10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

Commission file number 0-49814

MONARCH COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)	04-3627031 (I.R.S. Employer Identification No.)
375 North Willowbrook Road, Coldwater, Michigan (Address of principal executive offices)	49036 (Zip Code)

Registrant’s telephone number, including area code: (517) 278-4566

Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share registered on NASDAQ Capital Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Exchange Act. Yes o No þ.

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

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o Accelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the average of bid and ask price market price of such stock as of June 30, 2008 was approximately $19.3 million as reported on the NASDAQ Capital Market. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the issuer that such person is an affiliate of the issuer.)

As of February 28, 2009, the registrant had 2,046,102 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE PART III of Form 10-K — Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in April 2009.

PART I

ITEM 1. Business

General

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

On April 15, 2004, the Company completed its acquisition of MSB Financial, Inc., parent company of Marshall Savings Bank. Accordingly, MSB Financial was merged with and into Monarch Community Bancorp, Inc. On June 7, 2004, Marshall Savings Bank was merged with and into Monarch Community Bank. The Company issued a total of 310,951 shares of its common stock and paid cash of $19.7 million to former MSB Financial stockholders. The cash paid in the transaction came from the Company’s existing liquidity. The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase accounting fair value adjustments are being amortized under various methods and over the lives of the corresponding assets and liabilities. Goodwill recorded for the acquisition amounted to $9.6 million and is not amortized but evaluated for impairment at least annually. A core deposit intangible of $2.1 million was recorded as part of the acquisition and is being amortized on an accelerated basis over a period of 9.5 years.

Monarch Community Bank provides a broad range of banking services to its primary market area of Branch, Calhoun and Hillsdale counties, Michigan. The Bank owns 100% ownership of First Insurance Agency. First Insurance Agency is a licensed insurance agency established to allow for the receipt of fees on insurance services provided to the Bank’s customers. The Bank also owns a 24.98% interest in a limited partnership formed to construct and operate multi-family housing units. Community Services Group, Inc. with assets totaling $996,000 as of April 30, 2006 was dissolved with no gain or loss on the dissolution.

On June 3, 2006, the Company completed the conversion of the Bank from a federally chartered stock savings institution to a Michigan state chartered commercial bank. As a result of the conversion, the Company became a federal bank holding company regulated by the Board of Governors of the Federal Reserve. The Bank will be regulated by the Michigan Office of Financial and Insurance Regulation (“OFIR”) and the Federal Deposit Insurance Corporation (“FDIC”). Prior to the conversion, both the Company and the Bank had been regulated by the federal Office of Thrift Supervision. The Bank’s deposits continue to be insured to the maximum extent allowed by the Federal Deposit Insurance Corporation (“FDIC”). The Bank has a website at http://www.monarchcb.com. References in this Form 10-K to “we”, “us”, and “our” refer to the Company and/or the Bank as the context requires. Our common stock trades on The NASDAQ Capital Market under the symbol “MCBF.”

Our principal business consists of attracting retail deposits from the general public and investing those funds primarily in permanent loans secured by first mortgages on owner-occupied, one-to-four family residences, loans secured by commercial and multi-family real estate, commercial business loans and construction loans secured primarily by residential real estate. We also originate home equity loans and a variety of consumer loans. Our originations of consumer loans has steadily declined over the last five years.

Our revenues are derived principally from interest on loans, investment securities and overnight deposits, as well as from sales of loans and fees and charges on deposit accounts.

We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include passbook and statement savings accounts, money market deposit accounts, interest bearing and non-interest bearing checking accounts and certificates of deposit with varied terms ranging from six months to 60 months. We solicit deposits in our market area and utilize brokered deposits.

At December 31, 2008, we had assets of $291.8 million, including net loans of $247.5, deposits of $192.2 million and stockholders’ equity of $36.3 million.

2

Forward-Looking Statements

This document, including information incorporated by reference, future filings by Monarch Community Bancorp on Form 10-Q and Form 8-K and future oral and written statements by Monarch Community Bancorp and its management may contain forward-looking statements which are based on assumptions and describe future plans, strategies and expectations of Monarch Community Bancorp and Monarch. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar words. Our ability to predict results or the actual effect of future plans or strategies is uncertain and we disclaim any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information or otherwise. Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, changes in the relative difference between short and long-term interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, including levels of non-performing assets, demand for loan products, deposit flows, competition, demand for financial services in our market area, our operating costs and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements.

Employees

The Bank employs 85 full-time and 3 part-time employees as of December 31, 2008. The holding company does not have any employees.

Market Area

Headquartered in Coldwater, Michigan, our geographic market area for loans and deposits is principally Branch, Calhoun and Hillsdale counties. As of June 30, 2008, we had an 19.61% market share of FDIC-insured deposits in Branch County, a 5.6% market share of FDIC-insured deposits in Calhoun County and a 3.74% market share of FDIC-insured deposits in Hillsdale County, ranking us third, seventh and seventh, respectively, in those counties among all insured depository institutions.

The local economy is based primarily on manufacturing and agriculture. Most of the job growth, particularly in Hillsdale County, has been in automobile products-related manufacturing. Median household income and per capita income for our primary market are below statewide averages, reflecting the rural economy and limited economic growth opportunities.

Lending Activities

General. At December 31, 2008, our net loan portfolio totaled $247.5 million, which constituted 84.8% of our total assets.

Our mortgage loans carry either a fixed or an adjustable rate of interest. Mortgage loans are generally long-term and amortize on a monthly basis with principal and interest due each month. Mortgage loans up to $300,000 may be approved by certain loan officers and loans up to $500,000 may be approved by the President, within individual lending limits set by the Board of Directors. Loans up to $1.5 million may be approved by the Management Loan Committee which is comprised of several senior managers. Loans over $1.5 million must be approved by the Board of Directors’ Loan Committee. Applications for loans that would be considered sub-prime cannot be approved by individual loan officers and must be presented to the Management Loan Committee for review and approval. Our legal lending limit is summarized in the Loans to One Borrower paragraph of the Regulation and Supervision section of this document.

3

Loan Portfolio Composition. The following table presents information concerning the composition of our loan portfolio as of the dates indicated.

	December 31, 2008					December 31, 2007					December 31, 2006					December 31, 2005					December 31, 2004
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
											(Dollars in thousands)
Real Estate Loans:
One-to four-family	$	124,855		49.80	%	$	126,780		55.80	%	$	140,374		60.30	%		139,636	$	64.40	%	$	141,251		62.31	%
Multi-family		5,728		2.26			5,594		3.22			7,511		3.22			3,534		1.67			4,042		1.79
Commercial		75,730		30.19			56,714		24.97			41,079		17.64			34,721		16.03			42,746		18.87
Construction or development		9,499		3.79			6,409		2.82			9,529		4.09			5,415		2.50			8,853		3.92
Total real estate loans		215,812		86.04			195,497		85.25			198,493		85.25			183,306		84.60			196,892		86.89
Other loans:
Consumer loans:
Home equity		20,677		8.24			20,430		8.99			19,077		8.19			16,170		7.46			14,234		6.28
Other		5,737		2.29			7,014		3.09			9,087		3.90			10,822		5.00			10,151		4.48
Total consumer loans		26,414		10.53			27,444		12.08			28,164		12.09			26,992		12.46			24,385		10.76
Commercial Business Loans		8,609		3.43			4,228		1.86			6,205		2.67			6,364		2.94			5,330		2.35
Total other loans		35,023		13.96			31,672		13.94			34,369		14.76			33,356		15.40			29,715		13.11
Total Loans		250,835		100.00	%		227,169		100.00	%		232,862		100.00	%		216,662		100.00	%		226,607		100.00	%
Less:
Allowance for loan losses		2,719					1,824					2,024					2,925					6,420
Net deferred loan fees		574					548					591					640					808
Loans in process		—					—					—					—					6
Total Loans, net	$	247,542				$	224,797				$	230,247					213,097				$	$219,373

4

The following table shows the composition of our loan portfolio by fixed and adjustable-rate at the dates indicated.

	December 31, 2008					December 31, 2007					December 31, 2006
	Amount		Percent			Amount		Percent			Amount		Percent
						(Dollars in thousands)
Fixed-Rate Loans
Real Estate Loans:
One-to-four family	$	92,644		36.9	%	$	83,386		36.7	%	$	87,568		37.6	%
Multi-family		5,524		2.2	%		5,397		2.4	%		5,578		2.4	%
Commercial		47,689		19.0	%		36,723		16.2	%		21,081		9.1	%
Construction or development		8,111		3.2	%		5,537		2.4	%		4,908		2.1	%
Total real estate loans		153,968		61.4	%		131,043		57.7	%		119,135		51.2	%
Consumer		19,406		7.7	%		21,354		9.4	%		20,687		8.9	%
Commercial Business		7,011		2.8	%		2,932		1.3	%		4,544		1.9	%
Total fixed-rate loans		180,385		71.9	%		155,329		68.4	%		144,366		62.0	%
Adjustable-Rate Loans
Real Estate Loans:
One-to-four family	$	32,211		12.8	%	$	43,394		18.3	%	$	52,805		22.7	%
Multi-family		204		0.1	%		197		0.1	%		1,932		0.8	%
Commercial		28,041		11.2	%		19,991		8.8	%		19,999		8.6	%
Construction or development		1,388		.6	%		872		0.3	%		4,622		2.0	%
Total real estate loans		61,844		24.7	%		64,454		27.5	%		79,358		34.1	%
Consumer		7,008		2.8	%		6,090		2.7	%		7,477		3.2	%
Commercial Business		1,598		.6	%		1,296		0.6	%		1,661		0.7	%
Total adjustable-rate loans		70,450		28.1	%		71,840		31.6	%		88,496		38.0	%
Total loans		250,835		100.0	%		227,169		100.0	%		232,862		100.0	%
Less:
Allowance for loan losses		2,719					1,824					2,024
Net deferred loan fees		574					548					591
Loans in process		—					—					—
Total Loans, net	$	247,542				$	224,797				$	230,247

5

The following table illustrates the contractual maturity of our loan portfolio at December 31, 2008. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

	Real Estate
						Multi-family and					Construction or
	One-to-Four Family					Commercial					Development					Consumer					Commercial Business					Total
			Weighted					Weighted					Weighted					Weighted					Weighted					Weighted
			Average					Average					Average					Average					Average					Average
	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
		(Dollars in Thousands)
Due to Mature:
One year or less (1)		7,505		6.22	%		5,048		6.06	%		2,470		5.94	%		1,860		7.77	%		1,045		6.69	%		17,928		6.32	%
After one year through five years		20,838		6.87	%		53,354		6.59	%		1,506		6.73	%		14,907		7.60	%		2,242		6.69	%		92,847		6.82	%
After five years		96,461		6.72	%		23,174		6.32	%		5,574		4.82	%		9,646		5.64	%		5,205		7.28	%		140,060		6.52	%

⁽¹⁾ Includes demand loans.

The total amount of loans due after December 31, 2009 which have predetermined interest rates is $165.2 million while the total amount of loans due after such date which have floating or adjustable rates is $68.3 million.

6

One-to-Four Family Residential Real Estate Lending. We have focused our lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences in our market area. At December 31, 2008, one-to-four family residential mortgage loans totaled $124.9 million, or 49.8% of our gross loan portfolio.

We have originated sub-prime residential mortgage loans since 1985. However in more recent years we have moved away from this type of lending due to the higher risk associated with it. Our definition of sub-prime lending is substantially similar to regulatory guidelines. We review a borrower’s credit score, debt-to-income ratio and the loan-to-value ratio of the collateral in determining whether a loan is sub-prime. We utilize a loan risk grading system for all one-to-four family residential loans. The risk grading system provides that all loans with a credit score of less than 660 shall be considered for potential sub-prime classification. For a loan with a credit score between 600 and 660, loan-to-value ratio, debt-to-income ratio and the borrower’s history with the Bank will determine whether or not the loan is classified as sub-prime.

At December 31, 2008, $15.5 million, or 12.4% of our residential mortgage loans were classified as sub-prime loans as compared to $14.6 million, or 11.6% at December 31, 2007. The increase is primarily due to refinancing and restructuring existing loans in our portfolio. We charge higher interest rates on our sub-prime residential mortgage loans to attempt to compensate for the increased risk in these loans. Sub-prime lending entails a higher risk of delinquency, foreclosure and ultimate loss than residential loans made to more creditworthy borrowers. Delinquencies, foreclosure and losses generally increase during economic slowdowns or recessions as experienced in recent history. During 2008, $303,000, or 16.7%, of our total net charge-offs of $1.8 million were due to sub-prime loans as compared to $284,000, or 23.7% of our total net charge-offs of $1.2 million for 2007. During 2008 we have made significant efforts in assisting borrowers who are experiencing financial difficulty. See “Asset Quality.”

We generally underwrite our one-to-four family loans based on the applicant’s employment and credit history and the appraised value of the subject property. Presently, we lend up to 103% of the lesser of the appraised value or purchase price for one-to-four family residential loans. For loans with a loan-to-value ratio in excess of 89%, we generally require private mortgage insurance to reduce our credit exposure below 80%. Properties secured by one-to-four family loans are appraised by licensed appraisers. We obtain title insurance and require our borrowers to obtain hazard insurance and flood insurance, if necessary, in an amount not less than the value of the property improvements.

We currently originate one-to-four family mortgage loans on either a fixed rate or adjustable rate basis, as consumer demand dictates. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with secondary market requirements and other local financial institutions, and consistent with our asset/liability strategies. Our pricing for sub-prime loans is higher, as we attempt to offset the increased risks and costs involved in dealing with a greater percentage of delinquencies and foreclosures.

Adjustable-rate mortgages, or ARM loans, are offered with either a one-year, three-year, five-year or seven-year term to the initial repricing date. After the initial period, the interest rate for each ARM loan adjusts annually for the remaining term of the loan. During the years ended December 31, 2008 and December 31, 2007, we originated $3 million and $1.8 million of one-to-four family ARM loans, respectively, and $51.8 million and $40.0 million of one-to-four family fixed-rate mortgage loans, respectively.

Fixed-rate loans secured by one-to-four family residences have contractual maturities of up to 30 years, and are generally fully amortizing, with payments due monthly. We also offer balloon loans with one, three, five and seven year maturities. These loans normally remain outstanding, however, for a substantially shorter period of time because of refinancing and other prepayments. A significant change in the current level of interest rates could alter the average life of a residential loan in our portfolio considerably. Our one-to-four family loans are generally not assumable, do not contain prepayment penalties and do not permit negative amortization of principal. Most are written using secondary market underwriting guidelines, although we retain in our portfolio those loans which do not qualify for sale in the secondary market. Our real estate loans generally contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

7

Our one-to-four family residential ARM loans are fully amortizing loans with contractual maturities of up to 30 years, with payments due monthly. Our ARM loans generally provide for a maximum 2% annual adjustment and 6% lifetime adjustment to the initial rate. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as is our cost of funds.

In order to remain competitive in our market area, we may originate ARM loans at initial rates below the fully indexed rate, although that has not been a strategy in recent years.

ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s payment rises, increasing the potential for default. In past periods of rising interest rates, we have not experienced difficulty with the payment history for these loans. See “— Asset Quality — Non-performing Assets and Classified Assets.”

Multi-family and Commercial Real Estate Lending. We offer a variety of multi-family and commercial real estate loans. These loans are secured primarily by residential rental properties, commercial properties, retail establishments, churches and small office buildings located in our market area. At December 31, 2008, multi-family and commercial real estate loans totaled $81.5 million or 32.5% of our gross loan portfolio.

