MONARCH COMMUNITY BANCORP INC - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - MONARCH COMMUNITY BANCORP INC	Financial_Report.xls
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - MONARCH COMMUNITY BANCORP INC	ex31-2.htm
EX-31.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - MONARCH COMMUNITY BANCORP INC	ex31-1.htm
EX-32 - SECTION 1350 CERTIFICATION - MONARCH COMMUNITY BANCORP INC	ex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014 or

☐ 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: ☒ No: ☐

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

Yes ☒ No ☐

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

Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ 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: ☐ No: ☒

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: At July 28, 2014, there were 8,660,147 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, 2014 and December 31, 2013	3
Condensed Consolidated Statements of Income and Comprehensive Income – Three and Six Months Ended June 30, 2014 and 2013	4
Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2014 and 2013	5
Notes to Condensed Consolidated Financial Statements	6 - 28
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	29 - 36
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	36
Item 4 – Controls and Procedures	37
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings	37
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3 – Defaults Upon Senior Securities	37
Item 4 – [Reserved]	37
Item 5 – Other Information	37
Item 6 – Exhibits	37
SIGNATURES	38
CERTIFICATIONS	40 - 42

PART I—FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets	(Unaudited)
	June 30,			December 31,
	2014			2013
	(Dollars in thousands,
	except per share data)
Assets
Cash and due from banks	$	18,853			9,218
Federal Home Loan Bank overnight time and
other interest bearing deposits		4,200			6,173
Total cash and cash equivalents		23,053			15,391
Securities - Available for sale		18,895			18,947
Certificates of Deposit		1,736			1,736
Other securities		3,370			3,370
Loans held for sale		1,296			415
Loans, net		128,843			118,530
Foreclosed assets, net		744			1,068
Premises and equipment		3,727			3,880
Other assets		7,143			7,630
Total assets	$	188,807			170,967

Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	26,125			18,606
Interest bearing		129,162			130,949
Total deposits		155,287			149,555
Federal Home Loan Bank advances		12,000			—
Accrued expenses and other liabilities		1,564			1,691
Total liabilities		168,851			151,246

Stockholders' Equity
Preferred stock-$.01 par value, 5,000,000 shares authorized, and no shares		—			—
issued and outstanding as of June 30, 2014 and December 31, 2013
Common stock - $0.05 par value, 20,000,000 shares authorized, 8,660,147 shares issued		433			433
and outstanding at June 30, 2014 and December 31, 2013, respectively, adjusted for 1:5 split.
Additional paid-in capital		39,344			39,344
Accumulated deficit		(19,566	)		(19,630	)
Accumulated other comprehensive income (loss)		19			(152	)
Unearned stock compensation		(274	)		(274	)
Total stockholders' equity		19,956			19,721
Total liabilities and stockholders' equity	$	188,807			170,967

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2014			2013			2014			2013
	(Dollars in thousands, except per share data)
Interest Income
Loans, including fees		1,744			1,738			3,460			3,592
Investment securities		131			79			281			164
Federal funds sold and overnight deposits		4			18			7			30
Total interest income		1,879			1,835			3,748			3,786
Interest Expense
Deposits		134			259			284			561
Federal Home Loan Bank advances		8			73			12			146
Total interest expense		142			332			296			707
Net Interest Income		1,737			1,503			3,452			3,079
Provision for Loan Losses		(90	)		387			(90	)		387
Net Interest Income After Provision for Loan Losses		1,827			1,116			3,542			2,692
Non-interest Income
Fees and service charges		400			405			790			828
Loan servicing fees		115			108			225			209
Net gain on sale of loans		314			573			522			1,214
Net gain on sale of securities		—			3			—			3
Other income		(56	)		197			93			250
Total non-interest income		773			1,286			1,630			2,504
Non-interest Expense
Salaries and employee benefits		1,248			1,557			2,536			3,146
Occupancy and equipment		265			276			569			579
Data processing		250			245			500			480
Mortgage banking		95			98			178			236
Professional services		175			196			343			421
Amortization of core deposit intangible		—			36			—			71
NOW account processing		48			50			91			102
ATM/Debit card processing		47			63			93			116
Foreclosed property expense		50			140			72			204
Other general and administrative		376			527			726			955
Total non-interest expense		2,554			3,188			5,108			6,310
Income (Loss) - Before income taxes		46			(786	)		64			(1,114	)
Income Taxes		—			38			—			38
Net Income (Loss)		46			(824	)		64			(1,152	)
Dividends and amortization of discount on preferred stock		—			105			—			204
Net Income (Loss) available to common stock		46			(929	)		64			(1,356	)
Comprehensive Income (Loss)
Net Income (Loss)		46			(824	)		64			(1,152	)
Change in unrealized gain (loss) on securities, net of tax		34			(129	)		171			(128	)
Less: reclassification adjustments for securities' gain realized in net income, net of taxes		—			2			—			2
Comprehensive Income (Loss)		80			(951	)		235			(1,278	)
Earnings (Loss) Per Share (adjusted for 1:5 stock split)
Basic	$	0.01		$	(2.31	)	$	0.01		$	(3.37	)
Diluted	$	0.01		$	(2.31	)	$	0.01		$	(3.37	)

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows (Unaudited)	Six Months Ended
	June 30,
	2014			2013
	(Dollars in thousands)
Cash Flows From Operating Activities
Net Income (Loss)	$	64		$	(1,152	)
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization		434			548
Provision for loan losses		(90	)		387
Write down on foreclosed assets		108			371
(Gain) loss on sale of foreclosed assets		(116	)		(37	)
Mortgage loans originated for sale		(13,258	)		(34,077	)
Proceeds from sale of mortgage loans		12,377			34,555
Gain on sale of available for sale securities		—			(3	)
Gain on sale of mortgage loans		(522	)		(1,214	)
Net change in:
Accrued interest receivable		24			27
Other assets		200			2,995
Accrued expenses and other liabilities		57			(166	)
Net cash (used in) provided by operating activities		(722	)		2,234
Cash Flows From Investing Activities
Activity in available for sale securities:
Purchases		(521	)		(2,979	)
Proceeds from sale of securities		—			80
Proceeds from maturities of securities		781			1,862
Net change in Certificates of Deposit:
Purchases of certificates of deposit		(248	)		(248	)
Proceeds from maturities of certificates of deposit		248			245
Loan originations and principal collections, net		(10,252	)		8,178
Proceeds from sale of foreclosed assets		696			1,377
Purchase of premises and equipment		(52	)		(121	)
Net cash (used in) provided by investing activities		(9,348	)		8,394
Cash Flows From Financing Activities
Net increase in deposits		5,732			(3,018	)
Proceeds from FHLB advances		12,000			—
Net cash provided by financing activities		17,732			(3,018	)
Net Increase in Cash and Cash Equivalents		7,662			7,610
Cash and Cash Equivalents - Beginning		15,391			28,744
Cash and Cash Equivalents - End	$	23,053		$	36,354
Supplemental Cash Flow Information:
Cash paid for:
Interest		285			667
Noncash investing activities:
Loans transferred to foreclosed assets		441			1,040

See accompanying notes to condensed consolidated financial statements.

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Monarch Community Bancorp, Inc. (the “Corporation”) was incorporated in 2002 under Maryland law to hold all of the common stock of Monarch Community Bank (the “Bank”), formerly known as Branch County Federal Savings and Loan Association. The Bank converted to a stock savings institution effective August 29, 2002. In connection with the conversion, the Corporation sold 2,314,375 shares of its common stock in a subscription offering. On May 28, 2013, the Corporation completed a one for five reverse split of its common stock.

