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

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

Commission file number: 000-49814

MONARCH COMMUNITY BANCORP, INC.

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: þ No: o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 October 31, 2009, there were 2,045,006 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 — September 30, 2009 and December 31, 2008
Condensed Consolidated Statements of Income — Three and Nine Months Ended September 30, 2009 and 2008			2
Condensed Consolidated Statements of Changes in Stockholder’s Equity — Nine Months Ended September 30, 2009 and 2008			3
Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2009 and 2008			4
Notes to Condensed Consolidated Financial Statements			5-9
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			9-16
Item 3 — Quantitative and Qualitative Disclosures about Market Risk			16
Item 4T— Controls and Procedures			16
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings			17
Item 1A — Risk Factors			17
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			17
Item 3 — Defaults Upon Senior Securities			17
Item 4 — Submission of Matters to a Vote of Security Holders			17
Item 5 — Other Information			17
Item 6 — Exhibits			17
SIGNATURES			18
CERTIFICATIONS			19-22

PART I—FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

		(Unaudited)
		September 30,				December 31,
		2009				2008
		(Dollars in thousands,
		except per share data)
Assets
Cash and due from banks			23,830				5,595
Federal Home Loan Bank overnight time and other interest bearing deposits			2,290				677
Total cash and cash equivalents			26,120				6,272
Securities — Available for sale			18,360				8,916
Securities — Held to maturity			23				37
Other securities			4,237				4,237
Loans held for sale			787				860
Loans, net			230,476				247,542
Foreclosed assets, net			4,187				2,076
Premises and equipment			4,345				4,456
Goodwill			9,606				9,606
Core deposit intangible			567				681
Other assets			8,608				7,124
Total assets		$	307,316			$	291,807
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing		$	14,047			$	13,883
Interest bearing			201,657				178,273
Total deposits			215,704				192,156
Federal Home Loan Bank advances			49,678				60,178
Fed Funds Purchased			—				1,000
Accrued expenses and other liabilities			1,318				2,203
Total liabilities			266,700				255,537
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 September 30, 2009			6,737				—
Common stock — $0.01 par value, 20,000,000 shares authorized, 2,045,006 shares issued and outstanding at September 30, 2009 and September 30, 2008			20				20
Common stock warrants issued and outstanding 260,962 as of September 30, 2009			56				—
Additional paid-in capital			21,196				21,152
Retained earnings			13,175				15,867
Accumulated other comprehensive income			210				69
Unearned compensation			(778	)			(838	)
Total stockholders’ equity			40,616				36,270
Total liabilities and stockholders’ equity		$	307,316			$	291,807

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Income (Unaudited)

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30				September 30,				September 30				September 30
		2009				2008				2009				2008
		(Dollars in thousands, except per share data)
Interest Income
Loans, including fees		$	3,770			$	4,136			$	11,598			$	12,283
Investment securities			199				146				479				484
Federal funds sold and overnight deposits			1				14				4				100
Total interest income			3,970				4,296				12,081				12,867
Interest Expense
Deposits			1,218				1,421				3,811				4,458
Federal Home Loan Bank advances			582				691				1,882				1,992
Total interest expense			1,800				2,112				5,693				6,450
Net Interest Income			2,170				2,184				6,388				6,417
Provision for Loan Losses			1,250				731				5,413				1,488
Net Interest Income After Provision for Loan Losses			920				1,453				975				4,929
Non-interest Income
Fees and service charges			579				598				1,643				1,741
Loan servicing fees			116				110				333				330
Net gain on sale of loans			370				101				1,828				563
Net gain (loss) on sale of securities			—				—				2				2
Other income			27				89				127				204
Total non-interest income			1,092				898				3,933				2,840
Non-interest Expense
Salaries and employee benefits			1,190				1,063				3,468				3,330
Occupancy and equipment			286				262				797				779
Data processing			93				185				501				575
Amortization of mortgage servicing rights			110				91				446				321
Professional services			152				108				404				301
Amortization of core deposit intangible			35				43				113				139
NOW account processing			39				40				119				129
ATM/Debit card processing			57				52				175				149
Foreclosed property expense			144				84				253				169
Other general and administrative			379				330				1,296				1,008
Total non-interest expense			2,485				2,258				7,572				6,900
Income — Before income taxes			(473	)			93				(2,664	)			869
Income Taxes			(121	)			36				(669	)			232
Net Income		$	(352	)		$	57			$	(1,995	)		$	637
Dividends and amortization of discount on preferred stock		$	88			$	—			$	227			$	—
Net Income available to common stock		$	(440	)		$	57			$	(2,222	)		$	637
Earnings Per Share
Basic		$	(0.22	)		$	0.03			$	(1.13	)		$	0.30
Diluted		$	(0.22	)		$	0.03			$	(1.13	)		$	0.30