Our loans secured by multi-family and commercial real estate are originated with either a fixed or variable interest rate. The interest rate on variable-rate loans is based on the Wall Street Journal prime rate plus or minus a margin, generally determined through negotiation with the borrower. Loan-to-value ratios on our multi-family and commercial real estate loans typically do not exceed 80% of the appraised value of the property securing the loan. These loans which are typically balloon loans, in general require monthly payments, may not be fully amortizing and have maximum maturities of 25 years.

Loans secured by multi-family and commercial real estate are underwritten based on the income producing potential of the property and the financial strength of the borrower. We generally require personal guarantees of the principals of the borrower in addition to the security property as collateral for these loans. When legally permitted, we require an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family and commercial real estate loans are generally performed by independent state licensed fee appraisers approved by the Board of Directors. See “— Loan Originations, Purchases, Sales and Repayments.”

We do not generally maintain an insurance escrow account for loans secured by multi-family and commercial real estate, although we may maintain a tax escrow account for these loans. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is requested or required to provide periodic financial information.

Loans secured by multi-family and commercial real estate properties are generally larger and involve a greater degree of credit risk than one-to-four family residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “— Asset Quality — Non-performing Loans.”

8

Construction and Land Development Lending. We make construction loans to builders and to individuals for the construction of their residences as well as to businesses and individuals for commercial real estate construction projects. At December 31, 2008, we had $9.5 million in construction and land development loans outstanding, representing 3.8% of our gross loan portfolio.

Construction and land development loans are obtained through continued business with builders who have previously borrowed from us, from walk-in customers and through referrals from realtors and other customers. The application process includes submission of plans, specifications and costs of the project to be constructed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction, including the land and the building. We conduct regular inspections of the construction project being financed. During the construction phase, the borrower generally pays interest only on a monthly basis. Loan-to-value ratios on our construction and development loans typically do not exceed 80% of the appraised value of the project on an as completed basis, although the Board of Directors has made limited exceptions to this policy where special circumstances exist.

Because of the uncertainties inherent in estimating construction and development costs and the market for the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. These loans also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans.

Consumer and Other Lending. Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates, and carry higher rates of interest than do one-to-four family residential mortgage loans. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. At December 31, 2008, our consumer loan portfolio totaled $26.4 million, or 10.5% of our gross loan portfolio. We offer a variety of secured consumer loans, including home equity loans and lines of credit, auto loans, manufactured housing loans and loans secured by savings deposits, however the majority of new originations are home equity loans and lines of credit. We also offer a limited amount of unsecured loans including home improvement loans. We originate our consumer loans in our market area.

Our home equity lines of credit totaled $20.7 million, and comprised 8.4% of our gross loan portfolio at December 31, 2008. These loans may be originated in amounts, together with the amount of the existing first mortgage, of up to 100% of the value of the property securing the loan. The term to maturity on our home equity lines of credit ranges from 3 to 5 years for fixed rate loans and 1 to 15 for variable rate loans. No principal payments are required on most home equity lines of credit during the loan term. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower.

Consumer loans may entail greater risk than do one-to-four family residential mortgage loans, particularly in the case of consumer loans which are secured by rapidly depreciable assets, such as automobiles, boats, and manufactured housing. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

9

Commercial Business Lending. At December 31, 2008, commercial business loans comprised $8.5 million, or 3.5% of our gross loan portfolio. Most of our commercial business loans have been extended to finance local businesses and include short term loans to finance machinery and equipment purchases, inventory and accounts receivable. Commercial business loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital needs.

The terms of loans extended on the security of machinery and equipment are based on the projected useful life of the machinery and equipment, generally not to exceed seven years. Operating lines of credit generally are available to borrowers for up to 12 months, and may be renewed by Monarch. We issue a few standby letters of credit which are offered at competitive rates and terms and are generally issued on a secured basis. At December 31, 2008, there was a $10,000 financial standby letter of credit outstanding.

Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. Based on this underwriting information we assign a risk rating which assists management in evaluating the quality of the loan portfolio. We generally obtain personal guarantees on our commercial business loans. Nonetheless, these loans are believed to carry higher credit risk than more traditional single family loans.

Unlike residential mortgage loans, commercial business loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). Our commercial business loans are usually, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Loan Originations, Purchases, Sales and Repayments. We originate loans through referrals from real estate brokers and builders and other customers, our marketing efforts, and our existing and walk-in customers. While we originate adjustable-rate and fixed-rate loans, our ability to originate loans is dependent upon customer demand for loans in our market area. Demand is affected by local competition and the interest rate environment.

During the last several years up to 2008, due to low market interest rates, our dollar volume of fixed-rate, one-to-four family loans has substantially exceeded the dollar volume of the same type of adjustable-rate loans. Adjustable-rate loan originations as a percentage of total originations were 8.5% and 14.8% in 2008 and 2007 respectively. We sell a significant portion of the conforming, fixed-rate, one-to-four family residential loans we originate, primarily those with lower interest rates. We keep the sub-prime residential real estate loans we originate. We may purchase residential loans and commercial real estate loans from time to time.

In periods of economic uncertainty, the ability of financial institutions, including us, to originate or purchase large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in income.

10

The following table shows the loan origination, sale and repayment activities of Monarch for the periods indicated.

	Years Ended
	December 31,
	2008		2007
	(Dollars in thousands)
Originations by type:
Real Estate:
One-to-four family	$	54,846	$	44,652
Multi-family		250		608
Commercial		31,316		26,840
Construction or development		5,358		11,617
Total real estate loans		91,770		83,717
Consumer Loans:
Home Equity		5,809		7,407
Other		891		831
Commercial business		7,101		2,168
Total loans originated		105,571		94,123
Sales and Repayments:
One-to-four family loans sold		27,838		28,739
Commercial real estate loans sold		—		1,200
Principal repayments		54,067		69,906
Total reductions		81,905		99,845
Increase (decrease) in other items, net		921		243
Net increase (decrease)	$	22,745	$	(5,965	)

Asset Quality

When a borrower fails to make a payment on a residential mortgage loan on or before the due date, a late notice is mailed 10 to 15 days after the due date. All delinquent accounts are reviewed by a collector, who attempts to cure the delinquency by contacting the borrower once the loan is 30 days past due. Additionally, each week the collections department gives each loan officer a list of his or her loans that are 30 days past due. The loan officer attempts to contact the borrower to determine the reason for the delinquency and to urge the borrower to bring the loan current. Once the loan becomes 30 days delinquent, a letter is sent to the borrower requesting the borrower to bring the loan current, or, if that is not possible, to fill out and return a financial information update form. If the form is returned, the senior collector determines if the borrower exhibits an ability to repay, and, if so, brings the file to the Delinquency Committee for a decision whether to forbear collection action to allow the borrower to demonstrate the ability to make timely payments and/or establish an acceptable repayment plan to bring the loan current. If the borrower makes timely payments for a period of at least six months but does not appear to have the ability to bring the loan current, the file is given to a loan officer to obtain a new loan application from the borrower for the purpose of rewriting the loan in accordance with established loan policy. If the financial information update is not returned, or if the senior collector determines that the borrower no longer has the ability to repay the loan, or the Delinquency Committee declines to forbear collection activity, then when the loan becomes 60 days delinquent, the file is reviewed by the Delinquency Committee and the foreclosure process is begun by the sending of a notice of intent to foreclose. If during a period of forbearance the borrower fails to make timely payments, the Delinquency Committee reviews the loan and the foreclosure process commences unless extenuating circumstances exist. The notice of intent to foreclose allows the borrower up to 30 days to bring the account current. All loans over 60 days delinquent are handled by the senior collections officer until the delinquency is resolved or foreclosure occurs.

11

For consumer loans a similar collection process is followed. Follow-up contacts are generally on an accelerated basis compared to the mortgage loan procedure due to the nature of the collateral. Commercial loan collections are handled by our Delinquency Committee in conjunction with our Collection Department and the appropriate loan officer. The nature of these loans dictates that collection procedures are adjusted to suit each situation.

Delinquent Loans. The following tables set forth our loan delinquencies (60 days past due and over) by type, number, amount and percentage of type at the dates indicated:

								December 31, 2008
								Loans Delinquent For:
	60-89 Days							90 Days and Over							Total Delinquent Loans
					Percent of							Percent of							Percent of
					Loan							Loan							Loan
	Number		Amount		Category			Number		Amount		Category			Number		Amount		Category
								(Dollars in Thousands)
Real Estate
One-to-four family		50	$	2,284		1.83	%		23	$	466		0.37	%		73	$	2,750		2.20	%
Multi-family		—		—		0.00	%		1		164		2.86	%		1		164		2.86	%
Commercial		5		770		1.02	%		2		175		0.23	%		7		945		1.25	%
Construction or development		—		—		0.00	%		1		139		1.46	%		1		139		1.46	%
Total real estate loans		55	$	3,054		1.42	%		27	$	944		0.44	%		82	$	3,998		1.84	%
Consumer		5		73		0.28	%		3		115		0.44	%		8		188		0.71	%
Commercial Business		1		1		0.01	%		—		—		0.00	%		1		1		0.01	%
Total		61	$	3,128		1.25	%		30	$	1,059		0.42	%		91	$	4,187		1.67	%

								December 31, 2007
								Loans Delinquent For:
	60-89 Days							90 Days and Over							Total Delinquent Loans
					Percent of							Percent of							Percent of
					Loan							Loan							Loan
	Number		Amount		Category			Number		Amount		Category			Number		Amount		Category
								(Dollars in Thousands)
Real Estate
One-to-four family		31	$	1,457		1.15	%		12	$	607		0.48	%		43	$	2,064		1.63	%
Multi-family		—		—		0.00	%		—		—		0.00	%		—		—		0.00	%
Commercial		1		40		0.07	%		1		87		0.15	%		2		127		0.22	%
Construction or development		—		—		0.00	%		1		153		2.39	%		1		153		2.39	%
Total real estate loans		32	$	1,497		0.77	%		14	$	847		0.43	%		46	$	2,344		1.20	%
Consumer		7		87		0.32	%		—		—		0.00	%		7		87		0.32	%
Commercial Business		—		—		0.00	%		1		18		0.43	%		1		18		0.43	%
Total		39	$	1,584		0.70	%		15	$	865		0.38	%		54	$	2,449		1.08	%

12

Non-performing Assets. The table below sets forth the amounts and categories of the Bank’s non-performing assets. Loans are placed on non-accrual status when the loan is seriously delinquent and there is serious doubt that the Bank will collect all interest owing. Generally, all loans past due at least 90 days are placed on non-accrual status. For all years presented, the Bank had no troubled debt restructurings that involved forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates. Foreclosed assets include assets acquired in settlement of loans.

	December 31,
	2008			2007			2006			2005			2004
				(Dollars in Thousands)
Non-accruing loans:
One-to-four family		622			607		$	408		$	406		$	1,866
Multi-family		164			—			—			—			—
Commercial real estate		459			—						397			1,708
Construction or development		1,298			153			—			—			220
Consumer		28			—			60			8			93
Commercial business		—			—			—			—			344
Total		2,571			760			468			811			4,231
Accruing loans delinquent 90 days or more:
One-to-four family		—			—			—			—			—
Multi-family		—			—			—			—			—
Commercial real estate		—			87			—			—			—
Construction or development		—			—			—			—			—
Consumer		—			—			—			—			—
Commercial business		—			18			—			—			—
Total		—			105			—			—			—
Foreclosed assets:
One-to-four family (1)		1,669			1,453			1,580			2,239			1,560
Multi-family		—			—			—			—			—
Commercial real estate		407			62			—			480			400
Construction or development		—			—			—			—			—
Consumer		—			—			100			22			9
Commercial business		—			—			—			70			—
Total		2,076			1,515			1,680			2,811			1,969
Total non-performing assets	$	4,647		$	2,380		$	2,148		$	3,622		$	6,200
Total as a percentage of total assets		1.59	%		0.85	%		0.74	%		1.31	%		2.23	%

(1) Includes $1.3 million, $630,000, $895,000, $1.3 million and $726,000 in real estate in judgment and subject to redemption at December 31, 2008, 2007, 2006, 2005 and 2004 respectively.

For the years ended December 31, 2008, 2007 and 2006, respectively, there was $116,000, $89,000, and $60,000 of gross interest income which would have been recorded had non-accruing loans been current in accordance with their original terms.

13

Classified Assets. Federal regulations provide for the classification of loans, foreclosed and repossessed assets and other assets, such as debt and equity securities considered by the FDIC and OFIR to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management and approved by the board of directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC and OFIR, which may order the establishment of additional general or specific loss allowances.

In accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets, at December 31, 2008, we had classified $5.2 million of our assets as substandard, none as doubtful and none as loss. The total amount classified as substandard represented 14.3% of the Bank’s equity capital and 1.8% of the Bank’s assets at December 31, 2008. The allowance for loan losses at December 31, 2008 includes $364,000 related to substandard loans. At December 31, 2008, $4.6 million and $0 of substandard and doubtful assets, respectively, have been included in the table of non-performing assets. See “— Asset Quality — Delinquent Loans.”

Provision for Loan Losses. We recorded a provision for loan losses totaling $2.7 million for the year ended December 31, 2008 compared to $971,000 recorded for the year ended December 31, 2007. The provision for loan losses is charged to income to establish the allowance for loan losses to cover all known and inherent losses in the loan portfolio that are both probable and reasonable to estimate based on the factors discussed below under “Allowance for Loan Losses.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Comparison of Operating Results for the Years Ended December 31, 2008 and 2007 — Provision for Loan Losses” for a discussion of the reasons for the change in our loan loss provision.

Allowance for Loan Losses. The allowance is based on regular, quarterly assessments of the estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances for identified problem loans and portfolio segments. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

The formula allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of these loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based both on our historical loss experience as well as on significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.

14

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

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

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

Assessing the adequacy of the allowance for loan losses is inherently subjective as it requires making material estimates, including the net realizable value of collateral expected to be received on impaired loans that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, covers all known and inherent losses in the loan portfolio that are both probable and reasonable to estimate.