On November 15, 2013, the Corporation completed its offering of 8,250,000 shares of its common stock. The shares were issued at a purchase price of $2.00 per share, for aggregate consideration of $16.5 million. The closing of the offering occurred simultaneously with the closing of the series of transactions between the Corporation and the Department of Treasury pursuant to which the Department of Treasury received 2,272,601 shares of the Corporation’s common stock in exchange the 6,785 shares of Preferred Stock and the Warrants it held, and accrued dividends and interest on the preferred stock totaling $1,491,951. The transactions with Treasury resulted in the preferred stock and other obligations being settled at a discount, which was credited to paid-in-capital. The shares issued to the Treasury were sold as part of the offering, resulting in $4,545,202 of the offering proceeds being paid to the Department of Treasury. The net cash proceeds of the offering to the Corporation were approximately $10.5 million (net of the Treasury shares sold and total costs of $1.4 million).

Monarch Community Bank is headquartered in Coldwater, Michigan and operates five full service retail offices in Branch, Calhoun and Hillsdale Counties and nine loan production offices in Kalamazoo, Calhoun, Berrien, Ingham, Lenawee, Kent, Livingston and Jackson Counties in Michigan and one in Steuben County, Indiana. 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, 2013 filed with the Securities and Exchange Commission.

The results of operations for the six month period ended June 30, 2014 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 specific components as mentioned, which relate to identifiable problem credits, are loans classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of the loan.

The allowance also consists of general and unallocated components. The general component covers non-classified loans and is based on historical loss experience. Weighted average historical losses are used in this analysis, which are based on actual losses over the prior eighteen month, with the most recent nine months weighted 60% and the latter nine months 40%. 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.

As of June 30, 2014 the residential loan historical loss ratios were increased by .08% to 1.39% based on the particular segment. Multi-family real estate loan historical loss ratios were increased by .32% to 1.32%. All other commercial real estate loan historical loss ratios were increased by 1.01% to 1.32%. Construction loan historical loss ratios were increased by .50% to .64%, consumer loan historical loss ratios by .50% to .60%, commercial and industrial loan historical loss ratios by .28% to 1.57% and home equity lines of credit historical loss ratios by .03% to 1.34%. As of June 30, 2014, 22% of the allowance for loan loss reserve was attributable to adjustments to 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.

The unallocated component is maintained to cover uncertainties that could affect management’s estimates of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

RECLASSIFICATIONS

Certain 2013 amounts have been reclassified to conform to the 2014 presentation.

NOTE 2 - SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value

June 30, 2014
Available-for-sale securities:
Collateralized Mortgage obligations	$	6,357	$	12	$	(23	)	$	6,346
U.S. government agency obligations		5,638		17		(28	)		5,627
Mortgage-backed securities		3,038		49		—			3,087
Obligations of states and
political subdivisions		3,834		22		(21	)		3,835
Total available-for-sale securities	$	18,867	$	100	$	(72	)	$	18,895

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value

December 31, 2013
Available-for-sale securities:
Collateralized Mortgage obligations	$	6,925	$	—	$	(141	)	$	6,784
U.S. government agency obligations		5,129		11		(49	)		5,091
Mortgage-backed securities		3,287		30		(10	)		3,307
Obligations of states and
political subdivisions		3,836		—		(71	)		3,765
Total available-for-sale securities	$	19,177	$	41	$	(271	)	$	18,947

There were no proceeds from the sale of investment securities for the six months ended June 30, 2014 and June 30, 2013. Gross realized gains were $0 and gross realized losses were $0 on the sales of investment securities for the six months ended June 30, 2014 and June 30, 2013.

There were no proceeds from the sale of investment securities for the six months ended June 30, 2014 compared to $80,000 in proceeds from the sale of investment securities for the same period ended June 30, 2013. Gross realized gains were $0 and gross realized losses were $3,000 on the sales of investment securities for the six months ended June 30, 2014 and June 30, 2013.

The amortized cost and fair value of securities available for sale at June 30, 2014 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, 2014
	Available for Sale Securities
	Amortized		Fair
	Cost		Value
	(Dollars in Thousands)

Due in one year or less	$	—	$	—
Due from one to five years		7,684		7,657
Due from five to ten years		1,788		1,805
Due after ten years		—		—
Total		9,472		9,462
Mortgage-backed securities		3,038		3,087
CMO Securities		6,357		6,346
Total available-for-sale securities	$	18,867	$	18,895

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, 2014.

The following table shows the gross unrealized losses and the fair value of the Corporation’s investments, aggregated by the investment category and length of time that individual securities have been in a continuous unrealized loss position. As of June 30, 2014, 17 securities were in a loss position. There were 21 securities in an unrealized loss position at December 31, 2013.

	Less than 12 Months					12 Months or More					Total
June 30, 2014	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Collateralized Mortgage obligations	$	1,704	$	(4	)	$	894	$	(19	)	$	2,598	$	(23	)
Mortgage-backed securities		—		—			—		—			—		—
U.S. government agency obligations		1,515		(3	)		973		(25	)		2,488		(28	)
Obligations of states and political subdivisions		500		(1	)		2,039		(20	)		2,539		(21	)
Total available-for-sale securities	$	3,719	$	(8	)	$	3,906	$	(64	)	$	7,625	$	(72	)

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). The share numbers reflect a one-for-five reverse stock split effective May 28, 2013.

	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Basic earnings (loss) per share
Numerator:
Net income (loss)	$	46		$	(824	)	$	64		$	(1,152	)
Dividends and amortization of discount on preferred stock		—			105			—			204
Net Income (Loss) allocated to common stock		46			(929	)		64			(1,356	)
Denominator:
Weighted average common shares outstanding		8,660			410			8,660			410
Less: Average unallocated ESOP shares		(6	)		(7	)		(6	)		(7	)
Less: Average non-vested RRP shares		—			—			—			—
Weighted average common shares outstanding
for basic earnings (loss)per share		8,654			403			8,654			403
Basic earnings (loss) per share		0.01			(2.31	)		0.01			(3.37	)
Diluted earnings (loss) per share
Numerator:
Net Income (Loss) allocated to common stock		46			(929	)		64			(1,356	)
Denominator:
Weighted average common shares outstanding
for basic earnings per share		8,654			403			8,654			403
Add: Dilutive effects of restricted stock,
stock options and warrants		—			—			—			—
Weighted average common shares and dilutive
potential common shares outstanding		8,654			403			8,654			403
Diluted earnings (loss) per share	$	0.01		$	(2.31	)	$	0.01		$	(3.37	)

NOTE 4 - FAIR VALUE MEASUREMENTS

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at June 30, 2014, and December 31, 2013, and the valuation techniques used by the Corporation to determine those fair values. Investment securities with fair value determined by Level 2 inputs include mortgage backed securities, collateralized mortgage obligations, obligations of states and political subdivisions and U.S Government Agency obligations.

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at June 30, 2014
Assets:
Investment Securities
Collateralized Mortgage obligations	$	—	$	6,346	$	—	$	6,346
U.S. government agency obligations		—		5,627		—		5,627
Mortgage-backed securities		—		3,087		—		3,087
Obligations of states and
political subdivisions		—		3,835		—		3,835
	$	—	$	18,895	$	—	$	18,895

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2013
Assets:
Investment Securities
Collateralized Mortgage obligations	$	—	$	6,784	$	—	$	6,784
U.S. government agency obligations		—		5,091		—		5,091
Mortgage-backed securities		—		3,307		—		3,307
Obligations of states and
political subdivisions		—		3,765		—		3,765
	$	—	$	18,947	$	—	$	18,947

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 2014 and 2013 to the impaired loans were recorded as additional allocations to the allowance for loan and lease losses. Adjustments in 2014 and 2013 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, 2014 and December 31, 2013 (000s omitted):

Assets Measured at Fair Value on a Nonrecurring Basis

	Balance at June 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans accounted for under FASB ASC 310		9,827		—		—		9,827
Foreclosed Assets		744		—		—		744

Assets Measured at Fair Value on a Nonrecurring Basis

	Balance at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans accounted for under FASB ASC 310		10,097		—		—		10,097
Foreclosed Assets		1,068		—		—		1,068

The fair value of impaired loans is estimated using either discounted cash flows or collateral value. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where a specific reserve is established based on the fair value of the collateral require classification in the fair value hierarchy. Impaired loans are categorized as level 3 assets because the values are based on available collateral (typically based on outside appraisals obtained at least annually) and discounted based on internal loan to value limits which typically range from 50% to 80% based on the collateral. Management reviews the impaired loans no less than quarterly for potential additional impairment and when there is little prospect of collecting principal or interest, loans or portions thereof may be charged off to the allowance for loan losses. Losses are recognized in the period a debt becomes uncollectible. The recognition of a loss does not mean that the loan has no recovery or salvage value, but rather it is not practical or desirable to defer writing off the loan even though a partial recovery may occur in the future.

