risk ratings, changes in internal risk ratings, loss forecasts, collateral values, geographic location, delinquency rates, nonperforming and restructured loans, origination channel, product mix, underwriting practices, industry conditions, and economic trends. No adjustments were made to the loss factors in the second quarter of 2011. 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.

4

RECLASSIFICATIONS

Certain 2010 amounts have been reclassified to conform to the 2011 presentation.

NOTE 2 — SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
June 30, 2011	Cost		Gains		Losses		Market Value
Available-for-sale securities:
U.S. Treasury	$	—	$	—	$	—	$	—
U.S. government agency obligations		1,108		94		—		1,202
Mortgage-backed securities		3,259		144				3,403
Obligations of states and political subdivisions		5,536		269		—		5,805
Total available-for-sale securities	$	9,903	$	507	$	—	$	10,410
Held-to-maturity securities:
Municipal securities	$	—	$	—	$	—	$	—

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
December 31, 2010	Cost		Gains		Losses		Market Value
Available-for-sale securities:
U.S. Treasury	$	—	$	—	$	—	$	—
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

Proceeds from sales of securities available for sale were $0 and $1.6 million for the six months ended June 30, 2011 and 2010, respectively. Gross gains of $0 and $37,000 were realized on these sales during 2011 and 2010, respectively.

5

The amortized cost and fair value of securities available for sale at June 30, 2011 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.

	June 30, 2011
	Held to Maturity Securities				Available for Sale Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Dollars in Thousands)
Due in one year or less	$	—	$	—	$	791	$	807
Due from one to five years		—		—		5,167		5,473
Due from five to ten years		—		—		686		727
Due after ten years		—		—		—		—
Total	$	—	$	—		6,644		7,007
Mortgage-backed securities						3,259		3,403
Total available-for-sale securities					$	9,903	$	10,410

There were no securities with unrealized losses at June 30, 2011.

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 June 30, 2011.

6

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			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Basic earnings per share
Numerator:
Net income	$	19		$	(6,816	)	$	217		$	(8,052	)
Dividends and amortization of discount on preferred stock	$	89		$	88		$	177		$	176
Net Income (Loss) available to common stock	$	(70	)	$	(6,904	)	$	40		$	(8,228	)
Denominator:
Weighted average common shares outstanding		2,049			2,045			2,049			2,045
Less: Average unallocated ESOP shares		(56	)		(65	)		(56	)		(65	)
Less: Average non-vested RRP shares		(1	)		(2	)		(1	)		(2	)
Weighted average common shares outstanding for basic earnings (loss) per share		1,992			1,978			1,992			1,978
Basic earnings (loss) per share	$	(0.04	)	$	(3.49	)	$	0.02		$	(4.16	)
Diluted earnings per share
Numerator:
Net Income (Loss) available to common stock	$	(70	)	$	(6,904	)	$	40		$	(8,228	)
Denominator:
Weighted average common shares outstanding for basic earnings per share		1,992			1,978			1,992			1,978
Add: Dilutive effects of restricted stock, stock options and warrants		—			—			—			—
Weighted average common shares and dilutive potential common shares outstanding		1,992			1,978			1,992			1,978
Diluted earnings (loss) per share	$	(0.04	)	$	(3.49	)	$	0.02		$	(4.16	)

NOTE 4 — RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASU 2010-06,Improving Disclosures about Fair Value Measurements.The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06 to amend ASC 820,Fair Value Measurement and Disclosures(“ASC 820”), to require additional disclosures regarding fair value measurements. Specifically, the ASU requires disclosure of the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; the reasons for any transfers in or out of Level 3; and information in the reconciliation of recurring Level 3 measurements about gross purchases, sales, issuances and settlements. Except for the requirement to disclose purchases, sales, issuances and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, all the amendments to ASC 820 made by ASU 2010-06 were effective for the Corporation on January 1, 2010. The requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 measurements was effective for the Corporation as of January 1, 2011. All required disclosures are incorporated into Note 5.