15

The following table summarizes activity in the allowance for loan losses for the years ending (000s omitted):

	December 31,
	2008			2007			2006			2005			2004
Balance at beginning of year	$	1,824		$	2,024		$	2,925		$	6,420		$	2,618
Charge-offs:
One-to-four family		879			774			223			754			375
Multi-family		—			28			—			—			—
Commercial real estate		321			197			15			1,904			1,306
Construction or development		50			—			340			6			—
Consumer		532			386			494			393			181
Commercial business		239			17			113			386			—
Total		2,021			1,402			1,185			3,443			1,862
Recoveries:
One-to-four family		4			16			4			78			105
Multi-family		—			—			—			—			—
Commercial real estate		2			—			—			1			28
Construction or development		—			—			—			—			—
Consumer		198			175			275			230			143
Commercial business		—			40			5			24			—
Total		204			231			284			333			276
Net charge-offs:		1,817			1,171			901			3,110			1,586
Allowance acquired in acquisition		—			—			—			—			513
Additions charged to operations		2,712			971			—			—			4,875
Provision recovered from operations		—			—			—			(385	)		—
Balance at end of year	$	2,719		$	1,824		$	2,024		$	2,925		$	6,420
Ratio of net charge-offs during the year to average loans		0.76	%		0.49	%		0.39	%		1.42	%		0.82	%
Allowance as a percentage of non-performing loans		105.76	%		210.87	%		432.48	%		360.67	%		151.74	%
Allowance as a percentage of total loans (end of year)		1.21	%		0.81	%		0.93	%		1.37	%		2.84	%

16

The distribution of our allowance for losses on loans at the dates indicated is summarized as follows:

	December 31,
	2008					2007					2006
	Amount of		Percentage			Amount of		Percentage			Amount of		Percentage
	Loan Loss		of			Loan Loss		of			Loan Loss		of
	Allowance		Allowance			Allowance		Allowance			Allowance		Allowance
One-to-four family	$	1,618		59.5	%	$	979		53.7	%	$	783		60.3	%
Multi-family and non-residential real estate		533		19.6	%		351		19.2	%		809		20.8	%
Construction or development		75		2.8	%		154		8.4	%		7		4.1	%
Consumer		305		11.2	%		287		15.7	%		302		12.1	%
Commercial business		188		6.9	%		53		2.9	%		123		2.7	%
Total	$	2,719		100.0	%	$	1,824		100.0	%	$	2,024		100.0	%

	2005					2004
	Amount of		Percentage			Amount of		Percentage
	Loan Loss		of			Loan Loss		of
	Allowance		Allowance			Allowance		Allowance
One-to-four family	$	1,378		64.4	%	$	1,516		62.3	%
Multi-family and non-residential real estate		1,091		17.7	%		4,513		20.7	%
Construction or development		17		2.5	%		27		3.9	%
Consumer		284		12.5	%		296		10.7	%
Commercial business		155		2.9	%		68		2.4	%
	$	2,925		100.0	%	$	6,420		100.0	%

Investment Activities

Commercial banks have the authority to invest in various types of liquid assets, including United States Treasury obligations and securities of various federal agencies, including callable securities, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, state chartered commercial banks may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that a state chartered commercial banks is otherwise authorized to make directly.

The President/CEO has the basic responsibility for the management of our investment portfolio, under the guidance of the asset and liability management committee. The President/CEO considers various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset and Liability Management and Market Risk.”

17

Our investment portfolio consists of U.S. government agency securities, municipal bonds and overnight deposits. This provides us with flexibility and liquidity. We also have a limited amount of mortgage-backed securities. See Note 3 of the Notes to Consolidated Financial Statements.

The following table sets forth the composition of our securities portfolio at the dates indicated (dollars in thousands):

	December 31, 2008							December 31, 2007
					Percent of							Percent of
			Fair		Total					Fair		Total
	Amortized		Market		Fair Market			Amortized		Market		Fair Market
	Cost		Value		Value			Cost		Value		Value
Available-for-sale securities:
U.S. government agency obligations	$	5,698	$	5,761		64.3	%	$	7,692	$	7,730		68.3	%
Mortgage-backed securities		739		734		8.2	%		932		918		8.1	%
Obligations of states and political subdivisions		2,375		2,421		27.0	%		2,381		2,436		21.5	%
Total available-for-sale securities	$	8,812	$	8,916		99.6	%	$	11,005	$	11,084		97.9	%
Held-to-maturity securities:
Municipal security	$	37	$	37		0.4	%	$	238	$	234		2.1	%
Total investment securities	$	8,849	$	8,953		100.0	%	$	11,243	$	11,318		100.0	%

	December 31, 2006
					Percent of
			Fair		Total
	Amortized		Market		Fair Market
	Cost		Value		Value
Available-for-sale securities:
U.S. government agency obligations	$	10,730	$	10,626		76.3	%
Mortgage-backed securities		1,108		1,082		7.8	%
Obligations of states and political subdivisions		1,964		1,998		14.3	%
Total available-for-sale securities	$	13,802	$	13,706		98.4	%
Held-to-maturity securities:
Municipal security
Total investment securities	$	14,030	$	13,934		100.0	%

18

The maturities of the investment securities portfolio, excluding FHLB stock, as of December 31, 2008 are indicated in the following table:

	Less than 1 year					1 to 5 years					5 to 10 years					Over 10 years					Total Securities
			Wgt					Wgt					Wgt					Wgt					Wgt
	Amortized		Ave			Amortized		Ave			Amortized		Ave			Amortized		Ave			Amortized		Ave
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
	(Dollars in Thousands)
Available-for-sale securities:
U.S. government agency obligations	$	2,998		4.33	%	$	1,251		2.65	%	$	1,449		5.12	%	$	—		0.00	%	$	5,698		4.16	%
Mortgage-backed securities		—		0.00	%		739		4.50	%		—		0.00	%		—		0.00	%		739		4.50	%
Obligations of states and political subdivisions		—					900		4.30	%		1,475		4.12	%		—		0.00	%		2,375		4.19	%
Total available-for-sale securities		2,998		4.33	%		2,889		3.64	%		2,925		4.62	%		—		0.00	%		8,812		4.20	%
Held-to-maturity securities:
Municipal security		—		0.00	%		37		4.50	%		—		0.00	%		—		0.00	%		37		4.50	%
Total investment securities	$	2,998		3.48	%	$	2,927		3.65	%	$	2,924		4.62	%	$	—		0.00	%	$	8,849		4.20	%

Sources of Funds

General. Our sources of funds are deposits, borrowings, receipt of principal and interest on loans, interest earned on or maturation of investment securities and overnight funds and funds provided from operations.

Deposits. We offer a variety of deposit accounts to both consumers and businesses having a wide range of interest rates and terms. Our deposits consist of passbook and statement savings accounts, money market deposit accounts, NOW and demand accounts and certificates of deposit. We solicit deposits in our market area and have accepted and continue to utilize brokered deposits. At December 31, 2008, we had $39.4 million of brokered deposits. In our experience brokered deposits are an attractive and stable source of funds and are necessary to supplement our local market deposit gathering. However, brokered deposits may be less stable than local deposits if deposit brokers or investors lose confidence in us or find more attractive rates at other financial institutions. We primarily rely on competitive pricing policies, marketing and customer service to attract and retain these deposits.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. We have become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. We try to manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe that our deposits are relatively stable sources of funds. Despite this stability, our ability to attract and maintain these deposits and the rates paid on them has been and will continue to be significantly affected by market conditions.

19

The following table sets forth our deposit flows during the periods indicated:

	Year Ended
	December 31,
	2008			2007
	(Dollars in Thousands)
Opening balance	$	177,936		$	192,572
Net deposits (withdrawals)		8,359			(20,743	)
Interest credited		5,861			6,107
Ending balance	$	192,156		$	177,936
Net increase	$	14,220		$	(14,636	)
Percent increase (decrease)		7.99	%		-7.60	%

The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by Monarch at the dates indicated:

	Year Ended December 31,
	2008					2007
			Percent					Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Transaction and Savings Deposits:
Non-interest bearing accounts	$	13,883		7.2	%	$	13,609		7.6	%
Savings accounts		18,488		9.6	%		19,426		10.9	%
Checking & NOW accounts		16,058		8.4	%		17,927		10.1	%
Money market accounts		41,156		21.4	%		26,014		14.6	%
Total transaction and savings	$	89,585		46.6	%	$	76,976		43.3	%
Certificates:
0.00-1.99%		72		0.0	%		—		0.0	%
2.00-3.99%		45,309		23.6	%		5,712		3.2	%
4.00-5.99%		57,190		29.8	%		95,248		53.5	%
Total certificates		102,571		53.4	%		100,960		56.7	%
Total deposits	$	192,156		100.0	%	$	177,936		100.0	%

20

The following table indicates the amount of our certificates of deposit by time remaining until maturity as of December 31, 2008:

	Maturity
			Over		Over		Over
	3 Months		3 to 6		6 to 12		12
	or less		Months		Months		Months		Total
	(Dollars in Thousands)
Certificates of deposit less than $100,000	$	9,245	$	9,029	$	17,205	$	20,471	$	55,950
Certificates of deposit of $100,000 or more		2,421		9,181		11,715		23,304		46,621
Total certificates of deposit	$	11,666	$	18,210	$	28,920	$	43,775	$	102,571

The following table shows rate and maturity information for our certificates of deposit as of December 31, 2008:

	0.00-1.99%			2.00-3.99%			4.00-5.99%			6.00-7.99%			Total		Percent of Total
							(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
March 31, 2009	$	—		$	8,618		$	3,048		$	—		$	11,666		11.4	%
June 30, 2009		—			11,401			6,809			—			18,210		17.8	%
September 30, 2009		—			6,616			4,304			—			10,920		10.6	%
December 31, 2009		65			8,396			9,589			—			18,050		17.6	%
March 31, 2010		—			394			3,812			—			4,206		4.1	%
June 30, 2010		—			1,489			2,107			—			3,596		3.5	%
September 30, 2010		—			535			4,403			—			4,938		4.8	%
December 31, 2010		—			1,275			1,376			—			2,651		2.6	%
March 31, 2011		—			812			3,877			—			4,689		4.6	%
June 30, 2011		—			195			1,225			—			1,420		1.4	%
September 30, 2011		—			196			5,203			—			5,399		5.3	%
December 31, 2011		—			2,305			3,695			—			6,000		5.8	%
Thereafter		7			3,077			7,742			—			10,826		10.6	%
Total	$	72		$	45,309		$	57,190		$	—		$	102,571		100.0	%
Percent of total		0.07	%		44.17	%		55.76	%		0.00	%

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Borrowings. Although deposits are our primary source of funds, we utilize borrowings when they are a less costly source of funds, when we desire additional capacity to fund loan demand or when they meet our asset/liability management goals. Our borrowings historically have consisted of advances from the Federal Home Loan Bank of Indianapolis and Fed funds purchased from a correspondent bank.

We may obtain advances from the Federal Home Loan Bank of Indianapolis upon the security of certain of our mortgage loans and investment securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. At December 31, 2008, we had $60.2 million in Federal Home Loan Bank advances outstanding. See Note 9 of the Notes to Consolidated Financial Statements for information on maturity dates and interest rates related to our Federal Home Loan Bank advances.

We may also obtain fed funds purchased from a correspondent bank. The Bank has an unsecured federal funds line of credit with a correspondent bank allowing for overnight borrowings up to $3.0 million. At December 31, 2008 we had $1.0 million fed funds purchased outstanding at a rate of .25%.

The following table sets forth the maximum month-end balance and average balance of Federal Home Loan Bank advances and fed funds purchased for the periods indicated:

	Year Ended
	December 31,
	2008		2007
	(Dollars in Thousands)
Maximum Balance:
FHLB advances	$	62,330	$	62,476
Fed funds purchased	$	3,000	$	—
Average Balance:
FHLB advances	$	55,106	$	57,859
Fed funds purchased	$	55	$	—

The following table sets forth certain information concerning our borrowings at the dates indicated.

	December 31,
	2008			2007
	(Dollars in Thousands)
FHLB advances	$	60,178		$	59,330
Fed funds purchased	$	1,000		$	—
Weighted average interest rate of FHLB
FHLB advances		4.45	%		5.10	%
Fed funds purchased		0.25	%		0.00	%

Competition

We face strong competition in originating real estate and other loans and in attracting deposits. Competition comes from a wide array of sources including but not limited to mortgage brokers, savings institutions, other commercial banks, and credit unions including non-local Internet based and telephone-based competition.

Employees

At December 31, 2008, we had a total of 85 employees, including 3 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.

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Federal and State Taxation

Federal Taxation

General. The Company is subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Monarch Community Bancorp. Our federal income tax returns for the past three years are open to audit by the IRS. In our opinion, any examination of still open returns would not result in a deficiency which could have a material adverse effect on our financial condition. No federal income tax returns are being audited by the IRS at this time.

Method of Accounting. For federal income tax purposes, the Company reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on December 31, for filing its federal income tax return.

Bad Debt Reserves. The Bank is on the experience method to determine its bad debt deduction for tax purposes. The Bank has made a conformity election and charges off bad debts for tax purposes in accordance with regulatory guidelines.

Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act, bad debt reserves created prior to the year ended December 31, 1997, were subject to recapture into taxable income should the Bank fail to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should the Bank make certain non-dividend distributions or cease to maintain a bank charter.

Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Bank has not been subject to the alternative minimum tax, nor do we have any such amounts available as credits for carryover.

Corporate Dividends-Received Deduction. Monarch Community Bancorp may eliminate from its income dividends received from the Bank if it elects to file a consolidated return with the Bank. The corporate dividends-received deduction is 100% or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf. Monarch Community Bancorp has elected to file a consolidated return with the Bank.

State Taxation

Monarch Community Bancorp and Monarch Community Bank are subject to the Michigan Business Tax (MBT). The MBT is a consolidated tax based on equity of the corporation. The tax returns of the Bank for the past four years are open to audit by the Michigan taxation authorities. No returns are being audited by the Michigan taxation authority at the current time. Other applicable state taxes include generally applicable sales, use, real property taxes, and personal property taxes.

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Regulation and Supervision

General

The growth and earnings performance of the Company and the Bank can be affected not only by management decisions and general economic conditions, but also by the policies of various governmental regulatory authorities including, but not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Michigan Office of Financial and Insurance Regulation (the “OFIR”), the Internal Revenue Service and state taxing authorities. Financial institutions and their holding companies are extensively regulated under federal and state law. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.

Federal and state laws and regulations generally applicable to financial institutions, such as the Company and the Bank, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds and the depositors, rather than the shareholders, of financial institutions.

The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities and Exchange Commission under the Exchange Act.

The Company’s common stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period.

The following references to material statutes and regulations affecting the Company and the Bank are brief summaries and do not purport to be complete, and are qualified in their entirety by reference to such statues and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and the Bank. See “Recent Developments” contained in “Management’s Discussion and Analysis.”

The Company

General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is required to register with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the “BHCA”). In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not do so absent such policy. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require.

Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring holding company and all of its insured depository institution affiliates.

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The BHCA limits the activities of a bank holding company that has not qualified as a financial holding company to banking and the management of banking organizations, and to certain non-banking activities that are deemed to be so closely related to banking or managing or controlling banks as to be a proper incident to those activities. Such non-banking activities include, among other things: operating a mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, nonoperating basis; and providing securities brokerage services for customers.

In November 1999, the Gramm-Leach-Bliley Act (the “GLB Act”) was signed into law. Under the GLB Act, a bank holding company whose subsidiary depository institutions all are well-capitalized and well-managed and who have Community Reinvestment Act ratings of at least “satisfactory” may elect to become a financial holding company. A financial holding company is permitted to engage in a broader range of activities than are permitted to bank holding companies.

Those expanded activities include any activity which the Federal Reserve (in certain instances in consultation with the Department of the Treasury) determines, by order or regulation, to be financial in nature or incidental to such financial activity, or to be complementary to a financial activity and not to pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Such expanded activities include, among others: insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities, and acting as principal, agent, or broker for such purposes; providing financial, investment, or economic advisory services, including advising a mutual fund; and underwriting, dealing in, or making a market in securities. The Company has not elected to be treated as a financial holding company.

Federal law also prohibits the acquisition of control of a bank holding company, such as the Company, by a person or a group of persons acting in concert, without prior notice to the Federal Reserve. Control is defined in certain cases as the acquisition of 10% of the outstanding shares of a bank holding company.

Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guideline levels, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least 4% must be Tier I capital (which consists principally of shareholders’ equity). The leverage requirement consists of a minimum ratio of Tier I capital to total assets of 3% for the most highly rated bank holding companies, with minimum requirements of 4% to 5% for all others.