Foreclosed assets, which include real estate owned and real estate in judgment and subject to redemption, acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are performed annually by management and the assets are carried at the lower of carrying amount or fair value less estimated selling expenses, which consist primarily of commissions that will be paid to an independent real estate agent upon sale of the property. The valuations consist of obtaining a broker price opinion or a new appraisal depending on the value of the asset. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Assets held as real estate in judgment may be subject to redemption for a period of six to twelve months depending on the collateral, following the foreclosure sale. Assets may be redeemed by the borrower for the foreclosure sale price, accrued interest and foreclosure costs. Any asset redeemed would be treated as a paid off loan. As of June 30, 2014 the Corporation held $744,000 in foreclosed assets owned as a result of foreclosure or the acceptance of a deed in lieu and $1.1 million in foreclosed assets as of December 31, 2013. No assets were redeemed by borrowers in 2013 or in the first six months of 2014.

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, 2014 and December 31, 2013. The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:

Securities - Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Mortgage Loans Held for Sale - Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Loans Receivable - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses using current market rates applied to the estimated life. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

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

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

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

	June 30, 2014
	Carrying Amount		Level 1		Level 2		Level 3		Total Estimated Fair Value
Assets:
Cash and cash equivalents	$	23,053	$	23,053	$	—	$	—	$	23,053
Certificates of Deposit		1,736		—		1,736		—		1,736
Securities - Available for sale		18,895		—		18,895		—		18,895
Other securities		3,370		—		3,370		—		3,370
Loans and loans held for sale, net		130,139		—		—		135,184		135,184

Liabilities:
Deposits		155,287		—		155,138				155,138
Federal Home Loan Bank
advances	$	12,000	$	—	$	11,906			$	11,906

	December 31, 2013
	Carrying Amount		Level 1		Level 2		Level 3		Total Estimated Fair Value
Assets:
Cash and cash equivalents	$	15,391	$	15,391	$	—	$	—	$	15,391
Certificates of Deposit		1,736		—		1,736		—		1,736
Securities - Available for sale		18,947		—		18,947		—		18,947
Other securities		3,370		—		3,370		—		3,370
Loans and loans held for sale, net		118,945		—		—		123,427		123,427

Liabilities:
Deposits		149,555		—		150,205		—		150,205
Federal Home Loan Bank										—
advances	$	—	$	—	$	—	$	—	$	—

NOTE 5 - LOANS

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

	June 30, 2014					December 31, 2013
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real Estate Loans:
One-to-four family	$	61,001		46.34		$	60,585		49.89
Multi-family		5,298		4.03			2,345		1.93
Commercial		52,739		40.07			47,245		38.90
Construction or development		3,949		3.00			2,332		1.92
Total real estate loans		122,987		93.44			112,507		92.64
Other loans:
Consumer loans:
Helocs and other		7,156		5.44			7,533		6.20
Commercial Business Loans		1,477		1.12			1,411		1.16
Total other loans		8,633		6.56			8,944		7.36
Total Loans		131,620		100.00	%		121,451		100.00	%

Allowance for loan losses		2,510					2,672
Less: Net deferred loan fees		267					249
Total Loans, net	$	128,843				$	118,530

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

A loan is considered impaired when it is probable that the Corporation 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, 2014 and December 31, 2013 are as follows:

June 30, 2014	30-59 Days Past Due		60-89 Days Past Due		Loans 90 Days or More Past Due		Total Past due Loans		Current Loans		Total Loans

Commercial	$	44	$	—	$	—	$	44	$	1,433	$	1,477
Commercial Real Estate:
Multi-family		—		—		—		—		5,298		5,298
Commercial Real Estate - other		—		—		—		—		52,739		52,739
Consumer:
Consumer - Helocs and other		31		18		48		97		7,059		7,156
Residential:
Residential - prime		895		121		180		1,196		47,721		48,917
Residential - subprime		756		238		105		1,099		10,985		12,084
Construction:
Construction - prime		80		—		—		80		3,869		3,949
Construction - subprime		—		—		—		—		—		—
Total	$	1,806	$	377	$	333	$	2,516	$	129,104	$	131,620

December 31, 2013	30-59 Days Past Due		60-89 Days Past Due		Loans 90 Days or More Past Due		Total Past due Loans		Current Loans		Total Loans

Commercial	$	—	$	—	$	—	$	—	$	1,411	$	1,411
Commercial Real Estate:
Multi-family		—		—		—		—		2,345		2,345
Commercial Real Estate - other		306		—		112		418		46,827		47,245
Consumer:
Consumer - Helocs and other		44		52		—		96		7,437		7,533
Residential:
Residential - prime		934		336		440		1,710		45,816		47,526
Residential - subprime		410		107		221		738		12,321		13,059
Construction:
Construction - prime		—		—		—		—		2,332		2,332
Construction - subprime		—		—		—		—		—		—
Total	$	1,694	$	495	$	773	$	2,962	$	118,489	$	121,451

All commercial loans will be assigned a risk rating by the Credit Analyst at inception. The risk rating system is composed of eight levels of quality and utilizes the following definitions.

Risk Rating Scores by definition:

Zero (0) Unclassified. Any loan which has not been assigned a classification.

One (1) Excellent. A well-structured credit relationship to an established borrower. Loans to entities with a strong financial condition and solid earnings history.

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

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.

Four (4) Average. Loans to entities which are considered bankable risks, although some signs of weaknesses are shown:

Marginal liquidity and working capital.

Short or unstable earnings history.

Would include most start-up businesses.

Would be enrolled in Small Business Administration or Michigan Strategic Fund programs.

Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past 12 months.

Management abilities are apparent yet unproven.

Debt to worth ratio of 3.50 or less.

Weakness in primary source of repayment with adequate secondary source of repayment.

If secured, loan is protected but collateral is marginal.

Industry outlook is uncertain; may be cyclical or highly competitive.

Loan structure generally in accordance with policy.

Five (5) Special Mention. Special Mention loans have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. Loans to entities that constitute an undue and unwarranted credit risk but not to the point of justifying or classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan. The following characteristics may apply:

Downward trend in sales, profit levels and margins.

Impaired working capital positions.

Cash flow is strained in order to meet debt repayment.

Loan delinquency (30-60 days) and overdrafts may occur.

Management abilities are questionable.

Highly leveraged, debt to worth ratio over 3.50:1.

Industry conditions are weak.

Inadequate or outdated financial information.

Litigation pending against borrower.

Loan may need to be restructured to improve collateral position and/or reduce payment amount.

Collateral / guaranty offers limited protection.

Six (6) Substandard. A substandard loan is inadequately protected by the current sound worth and repayment capacity of the borrower. Loans so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. There is a distinct possibility that the Bank will implement collection procedures if the loan deficiencies are not corrected. The following characteristics may apply:

Sustained losses have severely eroded the equity and cash flow.

Deteriorating liquidity.

Serious management problems.

	·	Chronic trade slowness; may be placed on COD by vendors.

Likelihood of bankruptcy.

Inability to access other funding sources.

Reliance on secondary source of repayment.

Interest non-accrual may be warranted.

Collateral provided is of little or no value.

Repayment dependent upon the liquidation of non-current assets.

Repayment may require litigation.