7

FASB ASU 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.In July 2010, the FASB issued ASU 2010-20, which requires new qualitative and quantitative disclosures on the allowance for credit losses, credit quality, impaired loans, modifications and nonaccrual and past due financing receivables. The guidance requires that an entity provide disclosures facilitating financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables (i.e., loans), how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. These required disclosures are to be presented on a disaggregated basis at the portfolio segment and the class of financing receivables level. As it relates to disclosures as of the end of a reporting period, ASU 2010-20 was effective for the Corporation as of December 31, 2010. Disclosures that relate to activity during a reporting period were required for the Corporation in the period beginning January 1, 2011 and are incorporated into Note 6 and Note 7. In January 2011, the FASB temporarily deferred the effective date for disclosures about troubled debt restructurings under ASU 2010-20. See ASU 2011-2 below which requires disclosures about troubled debt restructurings under ASU 2010-20 on a prospective basis beginning in the quarter ended September 30, 2011.

FASB ASU 2011-02,A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. In April 2011, the FASB issued ASU 2011-02, which provides additional guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the Corporation beginning in the quarter ended September 30, 2011 and are to be applied retrospectively to January 1, 2011. In addition, the modification disclosures described in ASU 2010-20, which were subsequently deferred by ASU 2011-01,Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings, will be effective on a prospective basis beginning in the quarter ended September 30, 2011. The Corporation has not completed evaluating the impact of ASU 2011-02 on its consolidated financial statements.

The FASB has issued ASU 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The impact of adoption of this ASU is not expected to be material.

FASB ASU 2011-05,Presentation of Comprehensive Income.In June 2011, the FASB issued ASU 2011-05, which provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We anticipate this statement will be adopted with our 2012 annual financial statements.

8

NOTE 5 — 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 June 30, 2011, and December 31, 2010, and the valuation techniques used by the Corporation to determine those fair values. Investment securities with fair value determined by Level 1 input include U.S. Treasury securities. Investment securities with fair value determined by Level 2 inputs include mortgage backed securities, obligations of states and political subdivisions and U.S Government Agency obligations.

			Significant
	Quoted Prices in		Other
	Active Markets for		Observable		Significant
	Identical Assets		Inputs		Unobservable		Balance at June
	(Level 1)		(Level 2)		Inputs (Level 3)		30, 2011
Assets:
June 30, 2011-Investment Securities
U.S. government agency obligations		—		1,202		—		1,202
Mortgage-backed securities		—		3,403		—		3,403
Obligations of states and political subdivisions		—		5,805		—		5,805
	$	—	$	10,410	$	—	$	10,410

			Significant
	Quoted Prices in		Other
	Active Markets for		Observable		Significant		Balance at
	Identical Assets		Inputs		Unobservable		December 31,
	(Level 1)		(Level 2)		Inputs (Level 3)		2010
Assets:
December 31, 2010-Investment Securities
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

9

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 2011 and 2010 to the impaired loans were recorded as additional allocations to the allowance for loan and lease losses. Adjustments in 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 June 30, 2011 and December 31, 2010 (000s omitted):

Assets Measured at Fair Value on a Nonrecurring Basis

			Quoted Prices in Active		Significant Other		Significant
	Balance at		Markets for Identical Assets		Observable Inputs		Unobservable Inputs
	June 30, 2011		(Level 1)		(Level 2)		(Level 3)
Impaired Loans accounted for under FASB ASC 310	$	9,409	$	—	$	—	$	9,409
Foreclosed Assets	$	3,994	$	—	$	—	$	3,994

Assets Measured at Fair Value on a Nonrecurring Basis

	Balance at		Quoted Prices in Active		Significant Other		Significant
	December 31,		Markets for Identical Assets		Observable Inputs		Unobservable Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Impaired Loans accounted for under FASB ASC 310	$	11,433	$	—	$	—	$	11,433
Foreclosed Assets		2,972		—		—		2,972

Fair Value of Financial Instruments

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

The fair value of all financial instruments not discussed below (cash and cash equivalents, federal funds sold, Federal Home Loan Bank stock, accrued interest receivable, federal funds purchased and interest payable) are estimated to be equal to their carrying amounts as of June 30, 2011 and December 31, 2010. The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:

Securities- Fair values for securities are based on quoted market prices.