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

		Preferred Stock								Common Stock																Accumulated
																		Additional								Other
		Number of								Number of								Paid in				Retained				Comprehensive				Unearned
		Shares				Amount				Shares				Amount				Capital				Earnings				Income (Loss)				Compensation				Total
Balance — January 1 , 2008											2,322				23				23,828				16,341				52				(1,158	)			39,086
Vesting of restricted shares																															220				220
259,733 shares repurchased at an average price $9.91/share											(260	)			(3	)			(2,596	)															(2,599	)
Stock option expenses																			8																8
Net Income																							637												637
Change in unrealized loss on
securities available-for-sale, net of tax																											(2	)							(2	)
Total comprehensive income																																			635
Dividends paid ($0.27/share)			—				—				—				—				—				(587	)			—				—				(587	)
Balance —September 30, 2008			—				—				2,062				20				21,240				16,391				50				(938	)			36,763
Balance — January 1, 2009			—				—				2,047			$	20			$	21,152			$	15,867			$	69			$	(838	)		$	36,270
Vesting of restricted shares											(1	)						$	(4	)											60				56
Issuance of preferred stock			6785				6785																												6,785
Discount on preferred stock							(56	)																											(56	)
Common stock warrants			261				56																												56
Stock option expenses																			48																48
Accretion of preferred stock disocunt							8																(8	)											—
Comprehensive Income:
Net Income																							(1,995	)											(1,995	)
Change in unrealized loss on																											141								141
securities available-for-sale, net of tax																																			—
Total comprehensive income																																			(1,854	)
Dividends on preferred stock																							(178	)											(178	)
Dividends paid ($0.25/share)			—				—				—				—				—				(511	)			—				—				(511	)
Balance — September 30, 2009			7,046				6,793				2,046				20				21,196				13,175				210				(778	)		$	40,616

Condensed Consolidated Statements of Cash Flows (Unaudited)

		Nine Months Ended
		September, 30
		2009				2008
		(Dollars in thousands)
Cash Flows From Operating Activities
Net Income			(1,995	)		$	637
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization			1,006				834
Provision for loan losses			5,413				1,488
Stock option expense			48				8
Gain on sale of foreclosed assets			47				(9	)
Mortgage loans originated for sale			(80,110	)			(25,617	)
Proceeds from sale of mortgage loans			82,011				25,832
Gain on sale of mortgage loans			(1,828	)			(563	)
(Gain) Loss on sale of available for sale securities			(2	)			(2	)
Earned stock compensation			60				220
Net change in:
Deferred loan fees			80				(34	)
Accrued interest receivable			(61	)			76
Other assets			(1,871	)			483
Accrued expenses and other liabilities			(956	)			(194	)
Net cash provided by operating activities			1,842				3,159
Cash Flows From Investing Activities
Activity in available-for-sale securities:
Purchases			(17,816	)			(2,268	)
Proceeds from maturities of securities			8,489				4,401
Activity in held-to-maturity securities:
Purchases			—				(7	)
Proceeds from maturities of securities			14				208
Loan originations and principal collections, net			8,856				(20,036	)
Proceeds from sale of foreclosed assets			559				1,619
Proceeds from sale of premises and equipment			—				—
Purchase of premises and equipment			(238	)			(212	)
Net cash provided by (used in) investing activities			(136	)			(16,295	)
Cash Flows From Financing Activities
Net increase in deposits			23,548				13,257
Repurchase of common stock			—				(2,599	)
Issuance of preferred stock, net			6,734				—
Issuance of Warrants			56				—
Cash Dividends-preferred stock			(178	)			—
Cash Dividends-common stock			(511	)			(587	)
Amortization of common stock warrants			(7	)			—
Proceeds from FHLB advances			—				38,500
Repayment of FHLB advances			(10,500	)			(40,500	)
Repayment of Fed Funds purchased			(1,000	)			—
Net cash provided by financing activities			18,142				8,071
Net Increase (Decrease) in Cash and Cash Equivalents			19,848				(5,065	)
Cash and Cash Equivalents — Beginning			6,272				13,842
Cash and Cash Equivalents — End		$	26,120			$	8,777
Supplemental Cash Flow Information:
Cash paid for:
Interest			5,757				6,492
Income taxes			236				385
Noncash investing activities:
Loans transferred to foreclosed assets			2,717				1,801