Seven (7) Doubtful. A doubtful loan has all the weakness inherent in a substandard loan with the added characteristic that collection and/or liquidation is pending. Loans or portions of loans with one or more weaknesses which, on the basis of currently existing facts, conditions, and values, makes ultimate collection of all principal highly questionable. The possibility of loss is high and specific loan loss reserve allocations should be made or charge offs taken on anticipated collateral shortfalls. However, the amount or the certainty of eventual loss may not allow for a specific reserve or charge off because of specific pending factors. Pending factors include proposed merger or acquisition, completion or liquidation in progress, injection of new capital in progress, refinancing plans in progress, etc. “Pending Factors” not resolved after six months must be disregarded. The following characteristics may apply:

Normal operations are severely diminished or have ceased.

Seriously impaired cash flow.

Secondary source of repayment is inadequate.

Survivability as a “going concern” is impossible.

Placement on interest non-accrual

Collection process has begun.

Bankruptcy petition has been filed.

Judgments have been filed.

Portion of the loan balance has been charged-off.

Eight (8) Loss. Loans classified loss are considered uncollectible and of such little value that their continuance as bankable asset is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. Further characterized by:

Liquidation or reorganization under bankruptcy, with poor prospects of collection.

Fraudulently overstated assets and/or earnings.

Collateral has marginal or no value.

Debtor cannot be located.

The following table represents the risk category of loans by class based on the analysis performed as of June 30, 2014 and December 31, 2013 (in thousands):

					June 30, 2014
Credit Rating			Commercial		Commercial Real Estate Multi-family		Commercial Real Estate Other
	0		$	—	$	26	$	302
	1-2			—		—		436
	3			432		1,797		18,832
	4			385		3,027		20,848
	5			578		—		9,274
	6			82		448		3,047
	7			—		—		—
		Total	$	1,477	$	5,298	$	52,739

				December 31, 2013
		Commercial		Commercial Real Estate Multi-family		Commercial Real Estate Other
0		$	—	$	27	$	309
1-2			—		—		472
3			312		835		14,252
4			1,011		1,033		20,408
5			—		—		8,677
6			88		450		3,127
7			—		—		—
	Total	$	1,411	$	2,345	$	47,245

For consumer residential real estate, and consumer loans, the Corporation 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, 2014 and December 31, 2013.

	June 30, 2014
	Residential - Prime		Residential - Subprime

Grade
Pass	$	48,668	$	11,801
Substandard		249		283
Total	$	48,917	$	12,084

			Consumer - Helocs and other
Performing			$	7,038
Nonperforming				118
Total			$	7,156

				Construction
Performing			$	3,949
Nonperforming				—
		Total	$	3,949


		December 31, 2013
		Residential - Prime		Residential - Subprime

Grade
Pass	$	46,860	$	12,775
Substandard		666		284
Total	$	47,526	$	13,059

			Consumer - Helocs and other
Performing			$	7,431
Nonperforming				102
Total			$	7,533

				Construction
Performing			$	2,332
Nonperforming				—
		Total	$	2,332

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2014 and December 31, 2013 (in thousands).

June 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance

With no related allowance recorded:
Commercial	$	—	$	—	$	—
Commercial Real Estate:
Commercial Real Estate - Multi-family		—		—		—
Commercial Real Estate - other		7,678		9,714		—
Consumer:
Consumer - Helocs and other		—		—		—
Residential:
Residential - prime		1,153		1,196		—
Residential - subprime		—		—		—
Construction:
Construction - prime		—		—		—
Construction - subprime		—		—		—

With an allowance recorded:
Commercial		47		47		23
Commercial Real Estate:
Commercial Real Estate - Multi-family		447		462		63
Commercial Real Estate - other		—		—		—
Consumer:
Consumer - Helocs and others		—		—		—
Residential:
Residential - prime		371		371		172
Residential - subprime		—		—		—
Construction:
Construction - prime		428		428		39
Construction - subprime		—		—		—
Total
Commercial	$	8,600	$	10,651	$	125
Consumer	$	—	$	—	$	—
Residental	$	1,524	$	1,567	$	172

December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance

With no related allowance recorded:
Commercial	$	—	$	—	$	—
Commercial Real Estate:
Commercial Real Estate - Multi-family		—		—		—
Commercial Real Estate - other		3,802		5,817		—
Consumer:
Consumer - Helocs and others		—		—		—
Residential:
Residential - prime		—		—		—
Residential - subprime		—		—		—
Construction:
Construction - prime		—		—		—
Construction - subprime		—		—		—

With an allowance recorded:
Commercial		48		48		22
Commercial Real Estate:
Commercial Real Estate - Multi-family		450		463		63
Commercial Real Estate - other		4,150		4,150		35
Consumer:
Consumer - Helocs and others		—		—		—
Residential:
Residential - prime		1,554		1,596		182
Residential - subprime		—		—		—
Construction:
Construction - prime		440		440		45
Construction - subprime		—		—		—
Total
Commercial	$	8,890	$	10,918	$	165
Consumer	$	—	$	—	$	—
Residental	$	1,554	$	1,596	$	182

The following table presents loans individually evaluated for impairment by class of loans for the three months ended June 30, 2014 and June 30, 2013 (in thousands).

	Three Months Ended June 30, 2014				Three Months Ended June 30, 2013

	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
With no related allowance recorded:
Commercial	$	—	$	—	$	377	$	—
Commercial Real Estate:
Commercial Real Estate - Multi-family		—		—		—		—
Commercial Real Estate - other		9,733		100		14,307		159
Consumer:
Consumer - Helocs and other		—		—		—		—
Residential:
Residential - prime		1,200		12		94		—
Residential - subprime		—		—		—		—

With an allowance recorded:
Commercial		47		—		49		1
Commercial Real Estate:
Commercial Real Estate - Multi-family		462		8		464		6
Commercial Real Estate - other		—		—		94		—
Consumer:
Consumer - Helocs and others		—		—		—		—
Residential:
Residential - prime		371		6		1,633		6
Residential - subprime		—		—		—		—
Construction:
Construction - prime		430		5		294		3
Construction - subprime		—		—		—		—
Total
Commercial	$	10,672	$	113	$	15,585	$	169
Consumer	$	—	$	—	$	—	$	—
Residental	$	3,971	$	18	$	1,727	$	6

The following table presents loans individually evaluated for impairment by class of loans for the six months ended June 30, 2014 and June 30, 2013 (in thousands).

	Six Months Ended June 30, 2014				Six Months Ended June 30, 2013
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
With no related allowance recorded:
Commercial	$	—	$	—	$	377	$	—
Commercial Real Estate:
Commercial Real Estate - Multi-family		—		—		—		—
Commercial Real Estate - other		9,766		198		14,334		315
Consumer:
Consumer - Helocs and other		—		—		—		—
Residential:
Residential - prime		1,207		24		95		—
Residential - subprime		—		—		—		—

With an allowance recorded:
Commercial		47		1		49		1
Commercial Real Estate:
Commercial Real Estate - Multi-family		463		16		464		11
Commercial Real Estate - other		—		—		100		—
Consumer:
Consumer - Helocs and others		—		—		—		—
Residential:
Residential - prime		372		12		1,662		13
Residential - subprime		—		—		—		—
Construction:
Construction - prime		433		10		296		6
Construction - subprime		—		—		—		—
Total
Commercial	$	10,709	$	225	$	15,620	$	333
Consumer	$	—	$	—	$	—	$	—
Residental	$	1,579	$	36	$	1,757	$	13

Payments received on loans in nonaccrual status are typically applied to reduce the recorded investment in the asset. While a loan is in nonaccrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining recorded investment in the asset (i.e., after charge-off of identified losses, if any) is deemed to be fully collectible. The following presents, by class, the recorded investment in loans and leases on non-accrual status as of June 30, 2014 and December 31, 2013.