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 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.

10

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

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

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

	June 30,				December 31,
	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	44,280	$	44,280	$	41,974	$	41,974
Securities — Held to maturity		—		—		10		10
Securities — Available for sale		10,410		10,410		11,466		11,466
Other securities		3,370		3,370		3,865		3,865
Loans held for sale		1,055		1,068		693		703
Net loans		168,149		170,666		182,768		185,268
Accrued interest and late charges receivable		508		508		264		264
Liabilities:
Deposits		197,754		197,686		206,028		206,400
Federal Home Loan Bank advances		30,350		32,141		36,350		38,532
Accrued interest payable		273		273		341		341

11

NOTE 6 — LOANS

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

	June 30, 2011					December 31, 2010
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real Estate Loans:
One-to-four family	$	85,281		48.9		$	93,294		49.1
Multi-family		4,400		2.5			4,783		2.5
Commercial		59,005		33.8			62,998		33.1
Construction or development		2,562		1.5			3,873		2.0
Total real estate loans		151,248		86.7			164,948		86.8
Other loans:
Consumer loans:
Home equity		12,928		7.4			14,814		7.8
Other		2,941		1.7			3,403		1.8
Total consumer loans		15,869		9.1			18,217		9.6
Commercial Business Loans		7,273		4.2			6,882		3.6
Total other loans		23,142		13.3			25,099		13.2
Total Loans		174,390		100.0	%		190,047		100.0	%
Allowance for loan losses		5,917					6,850
Less: Net deferred loan fees		324					429
Total Loans, net	$	168,149				$	182,768

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.

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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 June 30, 2011 are as follows:

June 30, 2011

	30-69		60-89
	DaysPast		DaysPast		Loans 90 Days or More		Total Past		Current
	Due		Due		Past Due		due Loans		Loans		Total Loans
Commercial	$	22	$	11	$	1,375	$	1,408	$	5,865	$	7,273
Commercial Real Estate:
Multi-family		454		—		—	$	454		3,946		4,400
Commercial Real Estate — other		640		—		3,390	$	4,030		54,975		59,005
Consumer:
Consumer — other		194		232		37	$	463		15,202		15,665
Consumer — auto		15		—		—	$	15		189		204
Residential:
Residential — prime		1,194		700		1,077	$	2,971		65,986		68,957
Residential — subprime		343		63		—	$	406		15,918		16,324
Construction:
Construction — prime		—		140		—	$	140		2,422		2,562
Construction — subprime		—		—		—	$	—		—		—
Total	$	2,862	$	1,146	$	5,879	$	9,887	$	164,503	$	174,390

December 31, 2010

	30-69		60-89
	DaysPast		DaysPast		Loans 90 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

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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. No changes have been made to the risk ratings in the second quarter of 2011.

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, 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.

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.

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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.

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.

15

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.

The following table represents the risk category of loans by class based on the most recent analysis performed as of June 30, 2011 and December 31, 2010 (in thousands):

June 30, 2011

			Commercial Real Estate		Commercial Real Estate
	Commercial		Multi-family		Other
Credit Rating	2011		2011		2011
0-2		—		35		2,984
3		11		209		3,384
4		3,505		128		25,704
5		1,814		3,574		8,467
6		737		454		16,387
7		1,206		—		2,079
Total	$	7,273	$	4,400	$	59,005

December 31, 2010

			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

16

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 June 30, 2011.

	June 30, 2011
	Residential — Prime		Residential — Subprime
	2011
Grade
Pass		67,720		16,221
Substandard		1,237		103
Total	$	68,957	$	16,324

	Consumer — Other		Consumer — Auto
	2011
Performing		15,358		204
Nonperforming		307		—
Total	$	15,665	$	204

	Construction - Prime
	2011
Performing		2,562
Nonperforming		—
Total	$	2,562

	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
Performing		3,873
Nonperforming		—
Total	$	3,873

17

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011 and December 31, 2010 (in thousands).