The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier I capital less all intangible assets), well above the minimum levels.

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Pursuant to its Small Bank Holding Company Policy, the Federal Reserve exempts certain bank holding companies from the capital requirements discussed above. The exemption applies only to bank holding companies with less than $500 million in consolidated assets that: (i) are not engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) do not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and (iii) do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. The Company qualifies for this exemption and, thus, is required to meet applicable capital standards on a bank-only basis. However, bank holding companies with assets of less than $500 million are subject to various restrictions on debt including requirements that debt is retired within 25 years of being incurred, that the debt to equity ratio is .30 to 1 within 12 years of the incurrence of debt and that dividends generally cannot be paid if the debt to equity ratio exceeds 1 to 1.

Dividends. As described below under the heading “Recent Developments,” as a result of the Company’s issuance of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”) to the U.S. Department of the Treasury (the “Treasury”) pursuant to the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”), the Company is restricted in the payment of dividends and, without the Treasury’s consent, may not declare or pay any dividend on the Company common stock other than its current quarterly cash dividend of $0.09 per share, as adjusted for any stock dividend or stock split. This restriction no longer applies on the earlier to occur of February 6, 2012 (the third anniversary of the issuance of the Preferred Shares to the Treasury) or the date on which the Company has redeemed all of the Preferred Shares issued or the date on which the Treasury has transferred all of the Preferred Shares to third parties not affiliated with the Treasury. In addition, as long as the Preferred Shares are outstanding, dividend payments are prohibited until all accrued and unpaid dividends are paid on such Preferred Shares, subject to certain limited exceptions.

Recent Developments. The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008. Pursuant to EESA, the Treasury has the authority to among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to its authority under EESA, the Treasury created the TARP CPP under which the Treasury was authorized to invest in non-voting, senior preferred stock of U.S. banks and savings associations or their holding companies.

The Company elected to participate in the CPP and on February 6, 2009, completed the sale of $6.785 million in preferred shares to the Treasury. The Company issued 6,785 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”), with a $1,000 per share liquidation preference, and a warrant to purchase up to 260,962 shares of the Company’s common stock at an exercise price of $3.90 per share (the “Warrant”).

The Preferred Shares issued by the Company pay cumulative dividends of 5% a year for the first five years and 9% a year thereafter. After three years, the Company may, at its option, redeem the Preferred Shares at their liquidation preference plus accrued and unpaid dividends. Both the Preferred Shares and the Warrant will be accounted for as components of regulatory Tier 1 capital. Among other restrictions, the securities purchase agreement between the Company and the Treasury limits the Company’s ability to repurchase its stock and subjects the Company to certain executive compensation limitations. The restrictions on stock repurchases are in effect until the earlier to occur of February 6, 2012 (the third anniversary of the issuance of the Preferred Shares to Treasury) or the date on which the Company has redeemed all of the Preferred Shares issued or the date on which the Treasury has transferred all of the Preferred Shares to third parties not affiliated with the Treasury.

26

The American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted on February 17, 2009. Among other things, ARRA sets forth additional limits on executive compensation at all financial institutions receiving federal funds under any program, including the CPP, both retroactively and prospectively. The executive compensation restrictions in ARRA, which will be further described in rules and regulations to be established, include among others: limits on compensation incentives, prohibitions on “Golden Parachute Payments”, the establishment by publicly registered CPP recipients of a board compensation committee comprised entirely of independent directors for the purpose of reviewing employee compensation plans, and the requirement of a non-binding vote on executive pay packages at each annual shareholder meeting until the government funds are repaid. The full impact of the ARRA is not yet certain because additional regulatory action is required.

The Bank

General. The Bank is a Michigan state-chartered bank, the deposit accounts of which are insured by the FDIC. As a state-chartered non-member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OFIR, as the chartering authority for state banks, and the FDIC, as administrator of the deposit insurance fund, and to the statutes and regulations administered by the OFIR and the FDIC governing such matters as capital standards, mergers, establishment of branch offices, subsidiary investments and activities and general investment authority. The Bank is required to file reports with the OFIR and the FDIC concerning its activities and financial condition and is required to obtain regulatory approvals prior to entering into certain transactions, including mergers with, or acquisitions of, other financial institutions.

Business Activities. The Bank’s activities are governed primarily by Michigan’s Banking Code of 1999 (the “Banking Code”) and the Federal Deposit Insurance Act (“FDI Act”). The FDI Act, among other things, requires that federal banking regulators intervene promptly when a depository institution experiences financial difficulties; mandates the establishment of a risk-based deposit insurance assessment system; and requires imposition of numerous additional safety and soundness operational standards and restrictions. The GLB Act, which amended the FDI Act, among other things, loosens the restrictions on affiliations between entities engaged in certain financial, securities, and insurance activities; imposes restrictions on the disclosure of consumers’ nonpublic personal information; and institutes certain reforms of the Federal Home Loan Bank System.

The federal laws contain provisions affecting numerous aspects of the operation and regulation of federally insured banks and empower the FDIC, among other agencies, to promulgate regulations implementing their provisions.

Branching. Michigan banks, such as the Bank, have the authority under Michigan law to establish branches throughout Michigan and in any state, the District of Columbia, any U.S. territory or protectorate, and foreign countries, subject to the receipt of all required regulatory approvals.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows the FDIC and other federal bank regulators to approve applications for mergers of banks across state lines without regard to whether such activity is contrary to state law. However, each state can determine if it will permit out of state banks to acquire only branches of a bank in that state or to establish de novo branches.

Loans to One Borrower. Under Michigan law, a bank’s total loans and extensions of credit and leases to one borrower is limited to 15% of the bank’s capital and surplus, subject to several exceptions. This limit may be increased to 25% of the bank’s capital and surplus upon approval by a 2/3 vote of its board of directors. Certain loans, including loans secured by bonds or other instruments of the United States and fully guaranteed by the United States as to principal and interest, are not subject to the limit just referenced. In addition, certain loans, including loans arising from the discount of nonnegotiable consumer paper which carries a full recourse endorsement or unconditional guaranty of the person transferring the paper, are subject to a higher limit of 30% of capital and surplus. At December 31, 2008, the Bank’s legal lending limit for loans to one borrower was $4.7 million; the Bank’s legal lending limit with approval of two-thirds of the Board of Directors was $7.9 million.

27

Enforcement. The OFIR and FDIC each have enforcement authority with respect to the Bank. The Commissioner of the OFIR has the authority to issue cease and desist orders to address unsafe and unsound practices and actual or imminent violations of law and to remove from office bank directors and officers who engage in unsafe and unsound banking practices and who violate applicable laws, orders, or rules. The Commissioner of the OFIR also has authority in certain cases to take steps for the appointment of a receiver or conservator of a bank.

The FDIC has similar broad authority, including authority to bring enforcement actions against all “institution-affiliated parties” (including shareholders, directors, officers, employees, attorneys, consultants, appraisers and accountants) who knowingly or recklessly participate in any violation of law or regulation or any breach of fiduciary duty, or other unsafe or unsound practice likely to cause financial loss to, or otherwise have an adverse effect on, an insured institution. Civil penalties under federal law cover a wide range of violations and actions. Criminal penalties for most financial institution crimes include monetary fines and imprisonment. In addition, the FDIC has substantial discretion to impose enforcement action on banks that fail to comply with its regulatory requirements, particularly with respect to capital levels. Possible enforcement actions range from requiring the preparation of a capital plan or imposition of a capital directive, to receivership, conservatorship, or the termination of deposit insurance.

Assessments and Fees. The Bank pays a supervisory fee to the OFIR of not less than $1,000 and not more than 25 cents for each $1,000 of total assets. The fee incurred in 2008 was $26,000. This fee is invoiced prior to July 1 each year and is due no later than August 15. The OFIR imposes additional fees, in addition to those charged for normal supervision, for applications, special evaluations and analyses, and examinations.

Regulatory Capital Requirements. The Bank is required to comply with capital adequacy standards set by the FDIC. The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. Banks with capital ratios below the required minimum are subject to certain administrative actions. More than one capital adequacy standard applies, and all applicable standards must be satisfied for an institution to be considered to be in compliance. There are three basic measures of capital adequacy: a total risk-based capital measure, a Tier 1 risk-based capital ratio; and a leverage ratio.

The risk-based framework was adopted to assist in the assessment of capital adequacy of financial institutions by, (i) making regulatory capital requirements more sensitive to differences in risk profiles among organizations; (ii) introducing off-balance-sheet items into the assessment of capital adequacy; (iii) reducing the disincentive to holding liquid, low-risk assets; and (iv) achieving greater consistency in evaluation of capital adequacy of major banking organizations throughout the world. The risk-based guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to different risk categories. An institution’s risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets.

Qualifying capital consists of two types of capital components: “core capital elements” (or Tier 1 capital) and “supplementary capital elements” (or Tier 2 capital). Tier 1 capital is generally defined as the sum of core capital elements less goodwill and certain other intangible assets. Core capital elements consist of (i) common shareholders’ equity, (ii) noncumulative perpetual preferred stock (subject to certain limitations), and (iii) minority interests in the equity capital accounts of consolidated subsidiaries. Tier 2 capital consists of (i) allowance for loan and lease losses (subject to certain limitations); (ii) perpetual preferred stock which does not qualify as Tier 1 capital (subject to certain conditions); (iii) hybrid capital instruments and mandatory convertible debt securities; (iv) term subordinated debt and intermediate term preferred stock (subject to limitations); and (v) net unrealized holding gains on equity securities.

Under current capital adequacy standards, the Bank must meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%. Of that ratio, at least half, or 4%, must be in the form of Tier 1 capital.

The Bank must also meet a leverage capital requirement. In general, the minimum leverage capital requirement is not less than 3% Tier 1 capital to total assets if the bank has the highest regulatory rating and is not anticipating or experiencing any significant growth. All other banks should have a minimum leverage capital ratio of not less than 4%.

28

Prompt Corrective Regulatory Action. The FDIC is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a bank is considered “well capitalized” if its risk-based capital ratio is at least 10%, its Tier 1 risk-based capital ratio is at least 6%, its leverage ratio is at least 5%, and the bank is not subject to any written agreement, order, or directive by the FDIC.

A bank generally is considered “adequately capitalized” if it does not meet each of the standards for well-capitalized institutions, and its risk-based capital ratio is at least 8%, its Tier 1 risk-based capital ratio is at least 4%, and its leverage ratio is at least 4% (or 3% if the institution receives the highest rating under the Uniform Financial Institution Rating System). A bank that has a risk-based capital ratio less than 8%, or a Tier 1 risk-based capital ratio less than 4%, or a leverage ratio less than 4% (3% or less for institutions with the highest rating under the Uniform Financial Institution Rating System) is considered to be “undercapitalized”. A bank that has a risk-based capital ratio less than 6%, or a Tier 1 capital ratio less than 3%, or a leverage ratio less than 3% is considered to be “significantly undercapitalized,” and a bank is considered “critically undercapitalized” if its ratio of tangible equity to total assets is equal to or less than 2%.

Subject to a narrow exception, the FDIC is required to appoint a receiver or conservator for a bank that is “critically undercapitalized.” In addition, a capital restoration plan must be filed with the FDIC within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by each company that controls a bank that submits such a plan, up to an amount equal to 5% of the bank’s assets at the time it was notified regarding its deficient capital status. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions, and expansion. The FDIC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Deposit Insurance. The Bank’s deposits are insured up to applicable limitations by a deposit insurance fund administered by the FDIC. Deposit accounts are generally insured up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. Effective October 3, 2008, EESA raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. This increase is effective on a temporary basis until December 31, 2009. Following the adoption of the Federal Deposit Insurance Reform Act of 2005, the FDIC has the opportunity, through its rulemaking authority, to better price deposit insurance for risk than was previously authorized. The FDIC adopted regulations effective January 1, 2007 that created a new system of risk-based assessments. Under the regulations there are four risk categories, and each insured institution is assigned to a risk category based on capital levels and supervisory ratings. Well-capitalized institutions with CAMELS composite ratings of 1 or 2 are placed in Risk Category I while other institutions are placed in Risk Categories II, III or IV depending on their capital levels and CAMELS composite ratings. The assessment rates may be changed by the FDIC as necessary to maintain the insurance fund at the reserve ratio designated by the FDIC, which currently is 1.25% of insured deposits. The FDIC may set the reserve ratio annually at between 1.15% and 1.50% of insured deposits. Deposit insurance assessments will be collected for a quarter at the end of the next quarter. Assessments will be based on deposit balances at the end of the quarter, except for institutions with $1 billion or more in assets and any institution that becomes insured on or after January 1, 2007 will have their assessment base determined using average daily balances of insured deposits.

29

As of September 30, 2008, the reserve ratio of the deposit insurance fund fell to 0.76%. On October 7, 2008, the FDIC established a restoration plan to restore the reserve ratio to at least 1.15% within five years (effective February 27, 2009 the FDIC extended this time to seven years) and proposed rules increasing the assessment rate for deposit insurance and making adjustments to the assessment system. On December 16, 2008, the FDIC adopted and issued a final rule increasing the rates banks pay for deposit insurance uniformly by 7 basis points (annualized) effective January 1, 2009. Under the final rule, risk-based rates for the first quarter 2009 assessment will range between 12 and 50 basis points (annualized). The 2009 first quarter assessment rates established by the FDIC provide that the highest rated institutions, those in Risk Category I, will pay premiums of between 12 and 14 basis points and the lowest rated institutions, those in Risk Category IV, will pay premiums of 50 basis points. On February 27, 2009, the FDIC adopted a final rule amending the way that the assessment system differentiates for risk and setting new assessment rates beginning with the second quarter of 2009. Beginning April 1, 2009, for the highest rated institutions, those in Risk Category I, the initial base assessment rate will be between 12 and 16 basis points and for the lowest rated institutions, those in Risk Category IV, the initial base assessment rate will be 45 basis points. The final rule modifies the means to determine a Risk Category I institution’s initial base assessment rate. It also provides for the following adjustments to an institution’s assessment rate: (1) a decrease for long-term unsecured debt, including most senior and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) an increase for secured liabilities above a threshold amount; and (3) for institutions in risk categories other than Risk Category I, an increase for brokered deposits above a threshold amount. After applying these adjustments, for the highest rated institutions, those in Risk Category I, the total base assessment rate will be between 7 and 24 basis points and for the lowest rated institutions, those in Risk Category IV, the total base assessment rate will be between 40 and 77.5 basis points.

On February 27, 2009, the FDIC also adopted an interim rule, with a request for comments, that imposes an emergency special assessment of up to 20 basis points of an institution’s assessment base on June 30, 2009, which will be collected on September 30, 2009. This interim rule also provides for possible additional special assessments of up to 10 basis points at the end of any calendar quarter whenever the FDIC estimates that the deposit insurance fund reserve ratio will fall to a level that the FDIC believes would adversely affect public confidence or to a level close to zero or negative.

On November 21, 2008, the FDIC adopted final regulations implementing the Temporary Liquidity Guarantee Program (“TLGP”) pursuant to which depository institutions could elect to participate. Pursuant to the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before June 30, 2009 (the “Debt Guarantee”), and (ii) provide full FDIC deposit insurance coverage for non-interest bearing deposit transaction accounts regardless of dollar amount for an additional fee assessment by the FDIC (the “Transaction Account Guarantee”). These accounts are mainly payment-processing accounts, such as business payroll accounts. The Transaction Account Guarantee will expire on December 31, 2009. Participating institutions will be assessed a 10 basis point surcharge on the portion of eligible accounts that exceeds the general limit on deposit insurance coverage.