Financing Receivables on Nonaccrual Status

	June 30, 2014
Commercial	$	—
Commercial real estate:
Commercial Real Estate - mulit-family		—
Commercial Real Estate - other		—
Consumer:
Consumer - Helocs and other		70
Residential:
Residential - prime		540
Residential - subprime		475
Construction
Construction - prime		—
Construction - subprime		—
Total	$	1,085


Financing Receivables on Nonaccrual Status

		December 31, 2013
Commercial	$	—
Commercial real estate:
Commercial Real Estate - mulit-family		—
Commercial Real Estate - other		112
Consumer:
Consumer - Helocs and other		—
Residential:
Residential - prime		748
Residential - subprime		494
Construction
Construction - prime		—
Construction - subprime		—
Total	$	1,354

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

In order to maximize the collection of loan balances, we evaluate troubled loans on a case-by-case basis to determine if a loan modification would be appropriate. We pursue loan modifications when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt. For loans secured by either commercial or residential real estate, if the client demonstrates a loss of income such that the client cannot reasonably support even a modified loan, we may pursue foreclosure, short sales and/or deed-in-lieu arrangements. For all troubled loans, we review a number of factors, including cash flows, loan structures, collateral values, and guarantees. Based on our review of these factors and our assessment of overall risk, we evaluate the benefits of renegotiating the terms of the loans so that they have a higher likelihood of continuing to perform. To date, we have restructured loans in a variety of ways to help our clients service their debt and to mitigate the potential for additional losses. The primary restructuring methods being offered to our clients are reductions in interest rates and extensions in terms. Loans that, after being restructured, remain in compliance with their modified terms and whose modified interest rate yielded a market rate at the time the loan was restructured, are reviewed annually and may be reclassified as non-TDR, provided they conform with the prevailing regulatory criteria. As of June 30, 2014 there have been no loans in which the TDR designation has been removed. The following table represents the modifications completed during the three months ended June 30, 2014 and 2013.

	Modifications
	Three Months Ended June 30, 2014
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial		—	$	—	$	—
Commercial real estate:
Commercial Real Estate - multi-family		—		—		—
Commercial Real Estate - other		—		—		—
Consumer:
Consumer - Heloc and other		—		—		—
Residential:
Residential - prime		1		156		156
Residential - subprime		—		—		—
Construction
Construction - prime		—		—		—
Construction - subprime		—		—		—
Total		1	$	156	$	156

	Modifications
		Three Months Ended June 30, 2013
		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial		—	$	—	$	—
Commercial real estate:
Commercial Real Estate - multi-family		—		—		—
Commercial Real Estate - other		—		—		—
Consumer:
Consumer - Heloc and other		—		—		—
Residential:
Residential - prime		5		806		805
Residential - subprime		3		113		113
Construction
Construction - prime		—		—		—
Construction - subprime		—		—		—
Total		8	$	919	$	918

The following table represents the modifications completed during the six months ended June 30, 2014 and 2013.

	Modifications
	Six Months Ended June 30, 2014
	Number of Contracts					Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial				—	$	—	$—
Commercial real estate:
Commercial Real Estate - multi-family				—		—	—
Commercial Real Estate - other				—		—	—
Consumer:
Consumer - Heloc and other				—		—	—
Residential:
Residential - prime				1		156	156
Residential - subprime				—		—	—
Construction
Construction - prime				—		—	—
Construction - subprime				—		—	—
Total				1	$	156	$156


		Modifications
			Six Months Ended June 30, 2013
				Number of Contracts		Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial				—	$	—	$—
Commercial real estate:
Commercial Real Estate - multi-family				—		—	—
Commercial Real Estate - other				1		212	212
Consumer:
Consumer - Heloc and other				—		—	—
Residential:
Residential - prime				6		861	860
Residential - subprime				5		217	217
Construction
Construction - prime				—		—	—
Construction - subprime				—		—	—
Total				12	$	1,290	$1,289

Troubled debt restructured loans which had payment defaults during the three months ended June 30, 2014 and 2013, segregated by class, are shown in the table below. Default occurs when a loan is 90 days or more past due or has been transferred to nonaccrual.

Modifications That Subsequently Defaulted
Three Months Ended June 30, 2014

	Number of Contracts		Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted
Commercial	—	$	—
Commercial real estate:
Commercial Real Estate - multi-family	—		—
Commercial Real Estate - other	—		—
Consumer:
Consumer - Heloc and other	—		—
Residential:
Residential - prime	—		—
Residential - subprime	—		—
Construction
Construction - prime	—		—
Construction - subprime	—		—
	—	$	—


Modifications That Subsequently Defaulted
Three Months Ended June 30, 2013

	Number of Contracts		Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted
Commercial	—	$	—
Commercial real estate:
Commercial Real Estate - multi-family	—		—
Commercial Real Estate - other	—		—
Consumer:
Consumer - Heloc and other	—		—
Residential:
Residential - prime	—		—
Residential - subprime	—		—
Construction
Construction - prime	—		—
Construction - subprime	—		—
	—	$	—

Modifications That Subsequently Defaulted
Six Months Ended June 30, 2014

	Number of Contracts		Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted
Commercial		—	$	—
Commercial real estate:
Commercial Real Estate - multi-family		—		—
Commercial Real Estate - other		—		—
Consumer:
Consumer - Heloc and other		—		—
Residential:
Residential - prime		—		—
Residential - subprime		—		—
Construction
Construction - prime		—		—
Construction - subprime		—		—
		—	$	—


Modifications That Subsequently Defaulted
Six Months Ended June 30, 2013

		Number of Contracts		Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted
Commercial		—	$	—
Commercial real estate:
Commercial Real Estate - multi-family		—		—
Commercial Real Estate - other		1		212
Consumer:
Consumer - Heloc and other		—		—
Residential:
Residential - prime		—		—
Residential - subprime		—		—
Construction
Construction - prime		—		—
Construction - subprime		—		—
		1	$	212

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

NOTE 6 - ALLOWANCE FOR LOAN LOSSES

Analysis related to the allowance for credit losses (in thousands) for the three months ended June 30, 2014 and 2013 is as follows:

For the Three Months Ended June 30, 2014
	Commercial			Commercial Real Estate Other			Multi - Family			Consumer			Residential - Prime			Residential - Subprime			Construction			Total

ALLOWANCE FOR CREDIT LOSSES:

Beginning Balance	$	84		$	531		$	95		$	205		$	1,145		$	559		$	58		$	2,677
Charge-Offs		—			—			—			(130	)		(47	)		(64	)		—			(241	)
Recoveries		1			98			1			52			12			—			—			164
Provision		25			(61	)		(3	)		79			(155	)		17			8			(90	)
Ending Balance		110			568			93			206			955			512			66			2,510

Ending Balance: individually
evaluated for impairment		23			—			63			—			172			—			39			297

Ending Balance: collectively
evaluated for impairment	$	87		$	568		$	30		$	206		$	783		$	512		$	27		$	2,213

For the Three Months Ended June 30, 2013
		Commercial		Commercial Real Estate Other			Multi - Family				Consumer		Residential - Prime			Residential - Subprime				Construction			Total

ALLOWANCE FOR CREDIT LOSSES:

Beginning Balance	$	14		$	599		$	82		$	210		$	1,176		$	512		$	52		$	2,645
Charge-Offs		—			—			—			(127	)		(131	)		(114	)		—			(372	)
Recoveries		—			5			—			42			33			4			—			84
Provision		(5	)		(5	)		(6	)		64			279			61			(1	)		387
Ending Balance		9			599			76			189			1,357			463			51			2,744

Ending Balance: individually
evaluated for impairment		—			9			71			—			359			—			38			477

Ending Balance: collectively
evaluated for impairment	$	9		$	590		$	5		$	189		$	998		$	463		$	13		$	2,267

Analysis related to the allowance for credit losses (in thousands) for the six months ended June 30, 2014 and 2013 is as follows:

For the Six Months Ended June 30, 2014
	Commercial			Commercial Real Estate Other			Multi - Family			Consumer			Residential - Prime			Residential - Subprime			Construction			Total

ALLOWANCE FOR CREDIT LOSSES:

Beginning Balance	$	56		$	521		$	77		$	249		$	1,132		$	577		$	60		$	2,672
Charge-Offs		—			(1	)		—			(198	)		(49	)		(64	)		—			(312	)
Recoveries		2			103			1			121			13			—			—			240
Provision		52			(55	)		15			34			(141	)		(1	)		6			(90	)
Ending Balance		110			568			93			206			955			512			66			2,510

Ending Balance: individually
evaluated for impairment		23			—			63			—			172			—			39			297

Ending Balance: collectively
evaluated for impairment	$	87		$	568		$	30		$	206		$	783		$	512		$	27		$	2,213


For the Six Months Ended June 30, 2013
		Commercial		Commercial Real Estate Other			Multi - Family				Consumer			Residential - Prime			Residential - Subprime			Construction			Total

ALLOWANCE FOR CREDIT LOSSES:

Beginning Balance	$	12		$	695		$	81		$	230		$	1,444		$	521		$	52		$	3,035
Charge-Offs		—			(121	)		—			(217	)		(408	)		(123	)		—			(869	)
Recoveries		2			30			1			112			42			4			—			191
Provision		(5	)		(5	)		(6	)		64			279			61			(1	)		387
Ending Balance		9			599			76			189			1,357			463			51			2,744

Ending Balance: individually
evaluated for impairment		—			9			71			—			359			—			38			477

Ending Balance: collectively
evaluated for impairment	$	9		$	590		$	5		$	189		$	998		$	463		$	13		$	2,267

The allowance for loan losses was $2.5 million at June 30, 2014 representing 1.91% of total loans, compared to $2.7 million at December 31, 2013 or 2.20% of total loans. The allowance for loan losses to non-performing loans ratio was 231% at June 30, 2014 compared to 197% at December 31, 2013. At June 30, 2014 we believe that our allowance appropriately considers incurred losses in our loan portfolio.

Analysis related to the allowance for loan receivables (in thousands) for the six months ended June 30, 2014 and December 31, 2013 is as follows:

As of
June 30, 2014
	Commercial		Commercial Real Estate Other		Multi - Family		Consumer		Residential - Prime		Residential - Subprime		Construction		Total

LOAN RECEIVABLES:

Ending Balance	$	1,477	$	52,739	$	5,298	$	7,156	$	48,917	$	12,084	$	3,949	$	131,620

Ending Balance: individually
evaluated for impairment		47		7,678		447		—		1,524		—		428		10,124

Ending Balance: collectively
evaluated for impairment	$	1,430	$	45,061	$	4,851	$	7,156	$	47,393	$	12,084	$	3,521	$	121,496

As of
December 31, 2013
	Commercial		Commercial Real Estate Other		Multi - Family		Consumer		Residential - Prime		Residential - Subprime		Construction		Total

LOAN RECEIVABLES:

Ending Balance	$	1,411	$	47,245	$	2,345	$	7,533	$	47,526	$	13,059	$	2,332	$	121,451

Ending Balance: individually
evaluated for impairment		48		7,952		450		—		1,554		—		440		10,444

Ending Balance: collectively
evaluated for impairment	$	1,363	$	39,293	$	1,895	$	7,533	$	45,972	$	13,059	$	1,892	$	111,007

The Corporation’s charge-off policy which meets regulatory minimums has not required any revisions during the second quarter of 2014. Losses on unsecured consumer loans are recognized at or before 120 days past due. Secured consumer loans, including residential real estate, are typically charged-off between 120 and 180 days past due, depending on the collateral type, in compliance with the FFIEC guidelines. Specific loan reserves are established based on credit and or collateral risks on an individual loan basis. When the probability for full repayment of a loan is unlikely the Bank will initiate a full charge-off or a partial write down of a loan based upon the status of the loan. Impaired loans or portions thereof are charged-off when deemed uncollectible. Loans that have been partially charged-off remain on nonperforming status, regardless of collateral value, until specific borrower performance criteria are met.

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

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

FORWARD-LOOKING STATEMENTS

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

OVERVIEW

Following Monarch Community Bank’s Safety and Soundness examination which was completed in early 2010, the Board of Directors of Monarch Community Bank stipulated to the terms of a formal enforcement action (“Consent Order”) with Federal Deposit Insurance Corporation (“FDIC”) and the Office of Financial and Insurance Regulation for the State of Michigan (“OFIR”). The Consent Order, which was effective May 6, 2010, contained specific actions needed to address certain findings from their examination and to address our financial condition. The Consent Order was terminated by the FDIC by order dated July 9, 2014.

We complied with all of the required actions in the Consent Order, including raising our Tier 1 and Total Risk Based Capital ratios to minimums of 9.0% and 11.0%, respectively. This was accomplished through the successful Private Placement of $16.5 million in common stock of the Corporation, which was completed in the fourth quarter of 2013. Concurrent with the closing of the capital raise, the Corporation also completed a series of transactions between the Corporation and the Department of Treasury pursuant to which the Department of Treasury received 2,272,601 shares of the Corporation’s common stock in exchange for the shares of Preferred Stock and the Warrants it held, and accrued dividends and interest on the Preferred Stock totaling $1,491,951. The transactions with Treasury resulted in the Preferred Stock and other obligations being settled at a discount, which was credited to paid-in-capital. The shares issued to the Treasury were sold as part of the public offering, resulting in $4,545,202 of the offering proceeds being paid to the Department of Treasury. The net cash proceeds of the offering to the Corporation were approximately $10.5 million (net of the Treasury shares sold and total costs of $1.4 million).

In connection with the termination of the Consent Order, the Company agreed among other things to: (i) to adopt a plan for collecting, charging off, selling or otherwise improving the quality of the Bank’s delinquent or substandard credits in order to reduce the Bank’s risk position with respect to these credits; (ii) not to extend additional credit to or for the benefit of borrowers with credits classified as “loss” or otherwise written off; (iii) to adopt a plan for reducing the volume of real estate loans with loan to value ratios in excess of regulatory guidelines; (iv) to adopt a profit plan aimed at improving earnings, with such plan to address the viability of each loan production office, realistic operating budgets and a budget review process for monitoring performance against budget; and (v) maintain Tier 1 capital as a percentage of assets at a minimum of 8.5%.

Management is now focused on the successful execution of the Bank’s strategic plan, which focuses on steady, profitable growth and sustained high credit quality. Credit quality continues to improve at the Bank, which has now completed six comprehensive external loan reviews over the last four years, with no recommendations for additional loan loss provisions or charge-offs, and no identification of material weaknesses in the credit approval or administration processes. Likewise, in 2010, the Bank retained the services of Rehmann Consulting to conduct the Bank’s internal audit function, a task which had previously been performed by a Bank employee. Since retaining Rehmann, the firm has performed four comprehensive internal audits, and has found no material weaknesses in the Bank’s policies and procedures.

In addition to the enhanced loan review and audit functions, the Bank has continued to focus on the reduction of problem loans. As a result, the Bank’s total non-performing assets have declined from $2.4 million at December 31, 2013 to $1.8 million at June 30, 2014. This constitutes a 32% drop in non-performing assets over the last six months, and a 56.8% improvement when compared to the $3.7 million in non-performing assets at June 30, 2013.

While continuing the focus on the reduction in problem loans, the Bank has also pursued the development of additional sources of fee income. Since January of 2011, the Bank has opened a number of loan production offices throughout Michigan and Indiana, two of which now house commercial lenders. Residential loan production offices are currently operating in Battle Creek, Jackson, Brighton, and Adrian, Michigan, with an additional office in Angola, Indiana. Commercial loan production offices are now operating in East Lansing and Grand Rapids, Michigan. The establishment of these offices provides a geographic dispersion of risk, and places us in markets with demographics that support our growth plans.

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

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

2.	Continued expense reduction throughout the organization.

3.	Organic growth, focusing on commercial and residential lending in our defined markets and the expansion of our wealth management revenue. In late 2011, we established a new relationship with Investment Professionals, Inc., (IPI) replacing our previous relationship with Prudential. IPI provides compliance, sales, research and clearing support for investment advisors that are employed by the Bank and provide investment services under the name of Monarch Investment Services. This provides for enhanced branding of the Monarch name and increased fee income potential from investment services.