	June 30, 2011
			Unpaid				Average
	Recorded		Principal		Related		Recorded		Interest
	Investment		Balance		Allowance		Investment		Income
With no related allowance recorded:
Commercial	$	1,766	$	1,873	$	—	$	1,879	$	—
Commercial Real Estate:
Commercial Real Estate — Mulit-family		454		467		—		454		23
Commercial Real Estate — other		14,205		20,299		—		20,188		387
Consumer:
Consumer — other		364		364		—		364		22
Consumer — auto		—		—		—		—		—
Residential:
Residential — prime		2,846		3,445		—		3,524		145
Residential — subprime		5,005		5,005		—		4,982		348
With an allowance recorded:
Commercial		64		64		20		65		—
Commercial Real Estate:
Commercial Real Estate — Multi-family		—		—		—		—		—
Commercial Real Estate — other		572		607		202		610		—
Consumer:
Consumer — other		—		—		—		—		—
Consumer — auto		—		—		—		—		—
Residential:
Residential — prime		476		625		292		631		—
Residential — subprime		—		—		—		—		—
Total
Commercial	$	17,061	$	23,310	$	222	$	23,196	$	410
Consumer	$	364	$	364	$	—	$	364	$	22
Residental	$	8,327	$	9,075	$	292	$	9,137	$	493

	December 31, 2010
			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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The following presents by class, the recorded investment in loans and leases on non-accrual status as of June 30, 2011 and December 31, 2010.

Financing Receivables on Nonaccrual Status

	June 30, 2011
Commercial	$	1,830
Commercial real estate:
Commercial Real Estate - mulit-family		—
Commercial Real Estate — other		6,850
Consumer:
Consumer — other		186
Consumer — auto		—
Residential:
Residential — prime		1,933
Residential — subprime		63
Construction
Construction — prime		322
Construction — subprime		—
Total	$	11,184

Financing Receivables on Nonaccrual Status

	December 31, 2010
Commercial	$	1,625
Commercial real estate:
Commercial Real Estate - mulit-family		803
Commercial Real Estate — other		7,949
Consumer:
Consumer — other		89
Consumer — auto		—
Residential:
Residential — prime		3,007
Residential — subprime		263
Construction
Construction — prime		339
Construction — subprime		—
Total	$	14,075

NOTE 7 — ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows for the six months ended June 30, 2011.

Summary of Allowance for Loan Losses

	Three Months Ended						Six Months Ended
	June 30						June 30
	2011			2010			2011			2010
Beginning Balance	$	6,511		$	6,269		$	6,850		$	5,783
Loans Charged off		(699	)		(3,575	)		(1,612	)		(5,011	)
Recoveries		102			49			416			126
Provision for loan losses		3			7,040			263			8,885
Ending Balance	$	5,917		$	9,783		$	5,917		$	9,783

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The allowance for loan losses was $5.9 million at June 30, 2011 representing 3.5% of total loans, compared to $6.9 million at December 31, 2010 or 3.74% of total loans and $9.8 million at June 30, 2010 or 4.8% of total loans. The allowance for loan losses to non-performing loans ratio was 52.9% at June 30, 2011 compared to 48.7% at December 31, 2010 and 41.4% at June 30, 2010. At June 30, 2011 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 June 30, 2011 is as follows:

				Comercial
				Real Estate									Residential -			Residential -
	Commercial			Other			Multi Family			Consumer			Prime			Subprime			Construction			Total
ALLOWANCE FOR CREDIT LOSSES:
Beginning Balance		71			1,790			474			503			3,495			458			59			6,850
Charge-Offs		(60	)		(99	)		(286	)		(159	)		(740	)		(255	)		(13	)		(1,612	)
Recoveries		7			228			—			113			27			41			—			416
Provision		98			(477	)		118			(127	)		123			543			(15	)		263
Ending Balance		116			1,442			306			330			2,905			787			31			5,917
Ending Balance: individually evaluated for impairment		20			202			—			—			292			—			—			514
Ending Balance: collectively evaluated for impairment		96			1,240			306			330			2,613			787			31			5,403
FINANCING RECEIVABLES:
Ending Balance		7,273			59,005			4,400			15,869			68,957			16,324			2,562			174,390
Ending Balance: individually evaluated for impairment		1,830			14,455			454			364			3,322			5,005			322			25,752
Ending Balance: collectively evaluated for impairment		5,443			44,550			3,946			15,505			65,635			11,319			2,240			148,638