Coverage under the TLGP was available to any eligible institution that did not elect to opt out of the TLGP on or before December 5, 2008. The Bank did not opt out of the Transaction Account Guarantee portion of the TLGP. The Company and the Bank did not opt out of the Debt Guarantee program.

Payment of Dividends by the Bank. There are state and federal requirements limiting the amount of dividends which the Bank may pay. Generally, a bank’s payment of cash dividends must be consistent with its capital needs, asset quality, and overall financial condition. Additionally, OFIR and the FDIC have the authority to prohibit the Bank from engaging in any business practice (including the payment of dividends) which they consider to be unsafe or unsound.

Under Michigan law, the payment of dividends is subject to several additional restrictions. The Bank cannot declare or pay a cash dividend or dividend in kind unless the Bank will have a surplus amounting to not less than 20% of its capital after payment of the dividend. The Bank will be required to transfer 10% of net income to surplus until its surplus is equal to its capital before the declaration of any cash dividend or dividend in kind. In addition, the Bank may pay dividends only out of net income then on hand, after deducting its losses and bad debts. These limitations can affect the Bank’s ability to pay dividends.

30

Loans to Directors, Executive Officers, and Principal Shareholders. Under FDIC regulations, the Bank’s authority to extend credit to executive officers, directors, and principal shareholders is subject to substantially the same restrictions set forth in Federal Reserve Regulation O. Among other things, Regulation O (i) requires that any such loans be made on terms substantially similar to those offered to nonaffiliated individuals, (ii) places limits on the amount of loans the Bank may make to such persons based, in part, on the Bank’s capital position, and (iii) requires that certain approval procedures be followed in connection with such loans.

Certain Transactions With Related Parties. Under Michigan law, the Bank may purchase securities or other property from a director, or from an entity of which the director is an officer, manager, director, owner, employee, or agent, only if such purchase (i) is made in the ordinary course of business, (ii) is on terms not less favorable to the Bank than terms offered by others, and (iii) the purchase is authorized by a majority of the board of directors not interested in the sale. The Bank may also sell securities or other property to its directors, subject to the same restrictions (except in the case of a sale by the Bank, the terms may not be more favorable to the director than those offered to others).

In addition, the Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company and its non-bank subsidiaries, on investments in the stock or other securities of the Company and its non-bank subsidiaries, and on the acceptance of stock or other securities of the Company or its non-bank subsidiaries as collateral for loans. Various transactions, including contracts, between the Bank and the Company or its non-bank subsidiaries must be on substantially the same terms as would be available to unrelated parties.

Standards for Safety and Soundness. The FDIC has established safety and soundness standards applicable to the Bank regarding such matters as internal controls, loan documentation, credit underwriting, interest-rate risk exposure, asset growth, compensation and other benefits, and asset quality and earnings. If the Bank were to fail to meet these standards, the FDIC could require it to submit a written compliance plan describing the steps the Bank will take to correct the situation and the time within which such steps will be taken. The FDIC has authority to issue orders to secure adherence to the safety and soundness standards.

Reserve Requirement. Under a regulation promulgated by the Federal Reserve, depository institutions, including the Bank, are required to maintain cash reserves against a stated percentage of their net transaction accounts. Effective October 9, 2008, the Federal Reserve Banks are now authorized to pay interest on such reserves. The current reserve requirements are as follows:

• for transaction accounts totaling $10.3 million or less, a reserve of 0%; and

• for transaction accounts in excess of $10.3 million up to and including $44.4 million, a reserve of 3%; and

• for transaction accounts totaling in excess of $44.4 million, a reserve requirement of $1.023 million plus 10% of that portion of the total transaction accounts greater than $44.4 million.

The dollar amounts and percentages reported here are all subject to adjustment by the Federal Reserve.

ITEM 1A. Risk Factors

You should consider these risk factors, our “Recent Developments” contained in “Management’s Discussion and Analysis”, in addition to the other information in this Form 10-K, before deciding whether to make an investment in our Company’s stock.

We are dependent on the strength of our local economy for our growth and profitability

The success of our business depends on our ability to generate profits and grow our franchise. Our three county market area has a population base of approximately 231,000, and an economy based primarily on manufacturing and agriculture. Our local economy has not grown, and is not projected to grow as rapidly as the national economy. Job losses and unemployment rates in all three counties exceed the state and national averages.

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Our future profits may be affected by our inability to grow core deposits

We have had difficulty growing our core deposits. Competition in our market for core deposits is intense. Our net income is heavily dependent on net interest income. If we are unable to grow our core deposits, we will be required to obtain higher costing funds to facilitate asset growth. This could cause our future profits to be below peer.

We are making commercial real estate loans outside of our normal market area

In an attempt to grow our commercial real estate loan portfolio we consider it necessary in certain cases to make these loans outside of our normal market area. We have done this because competition for Commercial Real Estate loans in our local markets is intense. Lending outside of our normal market area may cause increased loan losses in the future if we lend in an area that we are not familiar with and that local economy suffers a recession.

Our loan portfolio possesses increased risk due to our subprime residential lending

Up until a few years ago, a significant portion of our one-to-four family residential loan originations were considered subprime. At December 31, 2008, $15.5 million of our residential mortgage loans were subprime loans. Historically, our foreclosure rates on our residential loan portfolio are higher than peer and we believe this is, to a significant extent, the result of our subprime residential lending and the economy in our market area. Future foreclosures will negatively impact profits because of higher loan loss provisions and expenses related to foreclosed properties.

If we lose our executive officers, it could adversely affect our operations

The successful operation of Monarch Community Bancorp and Monarch Community Bank is greatly dependent on the continued availability of capable executive officers. At present, the only executive officers of both Monarch Community Bancorp and Monarch Community Bank are Donald L. Denney, President and Chief Executive Officer, Andrew Van Doren, Vice President, Secretary and Corporate Counsel, and Rebecca S. Crabill, Vice President, Chief Financial Officer and Treasurer. We have entered into an employment agreement with Mr. Denney but not with the other executive officers. We do not have key man insurance on any of our executive officers.

The amount of common stock controlled by insiders, our articles of incorporation and bylaws and state and federal statutory and regulatory provisions could discourage hostile acquisitions of control

32

Purchases of common stock by directors and officers are for investment purposes and not necessarily for resale. Inside ownership of Monarch Community Bancorp (totaling 236,320 shares as of December 31, 2007) is significant and this inside ownership and provisions in our articles of incorporation and bylaws may have the effect of discouraging attempts to acquire Monarch Community Bancorp, a proxy contest for control of Monarch Community Bancorp, the assumption of control of Monarch Community Bancorp by a holder of a large block of common stock and the removal of Monarch Community Bancorp’s management, all of which certain shareholders might think are in their best interests. These provisions include among other things:

• the staggered terms of the members of the Board of Directors;

• an 80% shareholder vote requirement for the approval of any merger or consolidation of Monarch Community Bancorp into any entity that directly or indirectly owns 10% or more of Monarch Community Bancorp voting stock if the transaction is not approved in advance by at least a majority of the disinterested members of Monarch Community Bancorp’s Board of Directors;

• supermajority shareholder vote requirements for the approval of certain amendments to Monarch Community Bancorp’s articles of incorporation and bylaws;

• a prohibition of any holder of common stock voting more than 10% of the outstanding common stock;

• elimination of cumulative voting by shareholders in the election of directors;

• restrictions on the acquisition of our equity securities;

• the authorization of five million shares of preferred stock that could be issued without shareholder approval on terms or in circumstances that could deter a future takeover attempt; and

• the increase in the number of authorized shares and the reclassification of shares without stockholder approval.

In addition, the Maryland business corporation law, the state where Monarch Community Bancorp is incorporated, provides for certain restrictions on acquisition of Monarch Community Bancorp, and federal law contains restrictions on acquisitions of control of bank holding companies such as Monarch Community Bancorp.

The low trading volume in our common stock may make the value of the stock volatile and may make it difficult for shareholders to sell their shares when they desire.

Historically, there have been times when trading volume has been low. During those times the Company’s stock price has encountered some decline. Average daily trading volume for the years ending December 31, 2008 and 2007 were 3,473 and 8,004 shares respectively. The high and low levels of our stock price for each quarter of the last two fiscal years are disclosed in this document. A more detailed history of the Company’s stock price can be found under our stock symbol (MCBF).

ITEM 1B. Unresolved Staff Comments — None

ITEM 2. Properties

At December 31, 2008, we had six full service offices. At December 31, 2008, we owned all of our offices and the net book value of our investment in premises and equipment, excluding computer equipment, was $4.3 million. We believe that our current facilities are adequate to meet our present and immediately foreseeable needs.

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The following table provides information regarding our office and other facilities:

		Owned/
Location	County	Leased
Main Office
375 North Willowbrook Road	Branch	Owned
Coldwater, Michigan 49036
Branch Offices
87 Marshall Street	Branch	Owned
Coldwater, Michigan 49036
365 N. Broadway	Branch	Owned
Union City, Michigan 49094
1 West Carleton Road	Hillsdale	Owned
Hillsdale, Michigan 49242
15975 West Michigan Avenue	Calhoun	Owned
Marshall, Michigan 49068
107 North Park	Calhoun	Owned
Marshall, Michigan 49068
Other Facilities
34 Grand Street (Garage)	Branch	Owned
Coldwater, Michigan 49036
24 Grand Street (Drive through)	Branch	Owned
Coldwater, Michigan 49036

We utilize a third party service provider to maintain our data base of depositor and borrower customer information.

ITEM 3. Legal Proceedings

From time to time we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. We do not anticipate incurring any material liability as a result of any current litigation.

ITEM 4. Submission of Matters to a Vote of Security Holders

Not Applicable.

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PART II

ITEM 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock commenced trading on August 29, 2002 on the NASDAQ Market under the symbol “MCBF.” The table below shows the high and low sales prices of the common stock for the periods indicated, as reported on the NASDAQ Capital Market. For the years ended December 31, 2008 and 2007, the Company paid dividends of $0.36 and $0.29 per share, respectively.

Year		Quarter ending	High		Low
	2007	March 31	$	12.50	$	10.05
		June 30	$	12.16	$	11.23
		September 30	$	12.86	$	11.70
		December 31	$	12.50	$	11.10
	2008	March 31	$	10.37	$	9.80
		June 30	$	9.64	$	9.45
		September 30	$	9.25	$	8.04
		December 31	$	3.84	$	3.50

As of February 28, 2009, there were 2,046,102 shares of the Company’s common stock issued and outstanding and approximately 582 holders of record. The holders of record do include banks and brokers who act as nominees, each of whom may represent more than one stockholder.

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ITEM 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, continued

ISSUER PURCHASES OF EQUITY SECURITIES

	(a)		(b)		(c)		(d)
					Total Number of Shares		Maximum Number (or
					(or Unit) Purchased as		Approximate Dollar Value) of
	Total Number of				Part of Publicly		Shares (or Units) that may yet
	Shares (or Units)		Average Price paid		Anounced Plans or		Be Purchased Under the
Period	Purchased		per Share (or Unit)		Programs		Plans or Program
10/01/08-10/31/08		15,750	$	7.90		15,750		—
11/01/08-11/30/08		—	$	—		—		—
12/01/08-12/31/08		—	$	—		—		—
Total		15,750	$	7.90		15,750		—

Our board of directors approved the repurchase by us of up to an aggregate of 228,000 shares of our common stock pursuant to the Program. The Program was completed in October 2008.

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ITEM 6. Selected Financial Data

SELECTED FINANCIAL AND OTHER DATA

The summary information presented below under “Selected Financial Condition Data” and “Selected Operations Data” for, and as of the end of, each of the years ended December 31 is derived from our audited financial statements. The following information is only a summary and you should read it in conjunction with our consolidated financial statements, including notes thereto, included elsewhere in this document:

	December 31,
	2008		2007		2006		2005		2004
	(In Thousands)
Selected Financial Condition Data:
Total Assets	$	291,807	$	279,208	$	289,987	$	277,068	$	275,448
Loans receivable, net		247,542		224,797		230,247		213,097		219,373
Investment securities, at carrying value		8,916		11,322		13,934		14,584		8,324
Fed Funds sold and overnight deposits		677		6,151		7,864		6,988		6,120
Deposits		192,156		177,936		192,572		174,715		169,573
Federal Home Loan Bank Advances		60,178		59,330		54,476		59,562		65,955
Equity		36,270		39,086		39,986		40,576		39,419

	December 31,
	2008		2007		2006		2005			2004
	(In Thousands)
Selected Operations Data:
Total interest income	$	17,196	$	17,545	$	17,287	$	15,231		$	13,818
Total interest expense		8,536		9,222		8,607		6,567			6,173
Net interest income		8,660		8,323		8,680		8,664			7,645
Provision for loan losses		2,712		971		—		(385	)		4,875
Net interest income after provision for loan losses		5,948		7,352		8,680		9,049			2,770
Fees and service charges		2,757		2,921		2,642		2,496			2,333
Gains on sales of loans, mortgage-backed securities and investment securities		629		651		342		562			805
Other non-interest income		217		374		138		341			287
Total non-interest income		3,603		3,946		3,122		3,399			3,425
Total non-interest expense		9,152		8,992		9,710		10,503			9,978
Income before taxes		399		2,306		2,092		1,945			(3,783	)
Income tax provision		101		561		544		505			(1,272	)
Net income (loss)	$	298	$	1,745	$	1,548	$	1,440		$	(2,511	)

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ITEM 6. Selected Financial Data, continued

	December 31,
	2008			2007			2006			2005			2004
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)		0.10	%		0.61	%		0.54	%		0.52	%		-0.97	%
Return on Equity (ratio of net income to average equity)		0.78	%		4.30	%		3.85	%		3.59	%		-6.53	%
Interest rate spread information:
Average during period		3.11	%		3.05	%		3.26	%		3.41	%		3.15	%
Net interest margin		3.32	%		3.27	%		3.42	%		3.56	%		3.33	%
Ratio of operating expense to average total assets		3.20	%		3.17	%		3.41	%		3.80	%		3.85	%
Ratio of average interest-earning assets to average interest-bearing liabilities		1.06			1.06			1.05			1.05			1.07
Efficiency ratio		73.25	%		72.62	%		80.44	%		85.39	%		88.18	%
Asset Quality Ratios:
Non-performing assets to total assets at end of period		1.59	%		0.81	%		0.74	%		1.31	%		2.23	%
Non-performing loans to total loans		1.04	%		0.33	%		0.20	%		0.37	%		1.87	%
Allowance for loan losses to non-performing loans		105.76	%		240.00	%		432.48	%		360.67	%		151.74	%
Allowance for loan losses to loans receivable, net		1.10	%		0.81	%		0.88	%		1.37	%		2.84	%
Capital ratios:
Equity to total assets at end of period		12.43	%		14.00	%		13.79	%		14.64	%		14.31	%
Other data:
Number of full-service offices		6			6			6			6			7

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion is intended to assist in understanding the financial condition and results of operations of Monarch Community Bank. The discussion and analysis does not include any comments relating to Monarch Community Bancorp since Monarch Community Bancorp has no significant operations. The information contained in this section should be read in conjunction with the consolidated financial statements.