See accompanying notes to condensed consolidated financial statements.

MONARCH COMMUNITY BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Monarch Community Bancorp, Inc. (the “Corporation”) was incorporated in 2002 under Maryland law to hold all of the common stock of Monarch Community Bank (the “Bank”), formerly known as Branch County Federal Savings and Loan Association. The Bank converted to a stock savings institution effective August 29, 2002. In connection with the conversion, the Corporation sold 2,314,375 shares of its common stock in a subscription offering.

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

BASIS OF PRESENTATION

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

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

The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes required by generally accepted accounting principles in annual consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Corporation’s Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.

The results of operations for the three and nine month periods ended September 30, 2009 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 2009 amounts have been reclassified to conform to the 2008 presentation.

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				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30, 2009				September 30, 2008				September 30, 2009				September 30, 2008
Basic earnings per share
Numerator:
Net income		$	(352	)		$	57			$	(1,995	)		$	637
Dividends and amortization of discount on preferred stock		$	88			$	—			$	227			$	—
Net Income available to common stock		$	(440	)		$	57			$	(2,222	)		$	637
Denominator:
Weighted average common shares outstanding			2,046				2,097				2,046				2,196
Less: Average unallocated ESOP shares			(74	)			(83	)			(74	)			(83	)
Less: Average non-vested RRP shares			(6	)			(11	)			(7	)			(14	)
Weighted average common shares outstanding for basic earnings per share			1,966				2,003				1,965				2,099
Basic earnings per share		$	(0.22	)		$	0.03			$	(1.13	)		$	0.30
Diluted earnings per share
Numerator:
Net Income available to common stock		$	(440	)		$	57			$	(2,222	)		$	637
Denominator:
Weighted average common shares outstanding for basic earnings per share			1,966				2,003				1,965				2,099
Add: Dilutive effects of restricted stock, stock options and warrants			—				—				—				—
Weighted average common shares and dilutive potential common shares outstanding			1,966				2,003				1,965				2,099
Diluted earnings per share		$	(0.22	)		$	0.03			$	(1.13	)		$	0.30

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2009, the FASB issued Accounting Standards Update 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 provides guidance for valuing liabilities within the FASB Codification’s fair value hierarchy. ASU 2009-05 reiterates that the definition of fair value for a liability is the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date. It also reiterates that a company must reflect its own nonperformance risk, including its own credit risk, in fair value measurements of liabilities and that the liability’s nonperformance risk would be the same both before and after the hypothetical transfer on which the fair-value measurement is based. ASU 2009-05 is effective for interim and annual periods beginning after August 27, 2009, and applies to all fair-value measurements of liabilities required by GAAP. The adoption of ASU 2009-05 on October 1, 2009 did not have a material impact on the Corporation’s consolidated financial condition or results of operations.

FASB Accounting Standards Codification: In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM (Codification) and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162” (SFAS 168). SFAS 168 establishes the Codification as the single authoritative reference for nongovernmental U.S. GAAP, except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. SFAS 168 divides nongovernmental U.S. GAAP into two levels; that considered authoritative under the Codification and guidance that is non-authoritative. SFAS 168 became effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS 168 did not have a material impact on the Corporation’s consolidated financial condition or results of operations.

In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP SFAS 132(R)-1). FSP SFAS 132(R)-1 amends SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” existing guidance to provide additional guidance on an employer’s disclosures in an employer’s financial statements about plan assets of a defined benefit pension or other postretirement plan. Upon initial application, the provisions of FSP SFAS 132(R)-1 are not required for earlier periods that are presented for comparative purposes. The disclosures about plan assets required by FSP SFAS 132(R)-1 must be provided for fiscal years ending after December 15, 2009 and are not expected to have a material impact on the Corporation’s consolidated financial condition or results of operations.