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

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

FORWARD-LOOKING STATEMENTS

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

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

20

CRITICAL ACCOUNTING POLICIES

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

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

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

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

OVERVIEW

Following Monarch Community Bank’s 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:

1.	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.
2.	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.
3.	Conducting a formal capital raise — the Bank has interviewed a number of investment banking firms and has received bids from each of them regarding their desire to lead a formal capital raise for the Bank. Management reviewing these bids, including the pricing and the proposed approach to raising capital, and expects to formally engage one of these firms in the near future.

Management continues to focus on the improvement of credit quality at the Bank, and has completed three comprehensive external loan reviews over the last nine 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. In addition, our total non-performing assets have declined from $27.3 million at June 30, 2010 to $15.2 million at June 30, 2011. This constitutes a 44% drop in non-performing assets over a 12 month period. The slight loss available to common shareholders in the 2^nd quarter reflects a one-time loss of $260,000 from the sale of the last large parcel of bare land held in our Other Real Estate Owned portfolio.

In addition to improving credit quality, the bank continues to increase the sources of fee income through the opening of two new residential mortgage origination offices in Kalamazoo and Okemos, Michigan. Management is evaluating additional sites for mortgage origination offices in Michigan and Indiana.

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FINANCIAL CONDITION

Summary.Total assets decreased by $13.9 million, or 5.4%, to $243.0 million at June 30, 2011 compared to $256.9 million at December 31, 2010. Loans, excluding loans held for sale, totaled $168.1 million at June 30, 2011, down 8.0% from $182.8 million at December 31, 2010.

Securities

Securities decreased to $10.4 million at June 30, 2011 compared to $11.5 million at December 31, 2010. The decrease was attributable to the scheduled maturities of $500,000 in U.S. agency securities and scheduled repayment of $556,000 in Mortgage Backed securities. The yield on investment securities has increased to 3.58% during the six months ended June 30, 2011 from 3.01% 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 $14.6 million, or 8.0%, from $182.8 million at December 31, 2010 to $168.1 million at June 30, 2011. The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:

	June 30, 2011					December 31, 2010
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real Estate Loans:
One-to-four family	$	85,281		48.9		$	93,294		49.1
Multi-family		4,400		2.5			4,783		2.5
Commercial		59,005		33.8			62,998		33.1
Construction or development		2,562		1.5			3,873		2.0
Total real estate loans		151,248		86.7			164,948		86.8
Other loans:
Consumer loans:
Home equity		12,928		7.4			14,814		7.8
Other		2,941		1.7			3,403		1.8
Total consumer loans		15,869		9.1			18,217		9.6
Commercial Business Loans		7,273		4.2			6,882		3.6
Total other loans		23,142		13.3			25,099		13.2
Total Loans		174,390		100.0	%		190,047		100.0	%
Allowance for loan losses		5,917					6,850
Less: Net deferred loan fees		324					429
Total Loans, net	$	168,149				$	182,768

One-to-four family loans decreased $8.0 million from year end 2010 as a result of the Bank’s continued strategy to sell a large portion of new one to four family loan originations. Commercial real estate loans and construction loans decreased $5.3 million or 7.93%.

The allowance for loan losses was $5.9 million at June 30, 2011 compared to $6.9 million at December 31, 2010, a decrease of $1.0 million. Net charge offs year to date totaled $1.2 million compared to $4.9 million 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.

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Deposits

Total deposits decreased $8.3 million, or 4.02%, from $206.0 million at December 31, 2010 to $197.8 million at June 30, 2011. The decline in deposits included decreases in certificates of deposits of $11.8 million and in interest bearing checking and money market accounts of $3.3 million offsetting an increase in demand and savings accounts of $6.9 million.