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

FINANCIAL CONDITION

Summary

Our total assets increased by $17.8 million, or 10.42%, to $188.8 million at June 30, 2014 compared to $171.0 million at December 31, 2013. Loans, excluding loans held for sale, totaled $128.8 million at June 30, 2014, up 8.70% from $118.5 million at December 31, 2013.

Securities

Securities remained relatively unchanged at $18.9 million as of June 30, 2014 and December 31, 2013. A slight decrease was attributable to pay downs in the Mortgage Backed Securities and Collateralized Mortgage Obligation portfolios totaling $781,000 which offset of the purchase of a U.S. Treasury security in the amount $521,000 in the first quarter of 2014. The yield on investment securities has decreased to 1.88% during the six months ended June 30, 2014 from 2.14% 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 increased by $10.3 million, or 8.70%, from $118.5 million at December 31, 2013 to $128.8 million at June 30, 2014. 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, 2014					December 31, 2013
		Amount		Percent			Amount		Percent
		(Dollars in thousands)
Real Estate Loans:
	One-to-four family	$	61,001		46.34		$	60,585	49.89
	Multi-family		5,298		4.03			2,345	1.93
	Commercial		52,739		40.07			47,245	38.90
	Construction or development		3,949		3.00			2,332	1.92
	Total real estate loans		122,987		93.44			112,507	92.64
Other loans:
	Consumer loans:
	Helocs and other		7,156		5.44			7,533	6.20
	Commercial Business Loans		1,477		1.12			1,411	1.16
	Total other loans		8,633		6.56			8,944	7.36
	Total Loans		131,620		100.00	%		121,451	100.00	%

	Allowance for loan losses		2,510					2,672
Less:	Net deferred loan fees		267					249
	Total Loans, net	$	128,843				$	118,530

One-to-four family loans increased $416,000 from year end 2013 as a result of the slow-down in refinancing and an increase in customer interest in adjustable rate mortgages which the Bank retain rather than sell in the secondary market. The Bank has continued to sell a greater portion of new one- to-four family loan originations. Commercial real estate loans including multi-family loans and construction or development loans increased $10.1 million or 19.38%.

The allowance for loan losses was $2.51 million at June 30, 2014 compared to $2.67 million at December 31, 2013, a decrease of $162,000. Year to date net charge offs totaled $77,000 compared to $288,000 for the same period a year ago. Net charge offs year to date consisted of primarily consumer loans. The Company also recognized a reverse provision of $90,000, which was associated with the recovery of a previously charged off commercial real estate loan. See “Provision for Loan Losses” below for further explanation regarding charge-offs and non-performing loans. The current level of the allowance for loan losses is the result of management’s assessment of the risks within the portfolio based on the information revealed in credit monitoring processes.

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

Deposits

Total deposits increased $5.7 million, or 3.83%, from $149.6 million at December 31, 2013 to $155.3 million at June 30, 2014. The increase in deposits included increases of $7.5 million in demand deposits, $2.1 million in saving accounts and $1.5 million in money market accounts offset decreases of $1.2 million in interest bearing checking and $4.2 million in certificates of deposits.

In the past, we used brokered certificates of deposit to diversify our sources of funds and improve pricing at certain terms compared to the local market and advances available from Federal Home Loan Bank of Indianapolis. Because the Bank's regulatory capital ratios were less than the levels necessary to be considered "well capitalized" while the Consent Order was in effect, it could 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. With the Consent Order terminated, the rate limitations and prior approval requirements have ceased.

Federal Home Loan Bank Advances

Total Federal Home Loan Bank (FHLB) advances increased to $12.0 million as of June 30, 2014. During the period, loan demand outpaced deposit growth. As such, management evaluated alternative sources of funding and determined advances from FHLB had attractive rates and terms to meet the liquidity and growth needs of the bank. 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 $19.96 million at June 30, 2014 compared to $19.72 million at December 31, 2013. This represents 10.57% and 11.53% of total assets at June 30, 2014 and December 31, 2013, respectively. Increases in equity for the six months ended June 30, 2014 included net earnings of $64,000 and $171,000 in changes in unrealized losses on available for sale securities.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income before any provision for loan losses increased $234,000 for the quarter ended June 30, 2014 compared to the same period in 2013.

The net interest margin for the first quarter of 2014 increased 64 basis points to 4.03% compared to 3.39% for the same period in 2013. The improvement in the margin is largely due to reduction in wholesale funding costs as management continues to actively monitor its deposit base and borrowing. The net interest margin for the six months ended June 30, 2014 increased 62 basis points to 4.09% compared to 3.47% for the same period in 2013.

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.

	Six Months Ended June 30,							Six Months Ended June 30,
	2014							2013
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
	(dollars in thousands)
Fed Funds and overnight deposits	$	17,730	$	7		0.08	%	$	36,221	$	30		0.17	%
Investment securities		20,842		194		1.88			9,911		105		2.14
Other securities		3,307		87		5.31			5,445		59		2.19
Loans receivable		126,958		3,460		5.50			125,723		3,592		5.76
Total earning assets	$	168,837	$	3,748		4.48		$	177,300	$	3,786		4.31

Demand and NOW Accounts	$	51,795	$	4		0.02		$	47,418	$	4		0.02
Money market accounts		32,770		18		0.11			35,062		19		0.11
Savings accounts		25,833		6		0.05			24,126		6		0.05
Certificates of deposit		43,786		256		1.18			62,040		533		1.73
Federal Home Loan Bank Advances		4,074		12		0.59			7,018		145		4.17
Total interest bearing liabilities	$	158,258		296		0.38		$	175,664		707		0.81
Net interest income			$	3,452						$	3,079
Net interest spread						4.10	%						3.49	%
Net interest margin						4.09	%						3.47	%

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in volume multiplied by the old rate, and (2) changes in rate, which are changes in rate multiplied by the old volume. Changes attributable to both rate and volume are shown as mixed.

	Six Months Ended June 30,
	2014 vs. 2013
										Total
	Increase (Decrease) Due to									Increase
	Rate			Volume			Mix			(Decrease)
	(in thousands)
Interest-earning assets
Fed funds and overnight deposits	$	(32	)	$	(31	)		40			(23	)
Investment securities	$	(26	)	$	234			(119	)		89
Other securities	$	170		$	(47	)		(95	)		28
Loans receivable	$	(334	)	$	71			131			(132	)
Total interest-earning assets	$	(222	)	$	227		$	(43	)	$	(38	)

Interest-bearing liabilities
Demand and NOW accounts	$	(1	)	$	1			(0	)		—
Money market accounts	$	1		$	(3	)		1			(1	)
Savings accounts	$	(1	)	$	1			(0	)		—
Certificates of deposit	$	(343	)	$	(316	)		382			(277	)
Federal Home Loan Bank advances	$	(251	)	$	(123	)		241			(133	)
Total interest-bearing liabilities	$	(595	)	$	(440	)	$	624		$	(411	)
Net interest income										$	373

Provision for Loan Losses

The Bank recorded a reverse provision for loan losses of $90,000, which was due to a one-time recovery on a previously charged off loan, for the quarter ended June 30, 2014 compared to a provision for loan losses of $387,000 for the same period a year ago.

After evaluating the level of the allowance for loan losses in the second quarter, and upon receiving the one-time recovery of the previously charged off loan, a reverse provision was recorded. The Corporation recorded net charge offs of $77,000 during the second quarter of 2014 compared to a net charge off of $288,000 for the same period in 2013. The Corporation continues to monitor real estate dependent loans and focus on asset quality. Non-performing loans totaled $1.1 million as of June 30, 2014, decreasing from $1.4 million at December 31, 2013. Net charge offs for the six months ended June 30, 2014 were $72,000 compared to $678,000 for the same period in 2013. The Bank recorded a reverse provision $90,000 in the six months ended June 2014 compared to $387,000 for the same period a year ago.