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 Company 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 Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

The following table present information about the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2009, and the valuation techniques used by the Company to determine those fair values.

Significant

Other

Quoted Prices in Active

Observable

Significant

Markets for Identical

Inputs (Level

Unobservable

Balance at

Assets (Level 1)

2)

Inputs (Level 3)

September 30, 2009

Assets

Investment securities- available — for — sale

$

6,352

$

12,008

$

—

$

18,360

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans and foreclosed assets. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the Corporation’s assets at fair value on a nonrecurring basis as of September 30, 2009 (000s omitted):

Assets Measured at Fair Value on a Nonrecurring Basis

		Balance at				Quoted Prices in Active				Significant Other				Significant				Change in Fair Value for the
		September				Markets for Identical				Observable Inputs				Unobservable Inputs				quarter ended September 30,
		30, 2009				Assets (Level 1)				(Level 2)				(Level 3)				2009
Impaired Loans accounted for under FASB ASC 310			11,290				—				—				9,455				2,487
Foreclosed Assets			1,615				—				—				1,615				953

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 September 30, 2009 and December 31, 2008. 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.

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):

		September								December 31,
		2009								2008
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Assets:
Cash and cash equivalents		$	26,120			$	26,120			$	6,272			$	6,272
Securities — Held to maturity			23				23				37				37
Securities — Available for sale			18,360				18,360				8,916				8,916
Other securities			4,237				4,237				4,237				4,237
Loans held for sale			787				1,237				860				864
Net loans			230,476				239,342				247,542				250,068
Accrued interest and late charges receivable			1,361				1,361				1,300				1,300
Liabilities:
Federal Home Loan Bank advances			49,678				53,802				60,178				63,252
Fed funds purchased			—				—				1,000				1,000
Deposits			215,704				217,773				192,156				192,045
Accrued interest payable			426				426				526				526

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.

The Corporation is not aware of any market or institutional trends, events, or circumstances that will have or are likely to have a material effect on liquidity, capital resources, or results of operations except as discussed herein. Also, the Corporation is not aware of any current recommendations by regulatory authorities that will have such effect if implemented.

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.

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.

Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of an acquisition over the fair value of net identifiable tangible and intangible assets acquired. Under the provisions of FASB ASC 350-10-35-1 Intangibles—Goodwill and Other, goodwill is no longer amortized into the income statement over an estimated life, but rather is tested at least annually for impairment. Impairment of goodwill is evaluated by reporting unit and is based on a comparison of the recorded balance of goodwill to the applicable market value or discounted cash flows. To the extent that impairment may exist, the current carrying amount is reduced by the estimated shortfall. Intangible assets which have finite lives are amortized over their estimated useful lives and are subject to impairment testing.

In accordance with the Corporation’s annual review policy, its annual goodwill impairment analysis is conducted in the fourth quarter. The financial services industry and securities markets continue to be adversely affected by declining values of nearly all asset classes. If current economic conditions continue to result in a prolonged period of economic weakness, the Corporation’s business segments, including the Community Banking segment, may be adversely affected, which may result in impairment of goodwill and other intangibles in the future. Any resulting impairment loss could have a material adverse impact on the Corporation’s financial condition and its results of operations.

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.

FINANCIAL CONDITION

Assets

Total assets increased $15.5 million, or 5.3%, to $307.3 million at September 30, 2009 compared to $291.8 million at December 31, 2008. Management attributes this growth to a strategy for 2009 that emphasizes growth in our investment portfolio. The increase in assets is also a by-product of management’s continued focus on the growth of core deposits which has generated increased cash balances.

Securities

Securities increased to $18.4 million at September 30, 2009 compared to $8.9 million at December 31, 2008. The increase was attributable to $11.6 million in securities being purchased primarily to offset costs associated with the Capital Purchase Program (CPP).Those costs include an annual dividend of 5% and amortization of the discount on the preferred stock of .16%. The tax equivalent cost of the capital is 8%. See Equity for further discussion on the Capital Purchase Program (CPP). The yield on investment securities has decreased to 3.46% during the nine month ended September 30, 2009 from 4.29% for the same period a year ago. Management has slowed further purchasing of securities due to the decline in the current market yield. With the increase in securities we have continued to maintain a diversified securities portfolio, which includes obligations of U.S. government-sponsored agencies, securities issued by states and political subdivisions and mortgage-backed securities. We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow.