We have used brokered certificates of deposit to diversity our sources of funds and improve pricing at certain terms compared to the local market and advances available from Federal Home Loan Bank of Indianapolis. Due to the fact that 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 $6.0 million to $30.3 million during the six months ended June 30, 2011 compared $36.3 million at December 31, 2010. 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 $12.2 million at June 30, 2011 compared to $12.0 million at December 31, 2010. This represents 5.0% and 4.68% of total assets at June 30, 2011 and December 31, 2010, respectively. An increase in equity for the six months ended June 30, 2011 was attributable to net earnings of $217,000 offset by $171,000 in accrued 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 June 30, 2011 the dividend payable to the Treasury Department totaled $557,000. 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.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income before any provision for loan losses decreased $84,000 for the quarter ended June 30, 2011 compared to the same period in 2010. The net interest margin for the second quarter of 2011 increased 17 basis points to 3.0% compared to 2.83% for the same period in 2010. The improvement in the margin is largely due to the decline in cost of funds as the management continues to monitor cost of funds. Management believes that the cost of funds will continue to decline as higher cost funding sources are eliminated or reduced. The decrease in nonperforming loans and the reduced associated nonaccrual interest adjustment have also significantly impacted the margin. The yield on loans has increased from 5.61% in the second quarter of 2010 to 5.88% for the same period in 2011.

Net interest income before any provision for loan losses decreased $339,000 for the six months ended June 30, 2011 compared to the same period in 2010. The net interest margin increased 2 basis points to 2.98% compared to 2.96% for the same period in 2010. The yield on loans has increased to 5.86% for the six months ended June 30, 2011 compared to 5.81% for the same period in 2010.

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.

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The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made.

	Six Months Ended June 30,							Six Months Ended June 30,
	2011							2010
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
	(dollars in thousands)
Fed Funds and overnight deposits	$	40,398	$	14		0.07	%	$	18,429	$	1		0.01	%
Investment securities	$	10,812	$	192		3.58		$	16,886	$	252		3.01
Other securities	$	3,744	$	39		2.10		$	4,174	$	42		2.03
Loans receivable	$	182,597	$	5,306		5.86		$	223,174	$	6,428		5.81
Total earning assets	$	237,551	$	5,551		4.71		$	262,663	$	6,723		5.16
Demand and NOW Accounts	$	44,475	$	17		0.08		$	39,843	$	57		0.29
Money market accounts	$	40,012	$	98		0.49		$	55,668	$	262		0.95
Savings accounts	$	21,773	$	12		0.11		$	21,285	$	28		0.27
Certificates of deposit	$	99,099	$	1,195		2.43		$	96,213	$	1,503		3.15
Federal Home Loan Bank Advances	$	31,533	$	687		4.39		$	44,518	$	992		4.49
Fed Funds Purchased	$	—	$	—		—		$	5	$	—		0.00
Total interest bearing liabilities	$	236,892	$	2,009		1.17		$	257,532	$	2,842		2.23
Net interest income			$	3,542						$	3,881
Net interest spread						3.00	%						2.94	%
Net interest margin						2.98	%						2.96	%

Provision for Loan Losses

For the three months ended June 30, 2010, the Bank recorded a provision for loan losses of $7.0 million where no provision was recorded in the second 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 $11.2 million at the end of the second quarter of 2011, a decrease of $2.9 million from December 31, 2010. Net charge offs for the quarter ended June 30, 2011 were $598,000 compared to $3.5 million for the same period in 2010.

The Bank recorded a provision for loan losses of $8.9 million for the six months ended June 30, 2010 compared to $263,000 for the same period in 2011. Year to date 2011 net charge offs totaled $1.2 million compared to $4.9 million for the same period a year ago. Net charge offs year to date consisted of 78% one to four family residential mortgages, 4% consumer, 13% commercial real estate including multifamily, and the remaining 5% included construction and commercial and industrial.