Monarch’s results of operations depend primarily on its net interest income, which is the difference between interest income earned on loans, investments, and overnight deposits, and interest expense incurred on deposits and borrowings. Monarch’s results of operations also are significantly affected by the level of its gains from sales of mortgage loans.

Critical Accounting Policies

Other than described in Note 1 to the Consolidated Financial Statements, management does not believe the use of estimates and management judgment is 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.

Management Strategy

Our strategy is to operate as an independent retail oriented financial institution dedicated to serving the needs of customers in our market area. We are committed to providing a broad range of products and services to meet the needs of our consumer and small business customers. As part of this commitment, we expect to continue our origination of higher credit quality residential and commercial real estate loans to borrowers in our market area.

Our focus in 2009 is to lower our cost of funds through core deposit growth by broadening our relationships with consumer and business customers and continuing to provide a high level of customer service. We will continue to monitor non-interest expense. We will continue to monitor and improve of credit quality. We are dedicating resources to these initiatives that management believes will lead to a higher level of profitability, shareholder value and overall success. Management believes focusing on these areas in 2009 will serve the Company well into the future.

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Changes in Financial Condition from December 31, 2007 to December 31, 2008

General. Monarch’s total assets increased $12.6 million, or 4.5%, to $291.8 million at December 31, 2008 compared to $279.2 million at December 31, 2007. The most significant increase was in loans which increased $22.7 million.

Loans. Monarch’s net loan portfolio increased $22.7 million, or 10.1%, from $224.8 million at December 31, 2007 to $247.5 million at December 31, 2008. Gross loans increased $24.3 million, or 10.7%, from $227.2 million at December 31, 2007 to $251.4 million at December 31, 2008. The increase in the loan portfolio was the result of management’s continued strategy to originate commercial loans. One-to-four family loans decreased $1.9 million as a result of this strategy. Commercial real estate loans increased $19.0 million and the Bank also experienced increases in the level of multifamily real estate, construction and commercial business loans due to the focus on commercial loan originations. Management expects future growth in the loan portfolio to come from increased originations of commercial real estate and commercial business loans.

Securities. The Bank’s security portfolio decreased $2.4 million, or 21.5%, to $9.0 million at December 31, 2008 from $11.3 million at December 31, 2007. Securities were 3.0% of total assets at December 31, 2008 as compared to 4.0% at December 31, 2007. Due to the Bank’s dependence on borrowed funds and brokered CDs, Management did not consider growth in the investment portfolio to be prudent in 2008. Management purchases securities to maintain sufficient liquidity and to provide yield to offset declines in the loan portfolio when they occur.

Liabilities. Monarch’s deposits increased $14.2 million, or 8.0%, to $192.2 million at December 31, 2008 compared to $177.9 million at December 31, 2007. This increase was primarily in money market accounts which increased $15.1 million. Brokered CDs increased from $38.2 million at December 31, 2007 to $39.4 million at December 31, 2008. The Bank has attempted to reduce its reliance on brokered and large, out of area CDs, although the success of this strategy is dependent on growing core deposits. Local CD deposits increased $489,000. Savings account balances decreased $940,000 million as we experience movement out of these types of accounts into higher yielding deposit account types. Other interest bearing checking accounts decreased $1.9 million. This decrease is seen as a normal balance fluctuation. Non-interest bearing deposit accounts increased $274,000. The Bank expects its non-interest bearing deposits to increase in the future as a result of strategies to attract more small business depositors and municipal depositors.

Federal Home Loan Bank advances increased $848,000, or 1.4%, to $60.2 million at December 31, 2008 from $59.3 million at December 31, 2007. We replaced maturing advances and increased our outstanding advances because the interest rates available on these borrowings were lower than the market interest rates for brokered CDs. For several years our strategy has been to replace borrowed funds and brokered CDs with lower costing core deposits. Our lack of growth in core deposits has made this a challenge.

Equity. Total equity amounted to $36.3 million at December 31, 2008 and $39.1 million at December 31, 2007, or 12.4% and 14.0%, respectively, of total assets at both dates. The decrease in equity resulted from the repurchase during 2008 of 272,000 shares of Company stock at a total cost of $2.7 million and dividends payments of $772,000. Net income for 2008 of $298,000 helped offset the equity reductions.

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

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

	Year Ended December 31,
	2008							2007
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
	(dollars in thousands)
Fed Funds and overnight deposits	$	8,170	$	102		1.25	%	$	7,373	$	389		5.28	%
Investment securities		9,951		428		4.30			13,445		599		4.46
Other securities		4,174		209		5.01			4,174		188		4.50
Loans receivable (1)		238,838		16,457		6.89			229,451		16,369		7.13
Total earning assets	$	261,133	$	17,196		6.59		$	254,443	$	17,545		6.90
Demand and NOW accounts	$	32,032	$	95		0.30		$	32,619	$	78		0.24
Money market accounts		35,497		1,041		2.93			24,451		902		3.69
Savings accounts		19,123		81		0.42			21,502		90		0.42
Certificates of deposit		103,569		4,644		4.48			103,970		5,037		4.84
Fed Funds Purchased		56		—		—
Federal Home Loan Bank advances		55,106		2,675		4.85			57,268		3,115		5.44
Total interest bearing liabilities	$	245,383		8,536		3.48			239,810		9,222		3.85
Net interest income			$	8,660							8,323
Net interest spread						3.11	%						3.05	%
Net interest margin						3.32	%						3.27	%

	2006
	Average		Interest
	Outstanding		Earned/		Yield/
	Balance		Paid		Rate
Fed Funds and overnight deposits
Investment securities	$	6,913	$	380		5.50	%
Other securities		14,038		574		4.09
Loans receivable (1)		4,583		226		4.93
Total earning assets		228,613		16,107		7.05
	$	254,147	$	17,287		6.80
Demand and NOW accounts
Money market accounts	$	32,055	$	70		0.22
Savings accounts		19,304		617		3.20
Certificates of deposit		25,230		105		0.42
Federal Home Loan Bank advances		105,179		4,626		4.40
Total interest bearing liabilities		58,105		3,189		5.49
Net interest income	$	239,873		8,607		3.59
Net interest spread			$	8,680
Net interest margin						3.21	%
						3.42	%

(1) Calculated net of deferred loan fees, loan discounts and loans in process. Nonaccrual loans are included in the average outstanding balance.

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Rate/Volume Analysis

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

	Year Ended December 31,												Year Ended December 31,
	2008 vs. 2007												2007 vs. 2006
										Total												Total
	Increase (Decrease) Due to									Increase			Increase (Decrease) Due to									Increase
	Rate			Volume			Mix			(Decrease)			Rate			Volume			Mix			(Decrease)
	(in thousands)
Interest-earning assets
Fed funds and overnight deposits	$	(297	)	$	42			(32	)		(287	)	$	(15	)		25			(1	)		9
Investment securities		(21	)		(156	)		5			(171	)		51			(24	)		(2	)		25
Other securities		21			—			—			21			(20	)		(20	)		2			(38	)
Loans receivable		(559	)		670			(23	)		88			202			654			(594	)		262
Total interest-earning assets	$	(855	)	$	556		$	(50	)	$	(349	)	$	219		$	635		$	(595	)	$	258
Interest-bearing liabilities
Demand and NOW accounts		19			(1	)		(1	)		17			7			1			—			8
Money market accounts		(185	)		407			(84	)		139			95			165			25			285
Savings accounts		1			(10	)		—			(9	)		—			(15	)		—			(15	)
Certificates of deposit		(375	)		(19	)		1			(393	)		469			(53	)		(5	)		411
Fed Funds Purchased		—			—			—			—			—			—			—			—
Federal Home Loan Bank advances		(335	)		(118	)		13			(440	)		(28	)		(46	)		0			(74	)
Total interest-bearing liabilities	$	(875	)	$	259		$	(71	)	$	(686	)	$	542		$	52		$	21		$	615
Net interest income										$	337											$	(357	)

Comparison of Results of Operations for the Years Ended December 31, 2008, 2007, and 2006

General. Monarch reported net income of $298,000 for the year ended December 31, 2008 compared to net income of $1.7 million for the year ended December 31, 2007 and net income of $1.5 million in 2006. The reasons for the change in net income for the years are discussed below.

Net Interest Income. Net interest income before provision for loan losses increased to $8.7 million for 2008 compared to $8.3 million in 2007 and matched $8.7 million in 2006. Our net interest margin has increased from 3.27% in 2007 to 3.32% in 2008 compared to the decline from 3.42% in 2006 to 3.27% 2007. The increase from 2007 to 2008 is primarily due to the bank’s cost of funds decreasing more rapidly than its yield on earning assets. Management attributes this to the declining interest rate environment consistent throughout 2008. Previously the cost on interest-bearing liabilities increased more rapidly (3.59% in 2006 to 3.85 2007) than yields on interest-earning assets (6.80% in 2006 to 6.90% in 2007). Growing lower cost core deposits remains a challenge in our current market area. Our reliance on money market accounts, brokered CDs and FHLB borrowings continues to have an impact on our high cost of funds.

41

Interest Income. Total interest income in 2008 decreased $349,000 primarily from the decline in interest rates consistent through 2008. This followed a $258,000 increase in 2007 compared to 2006 due to increased interest income on loans. The modest increase in loan interest income in 2007 compared to 2006 was due to minimal growth in average loans outstanding and average yields. The decline in the average yield in 2008, (from 7.13% in 2007 to 6.89% in 2008) significantly offset the increase of $9.4 million in average loans outstanding from 2007 to 2008.

Interest Expense. Total interest expense increased $337,000 in 2008 compared to 2007. This followed an increase of $615,000 in 2007 compared to 2006. The increase in 2008 was primarily due to an increase in average money market accounts of $11.0 million from 2007 to 2008. The increase in 2007 was primarily the result of higher interest cost for money market accounts and CDs. Despite a decline in the average cost from 3.85% in 2007 to 3.48% in 2008. The Bank has seen its cost of funds increase because of increased market rates for CDs and further competition for money market deposits which has also resulted in higher rates being paid.

Provision for Loan Losses. The Bank recorded a provision for loan losses of $2.7 million in for the year ended December 31, 2008 compared to $971,000 for the same period in 2007. No provision for loan losses was recorded for 2006.

The increased provision for 2008 was necessitated by net charge-offs of $1.8 million in 2008 and increased loan delinquencies at December 31, 2008 as compared to December 31, 2007. Nonperforming assets increased to 1.59% of assets at December 31, 2008 compared to .85% at December 31, 2007. These levels have increased over the previous two years (see “Selected Financial and Other Data”). The Bank did not record a provision in 2006 despite net charge-offs of $901,000 as Management believed its Allowance for Loan Losses to be adequate.

Maintaining asset quality remains a priority and while Management believes our new loan originations over the last three years are of higher quality than those originated previously, more losses can be expected due to the economic conditions statewide and in the markets we operate in and provisions for loan losses in 2009 could approach the level of 2008. See “Loans” discussion above.

Non-interest Income. Non-interest income decreased slightly to $3.6 million for the year ended December 31, 2008 compared to $3.9 million for 2007. 2007 saw an increase in income to $3.9 from $3.1 million for the year ended December 31, 2006. This represented a decrease of 9% in 2008 compared to 2007 which increased 26% compared to 2006.

Fees and service charges were $2.3 million for 2008, $2.5 million for 2007, $2.2 million for 2006. Income from the Bounce Protection program has increased from $1.3 million in 2006 to $1.4 million in 2008 due to increased customer usage, an increase in the per transaction fee which took effect in 2006 and a decrease in 2007 in the charge from the third party service provider of the program. Future increases in this source of income are dependent on the Bank increasing the number of checking account customers. Management does not expect significant increases in Bounce Protection income from its existing customer base. Income from brokering residential mortgage loans decreased to $41,000 in 2008 compared to $166,000 in 2007 compared to $64,000 in 2006. During 2006, the Bank developed new mortgage banking relationships with several brokerage companies. The Bank has continued to utilize these companies as a resource for lending opportunities. The Bank does not expect brokered loan income to be a significant source of income in the future. Loan fees have declined from $176,000 in 2006 to $94,000 in 2008 due to competitive pressures as well as lower originations of construction and consumer loans.

Gain on sale of loans decreased $41,000 in 2008 to $627,000 from $668,000 in 2007. Our strategy, which began in 2007 has been to sell as many of the residential mortgage originations as possible to manage the Bank’s interest rate risk, credit risk and liquidity. This is a continuing strategy; management expects similar results in 2009 as seen in 2008 due to the decline in interest rates. Gains in 2008 represented a $265,000 increase over gains in 2006.

Net gain on sale of premises and equipment was $0 in 2008, $49,000 in 2007 and $0 in 2006 as the Company closed and disposed of one of its branch locations in Coldwater in 2007.

42

Other income decreased $108,000 (from $325,000 in 2007 to $217,000 in 2008) after increasing $187,000 in 2007 compared to 2006. This is due to a net gain of $68,000 on sales of foreclosed properties in 2008 compared to a net gain $139 in 2007 compared to a net loss of $67,000 in 2006. These fluctuations were created by the Bank selling more foreclosed properties in 2008 as compared to either 2007 or 2006. The net gain on sales of foreclosed properties for 2008 compared to 2007 was also impacted by the decline in the housing market in 2008. The Bank does occasionally experience a gain on sale of foreclosed property, as it has become increasingly more conservative in valuing these properties upon acquisition. Management expects 2009 to be similar to 2008 in terms of foreclosure activity and thus potential gains or losses on subsequent sales of the foreclosed properties. The soft real estate market may lead to longer holding periods as well as larger losses on disposal as compared to recent years.

Non-interest Expense. Non-interest expenses have decreased since 2006 by 6%. We have sought to reduce certain expenses and slow the growth of other operating expenses in an attempt to improve our profitability. Management is confident that the actions taken to control expenses will not affect the Company’s ability to fulfill its obligations to its customers and shareholders.

Salaries and employee benefits expense increased slightly from $4.5 million in 2007 to $4.6 million in 2008 as a result of normal increases in salaries and wages. There has been a decrease in expense from $5.0 million in 2006 to 4.6 million 2008 due to cost reduction measures implemented in 2006 including a 10% staff reduction, modifications to certain employee benefit programs and changes to the employee health program . These are expected to stabilize salaries and employee benefit costs in the future. Recruiting and retaining qualified staff continues to be a priority of Management.

Repossessed property expense has increased slightly from $207,000 in 2007 to $219,000 in 2008. Management attributes this increase to increased foreclosures and expects increases in 2009 due to the downturn in the economy. Repossessed property expense has decreased from $346,000 in 2006 to $219,000 in 2008. This is attributed management’s continued focus on better management of properties during the holding period, better sales efforts that have led to shorter holding periods and decreased impairment write-downs due to better valuation techniques at the time of foreclosure.

Professional services expenses decreased to $401,000 in 2008 compared to $591,000 in 2007 as the expenses moved to similar levels previously experienced in 2006 and 2005. For the year ended December 31, 2007 we did experience an increase in professional services expense of $150,000 due to the costs incurred in the Company’s attempt at going private. These costs in 2007 offset decreases the Company has experienced since 2006 in auditing expense, loan related legal fees and supervisory expenses. The Bank’s supervisory expense has been reduced because of a charter conversion in 2006 which changed the Bank’s primary regulator. We expect professional services expenses to increase in 2009 and beyond due to the Company’s need to continue to comply with provisions of Sarbanes-Oxley.