Loans

The Bank’s net loan portfolio decreased by $17.1 million, or 6.9%, from $247.5 million at December 31, 2008 to $230.5 million at September 30, 2009. The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:

		September 30, 2009								December 31, 2008
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
Real Estate Loans:
One-to-four family		$	111,102				46.9			$	124,855				49.8
Multi-family			5,455				2.3				5,728				2.2
Commercial			79,667				33.6				75,730				30.2
Construction or development			8,421				3.6				9,499				3.8
Total real estate loans			204,645				86.4				215,812				86.0
Other loans:
Consumer loans:
Home equity			18,717				7.9				20,677				8.2
Other			4,862				2.0				5,737				2.3
Total consumer loans			23,579				10.0				26,414				10.5
Commercial Business Loans			8,731				3.7				8,609				3.5
Total other loans			32,310				13.7				35,023				14.0
Total Loans			236,955				100.0	%			250,835				100.0	%
Allowance for loan losses			5,986								2,719
Less: Net deferred loan fees			493								574
Total Loans, net		$	230,476							$	247,542

One-to-four family loans decreased $13.8 million from year end 2008 as a result of the Bank’s continued strategy to sell a large portion of new one to four family loan originations. Historically low rates on residential mortgages have provided us the opportunity to refinance loans and increase our gains on sale of mortgages substantially. Commercial real estate loans increased $4 million or 5.2%. The Bank expects future loan growth to come primarily from commercial lending with a focus on in-market lending. Given the difficult economic conditions that we are facing in our market we remain cautiously optimistic about the Bank’s potential for loan growth during the remainder of the year.

The allowance for loan losses was $6 million at September 30, 2009 compared to $2.7 million at December 31, 2008, an increase of $3.3 million. The increase was necessitated by the increases in net charge offs and nonperforming assets which are directly related to the continued overall weakness in the Michigan economy. Year to date 2009 net charge offs totaled $2.3 million compared to $1.2 million for the same period a year ago. Net charge offs year to date consisted of 64% one to four family residential mortgages, 18% commercial real estate, 13% consumer and the remaining 5% included construction, commercial and industrial and home equity lines of credit. See “Provision for Loan Losses” below for further explanation regarding charge-offs and non-performing loans. We continue to be diligent in review of 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. The allowance balance is established after considering past loan loss experience, current economic conditions, composition of the loan portfolio, delinquencies, and other relevant factors.

Deposits

Total deposits increased $23.5 million, or 12.3%, from $192.2 million at December 31, 2008 to $215.7million at September 30, 2009. The increase is attributed to an increase of $10.1 million in local certificates of deposit, an increase of $5.9 million in demand and Now accounts, an increase in money market accounts of $15.1 million and an increase of $400,000 in savings accounts. Brokered deposits decreased $8 million as management continues to try to reduce its reliance on wholesale funding. The increase in local certificates of deposits and money market accounts is largely due to management’s efforts to remain competitive with interest rates in these categories of deposits. The increase in money market accounts has provided funding so it has not been necessary for management to borrow additional FHLB advances or increase brokered deposits. Brokered deposits have been managed to provide additional liquidity or reduce excess liquidity depending on current conditions. Management expects future deposit growth to come from increased sales and marketing efforts to attract lower cost savings and checking accounts as well as product enhancement.

Federal Home Loan Bank Advances

Total Federal Home Loan Bank (FHLB) advances decreased to $49.7 million as of September 30, 2009 from $60.2 at December 31, 2008. The decrease is attributable to the repayment of $10.5 million of FHLB advances during the nine months ended September 30, 2009. Management is attempting to reduce its reliance on borrowed funds through the growth of low cost core deposits. Should this strategy not succeed, management anticipates the need for future borrowings to fund loan growth. See “Net Interest Income” below, and also see “Liquidity” later in this report regarding available borrowings.