Nonperforming assets including the amount of real estate in judgment and foreclosed and repossessed properties, decreased from $17.0 million at the end of 2010 to $15.2 million as of June 30, 2011. This decrease was largely due to a decrease in nonperforming loans, specifically in commercial real estate loans.

The following table presents non-performing assets and certain asset quality ratios at June 30, 2011 and December 31, 2010.

	June 30,2011			December 31,2010
Non-performing loans	$	11,184		$	14,075
Real estate in judgement		1,917			1,430
Foreclosed and repossessed assets		2,077			1,542
Total non-performing assets	$	15,178		$	17,047
Non-performing loans to total loans		6.61	%		7.70	%
Non-performing assets to total assets		6.25	%		6.64	%
Allowance for loan losses to non-performing loans		52.90	%		48.70	%
Allowance for loan losses to net loans receivable		3.50	%		3.75	%

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Non-interest Income

Non-interest income for the quarter ended June 30, 2011 decreased $126,000, or 14.75%, from $854,000 to $728,000 compared to the same period a year ago. This decrease is attributable to a decrease in fees from overdraft protection, and other income, offset by an increase in gain on sale of loans.

Fees and Service charges decreased $108,000 for the three months ended June 30, 2011 compared to the same period a year ago primarily due to a decrease in fees from the overdraft protection program. Other income decreased $129,000 compared to the same period a year ago primarily due to an increase in losses on the disposition of other repossessed property. Net gain on sale of loans increased $123,000 for the quarter ended June 30, 2011 compared to the same period a year ago. Management attributes this to the implementation of a new lending approach. Loan servicing fees decreased $12,000 for the quarter due to the decrease in the secondary market portfolio.

Non-interest income for the six months ended June 30, 2011 decreased $152,000, or 7.9%, compared to the same period in 2010. Fees and Service charges decreased $206,000 for the six months ended June 30, 2011 compared to the same period a year ago primarily due to the reasons mentioned previously. A gain of $37,000 on the sale of investments was recognized in the six months of 2010 as management replaced securities to reposition maturities and improve overall credit quality of the portfolio compared to no gain in 2011. Loan servicing fees decreased $21,000 due to the decrease in the secondary market portfolio. Net gain on sale loans increased $81,000 for the six months ended June 30, 2011 due to the reasons mentioned previously. Other income increased $31,000 primarily due to a $38,000 increase in gain on sale of other repossessed property.

Non-interest Expense

Noninterest expense decreased $8,000, or .32% for the quarter ended June 30, 2011 compared to the same period a year ago. Salaries and employee benefits decreased $66,000. The decline in personnel expense was primarily attributable to a decline in general staffing. Professional services decreased $59,000 primarily due to decreases in legal fees associated with nonperforming loans. Foreclosed property expense increased $86,000 for the quarter due to an increase in additional write down of other repossessed property and increased expenses from maintenance costs and taxes on a higher level of properties in other repossessed property. All other expenses increased $31,000.

Noninterest expense decreased $139,000, or 2.8%, for the six months ended June 30, 2011 compared to the same period ending a year ago. Salaries and employee benefits decreased $101,000, in 2011. Professional services decreased $53,000 primarily due to decreases in legal fees associated with nonperforming loans. Occupancy and equipment decreased $17,000. Foreclosed property expense decreased $32,000 year to date. The decrease was attributable to a decrease in taxes paid on other repossesses properties. Amortization of mortgage servicing rights increased $20,000 due to an increase in secondary market activity. Other general and administrative expenses increased $29,000. All other expenses increased $15,000.

Federal Income Tax Expense

An income tax benefit was not recognized for the first six months of 2011. A $36,000 tax benefit for the six months of 2011, primarily associated with the $217,000 net earnings before income taxes, was offset by a corresponding decrease in the valuation allowance on deferred tax assets.

LIQUIDITY

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

At June 30, 2011, the Bank was considered “adequately capitalized” under regulatory guidelines which subjects the Bank to restrictions under the FDIC. These restrictions prohibit the Bank from accepting, renewing, or rolling over brokered deposits except with a waiver from the FDIC. This act also subjects the Bank to restrictions on the interest rates that can be paid on deposits.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, the Bank maintains a strategy of investing in various investments and lending products. The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. Certificates of deposit scheduled to mature in one year or less at June 30, 2011 totaled $44.9 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.