Amortization expense of intangible assets has decreased consistent with the aging of the Core Deposit Intangible established upon the acquisition of MSB Financial in 2004. As indicated in Note 2 to the Company’s financial statements, this expense will continually decline over the remaining life of the related asset.

Other general and administrative expense has decreased from $1.2 million in 2006 to $973,000 in 2007 compared to an increase to $1.2 million 2008. The increase from 2007 to 2008 is due to additional FDIC insurance coverage and an increase in advertising and marketing which was primarily attributable to costs incurred in conjunction with a more aggressive marketing strategy for 2008 that did not occur in 2007.

Federal Income Taxes. Our effective tax rate for purposes of the tax provision was 25.3% in 2008 compared to 24.3% in 2007, and 26% in 2006. The difference between the effective tax rates and the federal corporate income tax rate of 34% is attributable to the low income housing credits available to the Bank from the investment in the limited partnership as well as fluctuation of permanent book and tax differences such as non-taxable income and non-deductible expenses.

43

Liquidity and Commitments

We are required to maintain appropriate levels of liquid assets under FDIC regulations. Appropriate levels are determined by our Board of Directors and Management and are included in our asset liability management policy. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. We have maintained liquidity at levels above those believed to be adequate to meet the requirements of normal operations, including new loan funding and potential deposit outflows. At December 31, 2008, our liquidity ratio, which is our liquid assets as a percentage of total deposits less certificates of deposit maturing in more than one year and plus borrowings maturing in one year or less, was 5.0%. This level of liquidity is lower than that maintained last year. Management has taken steps to increase liquidity and is confident they will be able to effectively address the Bank’s liquidity needs while facilitating increased profitability.

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

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in overnight deposits, including fed funds, and short-term treasury and governmental agency securities. On a longer term basis, Monarch maintains a strategy of investing in various investments and lending products. Monarch uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. Certificates of deposit scheduled to mature in one year or less at December 31, 2008, totaled $58.8 million. Based on historical experience, management believes that a significant portion of these certificates of deposit can be retained by continuing to pay competitive interest rates.

If necessary, additional funding sources include additional deposits (including core deposits), brokered deposits, and Federal Home Loan Bank advances. Management is committed to increasing our core deposit balances but we have had difficulty doing so and core deposit growth may not be a significant source of liquidity in the future. Based on current collateral levels, at December 31, 2008, Monarch could borrow an additional $19.8 million from the Federal Home Loan Bank at prevailing interest rates. We anticipate we will continue to have sufficient funds, through deposits and borrowings, to meet our current commitments. For the year ended December 31, 2008, Monarch had a net decrease in cash and cash equivalents of $7.5 million as compared to a net decrease of $1.5 million for the year ended December 31, 2007.

The Company’s primary sources of funds during 2008 were operations of $3.7 million, increase in deposits of $14.2 million and net proceeds from Federal Home Loan Bank advances of $1.8 million. The primary uses of funds in 2008 were an increase in net loan originations of $27.7 million and repurchases of the Company’s stock of $2.7 million.

The Company’s primary sources of funds during 2007 were operations of $3.9 million, excess of repayments over new funding of loans of $3.0 million and net proceeds from Federal Home Loan Bank advances of $4.9 million. The primary uses of funds in 2007 were a decrease in deposits of $14.6 million and repurchases of the Company’s stock of $2.5 million.

Off-Balance Sheet Arrangements

At December 31, 2008, the total unused commercial and consumer lines of credit were $18.9 million and there were outstanding commitments under letters of credit of $10,000. At December 31, 2007, the total unused commercial and consumer lines of credit were $20.3 million and there were outstanding commitments under letters of credit of $16,000. The Company has no arrangements with any other entities that have or are reasonably likely to have a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

44

Capital

Consistent with its goals to operate a sound and profitable financial organization, Monarch actively seeks to maintain a “well capitalized” institution in accordance with regulatory standards. Note 12 to the Financial Statements details the capital position of the Bank as well as the capital levels necessary to remain well capitalized. At December 31, 2008 the equity to assets ratio of the Company was 12.4% which Management and the Board of Directors feels is more than adequate. During 2008, the Company repurchased 272,000 shares of its common stock in open market purchases.

Impact of Inflation

The consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturity structures of our assets and liabilities are critical to the maintenance of acceptable performance levels.

The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of non-interest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that we have made. We are unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.

Recent Developments

On February 6, 2009, the Company completed the sale of $6.8 million of preferred stock and a warrant to purchase common stock to the United States Department of the Treasury (the “U.S. Treasury”) under U.S. Treasury’s Capital Purchase Program under the Emergency Economic Stabilization Act of 2008 (“EESA”).

The Company issued and sold (1) 6,785 shares of Fixed Rate Cumulative Perpetual Preferred Stock Series A, liquidation preference of $1,000 per share (the “Series A Preferred Shares”), and (2) a ten-year warrant (the “Warrant”) to purchase up to 260,962 shares of the Company’s common stock (“Common Stock”) at an exercise price of $3.90 per share, or an aggregate purchase price of $1.0 million in cash. Cumulative dividends on the Series A Preferred Shares will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter.

The securities purchase agreement, dated February 6, 2009 (the “Purchase Agreement”), between the Company and the U.S. Treasury, pursuant to which the Series A Preferred Shares and the Warrant were sold, limits the payment of dividends on the Common Stock to the current quarterly cash dividend of $0.09 per share, limits the Company’s ability to repurchase its Common Stock, and subjects the Company to certain of the executive compensation limitations included in the EESA.

As a condition to the closing of the transaction, each of the Company’s Senior Executive Officers (as defined in the Purchase Agreement) executed a waiver voluntarily waiving any claim against the Treasury or the Company for any changes to their compensation or benefits, as required to comply with the regulation issued by the U.S. Treasury under the TARP Capital Purchase Program. The Senior Executive Officers also acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements (including so-called “golden parachute” agreements) as they relate to the period the U.S. Treasury holds any equity or debt securities of the Company acquired through the Capital Purchase Program.

In addition to EESA, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. The ARRA contains numerous provisions which modify EESA and which require additional rule making by various regulatory bodies. The precise impact of ARRA and the rules promulgated under it will become known in the coming months.

45

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Asset and Liability Management and Market Risk

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In monitoring interest rate risk, we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates.

The Board of Directors sets and recommends the asset and liability policies of the Bank which are implemented by the asset and liability management committee. The asset and liability management committee is comprised of members of our senior management. The purpose of the asset and liability management committee is to communicate, coordinate and control asset/liability management consistent with our business plan and board approved policies. The asset and liability management committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs.

46

The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. The asset and liability management committee generally meets on a quarterly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections. The Chief Financial Officer is responsible for reviewing and reporting on the effects of the policy implementation and strategies to the Board of Directors, each quarter.

In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, we have focused our strategies on:

• originating shorter-term commercial real estate loans for retention in our portfolio;

• selling a significant portion of the long-term, fixed rate residential mortgage loans we make;

• managing our deposits to establish stable deposit relationships with an emphasis on core, non-certificate deposits, supplementing these with brokered deposits, as appropriate; and

• maintaining longer-term borrowings at fixed interest rates to offset the negative impact of longer-term fixed rate loans in our loan portfolio. Future borrowings are expected to be short-term to reduce the average maturity of our borrowings.

At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the asset and liability management committee may determine to increase Monarch’s interest rate risk position somewhat in order to maintain the net interest margin. In addition, in an effort to manage our interest rate risk and liquidity, in 2008 and 2007 we sold $27.8 million and $28.7 million, respectively, of fixed-rate, one-to-four family mortgage loans in the secondary market. We expect to continue to sell a significant portion of our originated long term, fixed-rate, one-to-four family loans but may retain some portion of our 15 year and shorter, fixed-rate loans.

Monarch uses an internally generated model that uses scenario analysis to evaluate the IRR exposure of the Bank by estimating the sensitivity of the Bank’s portfolios of assets, liabilities, and off-balance sheet contracts to changes in market interest rates. The information presented in the following table presents the expected change in Monarch’s net portfolio value at December 31, 2008 that would occur upon an immediate change in interest rates.

Change in Interest Rates										Net Portfolio Value as %
Basis Points (“bp”)	Net Portfolio Value									of Present Value of Assets
(Rate Shock in Rates) (1)	$ Amount			$ Change			% Change			NPV Ratio			Change
+ 300 bp		27,505			5,533			-17	%		9.79	%	-271bp			-1.4
+ 200 bp		28,770			4,268			-13	%		10.09	%	-183bp			-1.1
+100 bp		30,760			2,278			-7	%		10.61	%	-80bp			-0.58
0 bp		33,038			0						11.19	%		0
-100 bp		36,308			3,270			10	%		12.08	%	+7bp			0.89
-200 bp		39,724			6,686			20	%		12.99	%	+25bp			1.8
-300 bp		n/m	(2)		n/m	(2)		n/m	(2)		n/m	(2)		n/m	(2)

(1) Assumes an instantaneous uniform change in interest rates at all maturities.

Based on the data from the model, management believes that the Bank’s IRR level remains minimal.

47

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

The Bank, like other financial institutions, is affected by changes in market interest rates. Our net interest margin can change, either positively or negatively, as the result of increases or decreases in market interest rates. Some factors affecting net interest margin are outside of our control; market interest rates are but one factor affecting the Bank’s net interest margin. However, management has the ability, through its asset/liability management and pricing policies to affect the Bank’s net interest margin notwithstanding the level of market interest rates. The preceding table indicates the Bank’s net portfolio value will decrease in an increasing interest rate scenario and increase in a decreasing interest rate scenario. Management believes that its net interest margin will behave similarly.

If rising interest rates stifle loan demand or create additional competitive pressures in attracting and retaining deposits, the Bank’s desire for growth in total assets may cause management to alter its strategy that could negatively impact the net interest margin. The timing and magnitude of interest rate changes, as well as the sector affected (short-term vs. long-term) will have an impact on the Bank’s net interest margin.

The following table provides information about the Company’s financial instruments that are sensitive to changes to interest rates as of December 31, 2008. The Company had no derivative instruments, or trading portfolio as of that date. The expected maturity date values for loans receivable, mortgage-backed securities and investment securities were calculated without adjusting the contractual maturity dates for expectations of repayments. Expected maturity date values for non-maturity, interest bearing deposits were based on the opportunity for repricing.

Principal Amount Maturing In:

																2014 and					Fair Value
	2009			2010			2011			2012			2013			beyond			Total		12/31/2008
Rate-sensitive assets
Fed funds and overnight deposits	$	677		$	—		$	—		$	—		$	—		$	—		$	677	$	677
Average interest rate		1.25	%
Securities	$	3,002		$	1,514		$	507		$	395		$	506		$	2,925		$	8,849	$	8,953
Average interest rate		4.33	%		2.97	%		4.50	%		4.38	%		4.25	%		4.61	%
Gross loans	$	17,928		$	13,176		$	24,182		$	22,222		$	33,267		$	140,060		$	250,835		250,068
Average interest rate		6.23	%		6.80	%		6.60	%		7.07	%		6.83	%		6.52	%
Rate-sensitive liabilities
Savings & interest-bearing demand deposits	$	75,702		$	—		$	—		$	—		$	—		$	—		$	75,702	$	89,553
Average interest rate		1.45	%
Certificates of deposit	$	58,747		$	15,490		$	8,338		$	13,517		$	6,479		$	—		$	102,571	$	103,744
Average interest rate		3.91	%		4.33	%		4.54	%		4.33	%		4.46	%
FHLB advances	$	15,500		$	8,000		$	16,000		$	13,000		$	7,678		$	—		$	60,178	$	63,252
Average interest rate		4.50	%		5.64	%		3.43	%		4.78	%		4.23	%

48

ITEM 8. Financial Statements and Supplementary Data

Monarch Community Bancorp, Inc. and
Subsidiaries

Consolidated Financial Report
December 31, 2008

Monarch Community Bancorp, Inc. and Subsidiaries

	Contents
Report Letter	3
Consolidated Financial Statements
Balance Sheet	4
Statement of Income	5
Statement of Stockholders’ Equity	6
Statement of Cash Flows	7
Notes to Consolidated Financial Statements	8-45

Plante & Moran, PLLC
Suite 400
634 Front Avenue N.W.
Grand Rapids, MI 49504
Tel: 616.774.8221
Fax: 616.774.0702
plantemoran.com

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Monarch Community Bancorp, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Monarch Community Bancorp, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each year in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Monarch Community Bancorp, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each year in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Monarch Community Bancorp, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each year in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

               

Grand Rapids, Michigan
March 3, 2009

3

Monarch Community Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheet
(000s omitted, except per share data)

	December 31,
	2008			2007
Assets
Cash and due from banks	$	5,595		$	7,691
Federal Home Loan Bank overnight time and other interest bearing deposits		677			6,151
Total cash and cash equivalents		6,272			13,842
Securities — Available for sale (Note 3)		8,916			11,084
Securities — Held to maturity (Note 3)		37			238
Other securities (Note 3)		4,237			4,237
Loans held for sale		860			422
Loans, net (Note 4)		247,542			224,797
Foreclosed assets, net (Note 6)		2,076			1,515
Premises and equipment (Note 7)		4,456			4,675
Goodwill (Note 2)		9,606			9,606
Core deposit (Note 2)		681			862
Other assets (Notes 5 and 10)		7,124			7,930
Total assets	$	291,807		$	279,208
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	13,883		$	13,609
Interest-bearing (Note 8):		178,273			164,327
Total deposits		192,156			177,936
Federal Home Loan Bank advances (Note 9)		60,178			59,330
Fed funds purchased (Note 9)		1,000			—
Accrued expenses and other liabilities (Note 14)		2,203			2,856
Total liabilities		255,537			240,122
Commitments and Contingencies (Note 11)		—			—
Stockholders’ Equity (Notes 12 ,13 and 17)
Common stock — $0.01 par value 20,000,000 shares authorized, 2,046,102 shares issued and outstanding at December 31, 2008 and 2,321,585 shares issued and outstanding at December 31, 2007		20			23
Additional paid-in capital		21,152			23,828
Retained earnings		15,867			16,341
Accumulated other comprehensive income		69			52
Unearned compensation (Notes 17 and 18)		(838	)		(1,158	)
Total stockholders’ equity		36,270			39,086
Total liabilities and stockholders’ equity	$	291,807		$	279,208

See Notes to Consolidated Financial Statements.

4

Monarch Community Bancorp, Inc. and Subsidiaries

Consolidated Statement of Income
(000s omitted, except per share data)

	Year Ended December 31,
	2008		2007			2006
Interest Income
Loans, including fees	$	16,457	$	16,369		$	16,107
Investment securities		637		787			800
Federal funds sold and overnight deposits		102		389			380
Total interest income		17,196		17,545			17,287
Interest Expense
Deposits		5,861		6,107			5,418
Federal Home Loan Bank advances		2,675		3,115			3,189
Total interest expense		8,536		9,222			8,607
Net Interest Income		8,660		8,323			8,680
Provision for Loan Losses (Note 4)		2,712		971			—
Net Interest Income After Provision for Loan Losses		5,948		7,352			8,680
Noninterest Income
Fees and service charges		2,314		2,477			2,195
Loan servicing fees		443		444			447
Net gain on sale of loans		627		668			362
Net loss on sale of investment securities (Note 3)		2		(17	)		(20	)
Net gain on sale of premises and equipment		—		49			—
Other income (Note 6)		217		325			138
Total noninterest income		3,603		3,946			3,122
Noninterest Expense
Salaries and employee benefits (Note 14, 17 and 18)		4,584		4,522			4,967
Occupancy and equipment (Note 7)		1,032		1,008			1,020
Data processing		777		731			704
Mortgage banking		406		359			382
Professional services		401		591			441
Amortization of intangible assets (Note 2)		181		230			291
NOW account processing		176		180			171
ATM/Debit card processing		200		192			233
Repossessed property expense (Note 6)		219		207			346
Other general and administrative		1,176		972			1,155
Total noninterest expense		9,152		8,992			9,710
Income - Before income taxes		399		2,306			2,092
Income Taxes (Note 10)		101		561			544
Net Income	$	298	$	1,745		$	1,548
Earnings Per Share
Basic	$	0.14	$	0.73		$	0.63
Diluted	$	0.14	$	0.73		$	0.63

See Notes to Consolidated Financial Statements.