Equity

Total equity was $40.6 million at September 30, 2009 compared to $36.3 million at December 31, 2008. This represents 13.2% and 12.4% of total assets at September 30, 2009 and December 31, 2008, respectively. Increases in equity primarily resulted from the issuance of preferred stock in the amount of $6.8 million associated with the Capital Purchase Program. Decreases in equity for the nine months ended September 30, 2009 included a net loss of $2 million and $689,000 in dividend payments, which included dividends to common shareholders of $511,000 and $178,000 on the Preferred stock. The annual 5% dividend on the Preferred Stock together with the amortization of the discount will reduce net income (or increase the net loss) applicable to common stock by approximately $350,000 annually. Management intends to utilize funds provided by the issuance of the preferred stock to invest in securities and pursue lending opportunities. Management considers its equity position to be strong.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income before any provision for loan losses decreased $14,000 for the quarter ended September 30, 2009 compared to the same period in 2008. The Bank’s net interest margin decreased to 3.16% for the quarter ended September 30, 2009 from 3.31% for the quarter ended September 30, 2008 as a result of the yield on earning assets declining faster than the cost of funds. This is attributable to the falling rate environment consistent through 2008 and 2009. Interest income from loans represented 95% of total interest income for the three months ended September 30, 2009 compared to 96.3% for the same period in 2008.

Net interest income before any provision for loan losses decreased $29,000 for the nine months ended September 30, 2009 compared to the same period in 2008. The Bank’s net interest margin decreased to 3.10% for the nine months ended September 30, 2009 from 3.29% for the nine months ended September 30, 2008 as our loan yields decreased more than our deposit costs compared to the same period a year ago as a result of falling rate environment mentioned previously.

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

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.

		Nine Months Ended September 30,												Nine Months Ended September 30,
		2009												2008
		Average				Interest								Average				Interest
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
		(dollars in thousands)												(dollars in thousands)
Fed Funds and overnight deposits		$	9,805			$	4				0.05	%		$	8,905			$	100				1.50	%
Investment securities			16,485				426				3.46				10,373				334				4.29
Other securities			4,174				53				1.70				4,174				150				4.79
Loans receivable			244,355				11,598				6.35				236,314				12,283				6.92
Total earning assets		$	274,819			$	12,081				5.88			$	259,766			$	12,867				6.60
Demand and NOW Accounts		$	33,297			$	68				0.27			$	32,270			$	72				0.30
Money market accounts			44,999				610				1.81				34,175				774				3.02
Savings accounts			19,011				53				0.37				19,267				61				0.42
Certificates of deposit			105,314				3,080				3.91				104,036				3,551				4.55
Fed Funds Purchased			—				—				0.00				—				—				0.00
Federal Home Loan Bank Advances			55,763				1,882				4.51				54,246				1,992				4.89
Total interest bearing liabilities		$	258,384				5,693				2.95			$	243,994				6,450				3.52
Net interest income						$	6,388											$	6,417
Net interest spread											2.93	%											3.08	%
Net interest margin											3.10	%											3.29	%

Provision for Loan Losses

The provision for loan losses was $1.3 million in the third quarter of 2009, compared to $731,000 in the third quarter of 2008 and $5.4 million for the nine month period ended September 30, 2009, compared to $1.5 million in the same period of 2008. Net charge-offs for the quarter ended September 30, 2009 totaled $814,000, compared to $442,000 for the quarter ended September 30 , 2008 and $2.1 million for the nine months ended September 30, 2009, compared to $1.0 million for the same period a year ago. The significant increase in the provision was primarily driven by the continued deteriorating economic conditions in Michigan and weaknesses in the local real estate markets which resulted in downgrades to the credit ratings of certain loans in the portfolio and a significant increase in the balances of nonperforming loans.

Nonperforming assets including the amount of real estate in judgment and foreclosed and repossessed properties, increased from $4.6 million at the end of 2008 to $13.6 million as of September 30, 2009. This increase was largely due to an increase nonperforming loans, specifically in commercial real estate and one to four family residential mortgage loans. Management also classified a large commercial loan relationship in the amount of $4 million as non-performing during the second quarter.

The following table presents non-performing assets and certain asset quality ratios at September 30, 2009 and December 31, 2008.