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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 June 30, 2011 and based on current collateral levels, the Bank could borrow an additional $8.8 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 $2.3 million during the six months ended June 30, 2011 compared to $4.0 million decrease for the same period in 2010. The primary sources of cash for the six months ended June 30, 2011 were $15.2 million in proceeds from the sale of mortgage loans, $1.1 million maturities of available-for-sale investment securities and $12.5 of principal loan collections in excess of loan originations compared to $10.9 million in proceeds from the sale of mortgage loans, $3.9 million in the sale and maturities of available-for-sale investment securities and $5.4 of principal loan collections in excess of loan originations. The primary uses of cash for the six months ended June 30, 2011 were $15.6 million of mortgage loans originated for sale, $6.0 million in repayments of FHLB advances and a decrease in deposits of $8.3 million compared to a decrease in deposits of $11.9 million, $10.9 million of mortgage loans originated for sale and $4.2 million in purchases of available-for-sale investment securities.

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

CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS

The Corporation has certain obligations and commitments to make future payments under contracts. At June 30, 2011, the aggregate contractual obligations and commitments are:

	Payments Due by Period
			Less than		1-3		3-5		After
	Total		1 year		years		years		5 years
	(Dollars in Thousands)
Certificates of deposit	$	93,256	$	44,940	$	37,952	$	10,364	$	—
FHLB advances		30,350		18,175		12,175		—		—
Total	$	123,606	$	63,115	$	50,127	$	10,364	$	—

	Amount of commitment expiration per period
			Less than		1 -3		3-5		After
	Total		1 year		years		years		5 years
	(Dollars in Thousands)
Commitments to grant loans	$	2,889	$	2,889	$	—	$	—	$	—
Unfunded commitments under HELOCs		11,619		2,330		2,242		1,884		5,163
Unfunded commitments under Contruction loans		294		267		12		10		5
Unfunded commitments under Commercial LOCs		147		116		31		—		—
Letters of credit		—		—		—		—		—
Total	$	14,949	$	5,602	$	2,285	$	1,894	$	5,168

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

CAPITAL RESOURCES

The Bank is subject to various regulatory capital requirement administered by federal and state banking agencies. The Bank’s regulatory capital ratios as of June 30, 2011 were as follows: Tier 1 leverage ratio 4.75%, Tier 1 risk-based capital ratio 7.61%; and total risk-based capital 8.89%.

In May 2010, the Bank agreed with the FDIC to increase the Bank’s Tier 1 risk-based capital ratio to at least 9%, and its total risk-based capital ratio to at least 11.0%. At June 30, 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 its Form 10 K for the year ended December 31, 2010 in connection with uncertainty about the Company’s ability to continue as a going concern.

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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 September 27, 2010 with the complete details of the Written Agreement.

ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK

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

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

ITEM 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 June 30, 2011 was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer, Chief Financial Officer and several other members of the Corporation’s senior management. The Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2011, 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.

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PART II-OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES

As previously disclosed, in the first quarter of 2010, the Corporation elected to suspend quarterly cash dividend payments on its Series A fixed rate, cumulative perpetual preferred stock issued to the U.S. Treasury. Therefore, the Corporation is currently in arrears with the dividend payments on the preferred stock, as permitted by the related documentation. As of June 30, 2011, the amount of the arrearages on the Series A fixed rate, cumulative perpetual preferred stock was $557,000.

Item 4. [RESERVED]

Item 5. OTHER INFORMATION

Not applicable

Item 6. EXHIBITS

See the index to exhibits.

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SIGNATURES

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

	MONARCH COMMUNITY BANCORP, INC.
Date: August 10, 2011	By:	/s/Richard J. DeVries
		Richard J. DeVries
		President and Chief Executive Officer
Date: August 10, 2011	And:	/s/Rebecca S. Crabill
		Rebecca S. Crabill
		Senior Vice President, Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
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.
101	Interactive Data File.

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