Nonperforming assets, including the amount of real estate in judgment and foreclosed and repossessed properties, decreased from $2.4 million at the end of 2013 to $1.8 million as of June 30, 2014. The following table presents non-performing assets and certain asset quality ratios at June 30, 2014 and December 31, 2013.

	June 30,2014			December 31,2013
				(In thousands)
Non-performing loans	$	1,085		$	1,354
Real estate in judgement		243			523
Foreclosed and repossessed assets		501			545
Total non-performing assets	$	1,829		$	2,422

Non-performing loans to total loans		0.82	%		1.11	%
Non-performing assets to total assets		0.97	%		1.42	%
Allowance for loan losses to non-performing loans		231.30	%		197.40	%
Allowance for loan losses to total loans receivable		1.91	%		2.20	%

Non-interest Income

Non-interest income for the quarter ended June 30, 2014 decreased by $513,000 to $773,000 from $1.3 million when compared to the same period a year ago. The decrease in non-interest income was mainly attributable to a decrease in gain on the sale of loans and other income.

Gain on sale of loans decreased $259,000, to $314,000 for the quarter ended June 30, 2014 from $573,000 for the same period a year ago. The decrease was a result of the slow-down in residential lending as rates rose in the second half of 2013 and remained higher during the first half of 2014 than rates were during the first half of 2013.

Other income decreased $253,000 during the second quarter ending June 30, 2014 compared to the same period a year ago. This decrease was largely due a charge to other income of $156,000 which was associated with Freddie Mac.

Non-interest income for the six months ended June 30, 2014 decreased $874,000, or 34.9%, from $2.5 million to $1.6 million compared to the same period a year ago. This is mainly attributable to a decrease in gain on sale of loans.

Net gain on sale of loans decreased $700,000 for the six months ended June 30, 2014 from $1.2 million to $500,000 when compared to the same period a year ago. Fees and Service charges decreased $38,000 for the six months ended June 30, 2014 compared to the same period a year ago primarily due to a decrease in income associated with NSF fees. Other income decreased $157,000 for the six months ended June 30, 2013 compared to a year ago due to the charge taken in the second quarter. All other non-interest income decreased $13,000.

Non-interest Expense

Non-interest expense decreased $634,000, or 19.9% for the quarter ended June 30, 2014 compared to the same period a year ago. The decrease is primarily due to decreases in compensation and benefits, other general and administrative expenses and foreclosed property expense. Compensation and benefits decreased $309,000 as a result of the reduction in staffing completed early in the fourth quarter of 2013. Other general and administrative expense decreased $151,000 for the quarter ended June 30, 2014 compared to the same period a year ago, largely due to reduction in expenses associated with travel and lodging and office supplies. Foreclosed property expense decreased $90,000 for the quarter as a result of decreased maintenance costs associated with the other repossessed properties held by the bank. Amortization of core deposit intangible decreased $36,000 as a result of the conclusion of the amortization of the core deposit intangible. All other non-interest expenses decreased $48,000 as of June 30, 2014 compared to the same period a year ago.

Noninterest expense decreased $1.2 million for the six months ended June 30, 2014 compared to the same period a year ago. Salaries and employee benefits decreased $610,000. Other general and administrative expenses decreased $229,000 year over year largely due reasons mentioned previously. Foreclosed property expense decreased $132,000, mainly due to continued efforts to aggressively dispose of properties. Professional fees decreased $78,000 due to a decrease in fees associated with problem loans. Amortization of core deposit intangible decreased $71,000 as a result of the conclusion of the amortization of the core deposit intangible. Mortgage banking expense decreased $58,000 due to decrease in one to four family refinance activity. All other non-interest income expense decreased $24,000.

Federal Income Tax Expense

For the six months ended June 30, 2014, we generated pretax income of $64,000. At June 30, 2014 we have a deferred tax asset of $9.2 million, primarily the result of net operating losses and timing differences associated with the deductibility of the allowance for loan losses. Based on our most recent assessment of our ability to utilize the deferred tax asset through generation of taxable income we have determined that we should retain the valuation allowance previously established on the deferred tax asset, reducing the carrying value to zero as of June 30, 2014. For the six months ended June 30, 2014, we reduced our tax valuation to the extent we would have otherwise recorded tax expense, which was approximately $15,000. There were no other changes in the carrying value of the deferred tax asset during the quarter.

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.

Prior to termination of the Consent Order, under regulatory guidelines which subject the Bank to restrictions under the FDIC the Bank was prohibited from accepting, renewing, or rolling over brokered deposits without a waiver from the FDIC. These guidelines also subjected the Bank to restrictions on the interest rates that could be paid on deposits. These restrictions have been eliminated by the termination of the Consent Order.

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, 2014 totaled $24.3 million. Management believes that a significant portion of these certificates of deposit will remain with the Bank provided the Bank pays a rate of interest that is competitive both in the local and national markets.

If necessary, additional funding sources include additional local core deposits, certificates of deposit gathered via the internet, Federal Home Loan Bank advances and securities available for sale. At June 30, 2014 and based on current collateral levels, the Bank could borrow an additional $15.9 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 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 $7.7 million during the six months ended June 30, 2014 compared to a $7.6 million increase for the same period in 2013. The primary sources of cash for the six months ended June 30, 2014 were $12.0 million in proceeds of FHLBI advances $12.4 million in proceeds from the sale of mortgage loans, an increased in deposits of $5.7 million and $781,000 the maturities of available-for-sale investment securities compared to $34.6 million in proceeds from the sale of mortgage loans, $8.2 million of principal loan collections in excess of loan originations and $1.9 million in the maturities of available-for-sale investment securities for the six months ended June 30, 2013.

The primary uses of cash for the six months ended June 30, 2014 were $13.2 million of mortgage loans originated for sale, 10.3 million of principal loan originations in excess of collections and $521,000 in purchases of available for sale securities compared to $34.0 million of mortgage loans originated for sale, $3.0 decrease in deposits and $3.0 million in purchases of available for sale securities.

Contractual Obligations AND OFF BALANCE SHEET ARRANGEMENTS

The Corporation has certain obligations and commitments to make future payments under contracts. At June 30, 2014, the aggregate contractual obligations and commitments are:

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.

	Payments Due by Period
			Less than		1-3		3-5		After
	Total		1 year		years		years		5 years
	(Dollars in Thousands)
Certificates of deposit	$	42,580	$	24,353	$	12,974	$	5,253	$	—
FHLB advances		12,000		8,000		4,000		—		—
Total	$	54,580	$	32,353	$	16,974	$	5,253	$	—

	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	$	9,116	$	9,116	$	—	$	—	$	—
Unfunded commitments under HELOCs		6,588		1,245		1,084		1,476		2,783
Unfunded commitments under Contruction loans		579		564		15		—		—
Unfunded commitments under
Commercial LOCs		596		405		191		—		—
Letters of credit		—		—		—		—		—
Total	$	16,879	$	11,330	$	1,290	$	1,476	$	2,783

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, 2014 were as follows: Tier 1 leverage ratio 10.17%, Tier 1 risk-based capital ratio 14.50%; and total risk-based capital 15.76%.

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%. In connection with the termination of the Consent Order the Company agreed the Bank would maintain a Tier 1 risk-based capital ratio of at least 8.5%. At June 30, 2014, these capital ratio requirements have been met.

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, 2014 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, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

PART II-OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

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

Not applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

Item 4. [RESERVED]

Item 5. OTHER INFORMATION

Not applicable

Item 6. EXHIBITS

See the index to exhibits.

SIGNATURES

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

	MONARCH COMMUNITY BANCORP, INC.

Date: August 14, 2014	By:	/s/ Richard J. DeVries
	Richard J. DeVries
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: August 14, 2014	And:	/s/ Rebecca S. Crabill
	Rebecca S. Crabill
	Senior Vice President, Chief Financial Officer
	(Principal Financial Officer)

INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit

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

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

32	Section 1350 Certification.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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MONARCH COMMUNITY BANCORP INC Reports