		September 30, 2009				December 31, 2008
		(In thousands)
Non-performing loans		$	9,445			$	2,571
Real estate in judgement			2,571				1,327
Foreclosed and repossessed assets			1,615				749
Total non-performing assets		$	13,631			$	4,647
Non-performing loans to total loans			3.98	%			1.04	%
Non-performing assets to total assets			4.44	%			1.59	%
Allowance for loan losses to non-performing loans			63.40	%			105.76	%
Allowance for loan losses to net loans receivable			2.52	%			1.10	%

The Bank had 43 non-performing loan relationships as of September 30, 2009 compared to 24 non-performing loan relationships as of December 31, 2008.

Non-interest Income

Non-interest income for the quarter ended September 30, 2009 increased $194,000, or 21.6%, from $898,000 to $1.1 million compared to the same period a year ago. This increase is attributable to an increase in gain on sale of loans offset by a decrease in fees and services charges.

Net gain on sale loans increased $269,000 for the quarter ended September 30, 2009 from $101,000 to $370,000 compared to the same period a year ago. The increase is largely due to the falling rate environment which has generated a significant amount of one to four family residential mortgage refinancing. Management expects this trend to decline through the latter half of 2009. Fees and service charges decreased $19,000 for the quarter ended September 30, 2009 from $598,000 to $579,000 compared to the same period a year ago. This decrease was a result of a decrease in overdraft fees of $17,000 offset by an increase of $2,000 in all other fees and charges. Future increases in this source of income are dependent on the Bank increasing the number of checking account customers. Management does not expect significant increases in Bounce Protection income from its existing customer base.

Non-interest income for the nine months ended September 30, 2009 increased $1.1 million or 38.5%, from $2.8 million to $3.9 million for the same period in 2008. Net gain on sale loans increased $1.3 million for the nine months ended September 30, 2009 from $563,000 to $1.8 million compared to the same period a year ago. Fees and Service charges decreased $98,000 for the nine months ended September 30, 2009 from $1.7 million to $1.6 million compared to the same period a year ago. As mentioned previously the decrease in fees and service charges is primarily due to the decrease in overdraft fees of $91,000. Other income decreased $74,000 from $204,000 to $127,000.

Non-interest Expense

Noninterest expense increased $227,000, or 10.1%, for the three months ended September 30, 2009 compared to the same period ending a year ago. Salaries and employee benefits increased $127,000 from $1.1 million to $1.2 million due normal increases in salaries and wages. Amortization of mortgage servicing rights increased $19,000 as a result of a continued increase in mortgage loan payoffs due to refinancing associated with the decrease of interest rates in the fourth quarter of 2008. Other general and administrative expenses increased $49,000, from $330,000 to $379,000; reflecting the increase in the quarterly FDIC assessment. Foreclosed property expense increased $60,000, from $84,000 to $144,000 due to increases in maintenance costs, loan collection costs, and losses and impairment charges associated with the disposition of other real estate. Professional services increased $44,000 from $108,000 to $152,000 primarily due to increases in legal fees associated with non-performing loans. Other operating expenses increased $20,000. Data processing decreased $92,000 from $185,000 to $93,000 due to a one time credit recognized with the renegotiation of our contract with the third party data processor Jack Henry and Associates.

Noninterest expense increased $672,000, or 9.7%, for the nine months ended September 30, 2009 compared to the same period ending a year ago. Salaries and employee benefits increased $138,000 from $3.3 million to $3.5 million due normal increases in salaries and wages. Other general and administrative expenses increased $288,000, from $1 million to $1.3 million; this is primarily due to the increase in FDIC insurance reflecting the increase of $136,000 one-time special assessment on all insured financial institutions equal to approximately 5 basis points of total assets, less tier one equity and the quarterly increases implemented earlier in the year.. Amortization of mortgage servicing rights increased $125,000, from $321,000 to $446,000, also for reasons mentioned previously. Professional services increased $103,000, from $301,000 to $404,000 primarily due to increases in legal fees associated with non-performing loans and legal fees associated with the issuance of preferred stock and common stock warrants as part of the Capital Purchase Program transaction. Other operating expenses increased $92,000. The increase in other operating expenses was due to increases in loan collection costs, and losses and impairment charges associated with the disposition of other real estate and additional costs associated with the reissuance of ATM/debit cards associated with a compromised card processing vendor. Data processing decreased $74,000 due to the reasons mentioned previously.

Federal Income Tax Expense

An income tax benefit totaling $121,000 was recorded in the third quarter of 2009, an effective rate of approximately 25% of the pretax loss. A significant component of income tax expense is made up of general tax credits generated each year. Due to the current year loss, these tax credits may not be fully utilized. Accordingly, in the second quarter of 2009, a valuation allowance of $300,000 was established on general business tax credit carry forward that are not expected to be utilized.

An income tax benefit totaling $669,000 was recorded for nine months ended September 30, 2009 compared to a provision for federal income tax of $232,000 for the same period a year ago. The effective tax rate for the nine months ended September 30, 2009 was 25.1% compared to 26.7% for the same period in 2008. The difference between the effective tax rates and the federal corporate income tax rate of 34% is attributable to the low income housing credits available to the Bank from the investment in the limited partnership as well as fluctuation of permanent book and tax differences such as non-taxable income and non-deductible expenses.

LIQUIDITY

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.

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 September 30, 2009 totaled $57.6 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 deposits and Federal Home Loan Bank advances. Deposits can be obtained in the local market area and from out of market sources; however, this may require the Bank to offer interest rates higher than those of the competition. At September 30, 2009 and based on current collateral levels, the Bank could borrow an additional $19.9 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 Company 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 $19.8 million during the nine months ended September 30, 2009 compared to a $5 million decrease for the same period in 2008. The primary sources of cash for the nine months ended September 30, 2009 were $6.8 million increase in cash generated by the issuance of preferred stock, $23.5 million increase in deposits, $80.1 million in proceeds from the sale of mortgage loans, $8.5 million in maturities of available-for-sale investment securities and $8.9 of principal loan collections in excess of loan originations compared to $13.3 million increase in deposits, $25.6 million in proceeds from the sale of mortgage loans, $38.5 million in proceeds from FHLB advances and $4.4 million in maturities of available-for-sale investment securities. The primary uses of cash for the nine months ended September 30, 2009 were $82.1 million of mortgage loans originated for sale, $10.5 million in repayments of FHLB advances, $1.0 million in repayment of Fed funds purchased, and $17.8 million in purchases of available-for-sale investment securities compared to $25.8 million of mortgage loans originated for sale, $40.5 million in repayments of FHLB advances, $20.0 million loan originations in excess of principal collections and $2.3 million in purchases of available-for-sale investment securities.

CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS

The Corporation has certain obligations and commitments to make future payments under contracts. At September 30, 2009, the aggregate contractual obligations and commitments are:

Contractual Obligations

		Payments Due by Period
						Less than				1-3				3-5				After
		Total				1 year				years				years				5 years
		(Dollars in Thousands)
Certificates of deposit		$	104,693			$	57,604			$	29,846			$	16,677			$	566
FHLB advances			49,678				5,000				37,000				7,678				—
Total		$	154,371			$	62,604			$	66,846			$	24,355			$	566

Other Commitments

		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		$	2,494			$	2,494			$	—			$	—			$	—
Unfunded commitments under HELOCs			14,882				1,572				3,712				2,665				6,933
Unfunded commitments under Commercial LOCs			1,954				546				896				490				22
Letters of credit			172				172				—				—				—
Total		$	19,502			$	4,784			$	4,608			$	3,155			$	6,955

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 requirements. As of September 30, 2009, the Bank met the regulatory standards to be classified as “well capitalized.” The Bank’s regulatory capital ratios as of September 30, 2009 were as follows: Tier 1 leverage ratio 9.08%, Tier 1 risk-based capital ratio 11.81%; and total risk-based capital, 12.99%. The regulatory capital requirements to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively. Management considers the Bank’s capital to be adequate for current and projected needs at both the Bank and Corporation.

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 company’s IRR is acceptable. Management believes, based on data from the model, as of September 30, 2009, and indicates that the Bank’s IRR level remains minimal.

ITEM 4T. CONTROLS AND PROCEDURES

An evaluation of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2009 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 Company’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 September 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

PART II-OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Corporation. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

Not applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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.

INDEX TO EXHIBITS

Exhibit No.		Description of Exhibit
10.1		Amendment No. 2 to Donald L. Denny Employment Agreement
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.