5

Monarch Community Bancorp, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity
(000s omitted, except per share data)

	Common Stock												Accumulated
	Number of						Additional Paid			Retained			Other Comprehensive			Unearned
	Shares			Amount			in Capital			Earnings			Income (Loss)			Compensation			Total
Balance — January 1, 2006		2,710		$	27		$	28,150		$	14,401		$	(155	)	$	(1,847	)	$	40,576
Issuance of 3,884 shares of common stock at an average price of $12.03/share in connection with Restricted Stock Plan		4						47									(47	)		—
3,399 shares repurchased at average price of $11.42/share		(3	)					(39	)											(39	)
Vesting of 16,811 restricted shares																	223			223
Allocation of ESOP shares (Note 17)								56									185			241
Repurchase of 177,300 shares		(177	)		(2	)		(2,108	)											(2,110	)
Stock option expenses								85												85
Comprehensive Income:
Net Income											1,548									1,548
Change in unrealized gain on securities available-for-sale, net of tax														92						92
Total comprehensive income																				1,640
Dividends paid ($0.24/share)		—			—			—			(630	)		—			—			(630	)
Balance — December 31, 2006		2,534		$	25		$	26,191		$	15,319		$	(63	)	$	(1,486	)	$	39,986
3,326 shares repurchased at average price of $11.95/share		(3	)					(40	)											(40	)
Vesting of 17,589 restricted shares																	235			235
Allocation of ESOP shares (Note 17)								43									93			136
Repurchase of 208,570 shares at average price of $11.78/share		(209	)		(2	)		(2,454	)											(2,456	)
Stock option expenses								88												88
Comprehensive Income:
Net Income											1,745									1,745
Change in unrealized loss on securities available-for-sale, net of tax														115						115
Total comprehensive income																				1,860
Dividends paid ($0.29/share)		—			—			—			(723	)		—			—			(723	)
Balance — December 31, 2007		2,322		$	23		$	23,828		$	16,341		$	52		$	(1,158	)	$	39,086
Vesting of 17,289 restricted shares																	227			227
Allocation of ESOP shares (Note 17)								15									93			108
Repurchase of 275,483 shares at average price of $9.81/share		(275	)		(3	)		(2,701	)											(2,704	)
Stock option expenses								10												10
Comprehensive Income:
Net Income											298									298
Change in unrealized loss on securities available-for-sale, net of tax														17						17
Total comprehensive income																				315
Dividends paid ($0.36/share)		—			—			—			(772	)		—			—			(772	)
Balance — December 31, 2008		2,047		$	20		$	21,152		$	15,867		$	69		$	(838	)	$	36,270

See Notes to Consolidated Financial Statements.

6

Monarch Community Bancorp, Inc. and Subsidiaries

Consolidated Statement of Cash Flows
(000s omitted)

	Year Ended December 31,
	2008			2007			2006
Cash Flows From Operating Activities
Net income	$	298		$	1,745		$	1,548
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,082			1,100			1,271
Provision for loan loss		2,712			971			—
Stock option expense		10			88			85
(Gain) loss on sale of foreclosed assets		(68	)		(138	)		67
Deferred income taxes		(274	)		(394	)		264
Mortgage loans originated for sale		(28,273	)		(28,224	)		(16,969	)
Proceeds from sale of mortgage loans		28,464			29,407			16,563
Gain on sale of mortgage loans		(627	)		(668	)		(362	)
(Gain) Loss on sale of available for sale securities		(2	)		17			20
Gain on sale of premises and equipment		—			(49	)		—
Earned stock compensation		335			371			464
Net change in:
Accrued interest receivable		64			(63	)		(164	)
Other assets		345			(226	)		337
Accrued expenses and other liabilities		(390	)		(109	)		925
Net cash provided by operating activities		3,676			3,828			4,049
Cash Flows From Investing Activities
Activity in available-for-sale securities:
Purchases		(3,519	)		(3,819	)		(4,755	)
Proceeds from sale of securities		5,691			4,428			2,543
Proceeds from maturities of securities		208			2,173			2,994
Activity in held-to-maturity securities:
Purchases		(7	)		(30	)		(7	)
Proceeds from maturities of securities		—			20			—
Activity in other securities:
Redemption of other securities, at par		—			—			600
Loan originations and principal collections, net		(27,672	)		3,001			(19,248	)
Proceeds from sale of foreclosed assets		1,715			1,793			3,196
Proceeds on sale of premises and equipment		—			283			30
Purchase of premises and equipment		(254	)		(131	)		(113	)
Net cash provided by (used in) investing activities		(23,838	)		7,718			(14,760	)
Cash Flows From Financing Activities
Net increase (decrease) in deposits		14,220			(14,636	)		17,587
Repurchases of common stock		(2,704	)		(2,496	)		(2,149	)
Dividends paid		(772	)		(723	)		(630	)
Proceeds from FHLB advances		44,500			41,500			27,000
Repayment of FHLB advances		(42,652	)		(36,646	)		(32,086	)
Net cash provided by (used in) financing activities		12,592			(13,001	)		9,722
Net Increase (Decrease) in Cash and Cash Equivalents		(7,570	)		(1,455	)		(989	)
Cash and Cash Equivalents - Beginning		13,842			15,297			16,286
Cash and Cash Equivalents — End	$	6,272		$	13,842		$	15,297

See Notes to Consolidated Financial Statements.

7

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies

Organization - Monarch Community Bancorp, Inc. (the Corporation) was incorporated in 2002 under Maryland law to hold all of the common stock of Monarch Community Bank (the Bank), formerly known as Branch County Federal Savings and Loan Association.

Monarch Community Bank provides a broad range of banking services to its primary market area of Branch, Calhoun and Hillsdale counties in Michigan. The Bank operates six full service offices. The Bank owns 100% of First Insurance Agency. The Bank also owns a 24.98% interest in a limited partnership formed to construct and operate multi-family housing units.

Community Services Group, Inc. with assets totaling $996,000 has been dissolved as of April 30, 2006 with all assets being transferred to Monarch Community Bank resulting in no gain or loss on the dissolution.

On June 3, 2006 the Corporation completed the conversion of the Bank from a federally chartered stock savings institution to a Michigan state chartered commercial bank. As a result of the conversion, the Corporation became a federal bank holding company regulated by the Board of Governors of the Federal Reserve and the Bank became regulated by the State of Michigan Office of Financial and Insurance Regulation (“OFIR”) and the Federal Deposit Insurance Corporation (“FDIC”). Prior to the conversion, both the Corporation and the Bank had been regulated by the Office of Thrift Supervision.

Basis of Presentation and Consolidation - The consolidated financial statements include the accounts of Monarch Community Bancorp, Inc., Monarch Community Bank, and First Insurance Agency, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates — The accounting and reporting policies of the Corporation and its subsidiaries conform to accounting principles generally accepted in the United States of America. Management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, identification and valuation of impaired loans, valuation of the mortgage servicing asset, valuation of investment securities, valuation of intangible assets and the valuation of the other real estate.

Significant Group Concentrations of Credit Risk - Most of the Corporation’s activities are with customers located within its primary market areas in Michigan. Note 3 summarizes the types of securities the Corporation invests in. Note 4 summarizes the types of lending that the Corporation engages in. The Corporation has a significant concentration of loans secured by residential real estate located in Branch, Calhoun and Hillsdale counties.

Cash and Cash Equivalents - For the purpose of the consolidated statement of cash flows, cash and cash equivalents include cash and balances due from banks, interest-bearing deposits and overnight time deposits with the Federal Home Loan Bank and fed funds sold. The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2008 and 2007, these reserve balances amounted to approximately $441,000 and $477,000, respectively.

8

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies (Continued)

Securities - Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses, net of deferred income taxes, excluded from earnings and reported in other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans Held for Sale - Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income.

Loans — The Corporation grants mortgage, commercial and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses - The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

9

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies (Continued)

The allowance consists of specific, general and unallocated components. The specific components relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower that the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures.

Servicing - Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.

Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

Credit Related Financial Instruments - In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

10

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies (Continued)

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

Premises and Equipment - Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets.

Goodwill and Other Intangible Assets – Goodwill represents the excess of the cost of an acquisition over the fair value of net identifiable tangible and intangible assets acquired. Under the provisions of SFAS 142, goodwill is no longer amortized into the income statement over an estimated life, but rather is tested at least annually for impairment. Impairment of goodwill is evaluated by reporting unit and is based on a comparison of the recorded balance of goodwill to the applicable market value or discounted cash flows. To the extent that impairment may exist, the current carrying amount is reduced by the estimated shortfall.

Intangible assets which have finite lives are amortized over their estimated useful lives and are subject to impairment testing.

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.

Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.

The components of other comprehensive income and related tax effects are as follows (000s omitted):

	2008			2007			2006
Change in unrealized holding gain (loss) on available-for-sale securities	$	27		$	158		$	118
Reclassification adjustment for (gains) losses realized in income		(2	)		17			20
Net unrealized gains (losses)	$	25		$	175		$	138
Tax effect		(8	)		(60	)		(46	)
Net-of-tax amount	$	17		$	115		$	92

11

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies (Continued)

Earnings (Loss) Per Common Share - Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common             shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate to outstanding stock options and Recognition and Retention Plan shares, and are determined using the treasury stock method.

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

	2008			2007			2006
Basic earnings per share
Numerator:
Net income	$	298		$	1,745		$	1,548
Denominator:
Weighted average common shares outstanding		2,159			2,508			2,626
Less: Average unallocated ESOP shares		(83	)		(93	)		(111	)
Less: Average non-vested RRP shares		(11	)		(32	)		(49	)
Weighted average common shares outstanding for basic earnings per share		2,065			2,383			2,466
Basic earnings per share	$	0.14		$	0.73		$	0.63
Diluted earnings per share
Numerator:
Net income	$	298		$	1,745		$	1,548
Denominator:
Weighted average common shares outstanding for basic earnings per share		2,065			2,383			2,466
Add: Dilutive effects of assumed exercises of stock options		—			—			—
Add: Dilutive effects of average non-vested RRP shares		—			—			—
Weighted average common shares and dilutive potential common shares outstanding		2,065			2,383			2,466
Diluted earnings per share	$	0.14		$	0.73		$	0.63

At December 31, 2008, stock options not considered in computing diluted earnings per share because they were antidilutive totaled 162,262 and non-vested RRP shares not considered in computing diluted earnings per share because they were antidilutive totaled 7,528. At December 31, 2007, there were 174,757 antidilutive stock options and 24,817 non-vested RRP shares. At December 31, 2006, there were 191,547 antidilutive stock options and 42,706 non-vested RRP shares.

12

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies (Continued)

Employee Stock Ownership Plan (ESOP) - Compensation expense is recognized as ESOP shares are committed to be released. Allocated and committed to be released ESOP shares are considered outstanding for earnings per share calculation based on debt service payments. Dividends declared on allocated ESOP shares are charged to retained earnings. Dividends declared on unallocated ESOP shares are used for debt service. The Corporation has committed to make contributions to the ESOP sufficient to service the debt to the extent not paid through dividends. The value of unearned shares to be allocated to ESOP participants for future services not yet performed is reflected as a reduction of stockholders’ equity.

Stock Based Compensation – SFAS No. 123(R) requires all companies to measure the cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options granted and recognized over the employee service period, which is usually the vesting period for the options. As amended, this statement became effective for the Corporation’s fiscal year beginning January 1, 2006. The effect on the Corporation’s net income will depend on the level of future option grants and the calculation of the fair value of the options granted, as well as the vesting periods provided.

Recent Accounting Pronouncements

FASB No. 157 and FASB No. 159 — Fair Value Measurement and The Fair Value Option for Financial Assets and Financial Liabilities — SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. It applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 157 and SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Corporation adopted these standards in 2008. The required disclosures are noted below. The adoption of these statements did not have an impact on financial statements.

Fair Value Measurements

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

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

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

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

The following table present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2008, and the valuation techniques used by the Company to determine those fair values.

13

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Fair Value Measurements (Continued)

	Quoted Prices in
	Active Markets for		Significant Other		Significant	Balance at
	Identical Assets		Observable Inputs		Unobservable	December
	(Level 1)		(Level 2)		Inputs (Level 3)	31, 2008
Assets
Investment securities — available — for — sale	$	5,757	$	3,159	$-	$	8,916

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the Corporations’ assets at fair value on a nonrecurring basis as of December 31, 2008

Assets Measured at Fair Value on a Nonrecurring Basis

					Significant
			Quoted Prices in		Other				Change in Fair
	Balance at		Active Markets for		Observable		Significant		Value for the year
	December		Identical Assets		Inputs		Unobservable		ended December
	31, 2008		(Level 1)		(Level 2)		Inputs (Level 3)		31, 2008
Impaired Loans accounted for under SFAS 114	$	2,377	$	—	$	—	$	2,377	$	(193	)

The fair value of impaired loans accounted for under SFAS 114 is estimated using either discounted cash flows or collateral value. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2008, substantially all of the total impaired loans were evaluated based on fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of the collateral require classification in the fair value hierarchy. Impaired loans are categorized as level 3 assets because the values are based on available collateral (typically based on outside appraisals) and customized discounting criteria, if deemed necessary. The change in fair value of impaired loans is accounted for in the allowance for loan losses (see Note 4).

Other assets, including bank-owned life insurance, goodwill, intangible assets and other assets acquired in business combinations, are also subject to periodic impairment assessments under other accounting principles generally accepted in the United States of America. These assets are not considered financial instruments. Effective February 12, 2008, the FASB issued a staff position, FSP FAS 157-2, which delayed the applicability of FAS 157 to non-financial instruments. Accordingly, these assets have been omitted from the above disclosures.

14

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Supplemental Cash Flow Information (000s omitted)

	December 31,
	2008		2007		2006
Cash paid (received) for:
Interest	$	8,553	$	9,218	$	8,491
Income taxes	$	400	$	500	$	(1,122	)
Noncash investing activities -
Loans transferred to real estate owned	$	1,715	$	1,478	$	2,097
Issuance of common stock in connection with the 2003 Recognition and Retention Plan	$	—	$	—	$	47

Reclassifications – Certain prior year amounts have been reclassified to conform with current year presentation.

15

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2 – Goodwill and Intangible Assets

In June 2001, the Financial Accounting Standards Board released SFAS No. 142 addressing the accounting for goodwill and other intangible assets. Among other things, SFAS No. 142 stipulated that goodwill not be amortized, but should be tested for impairment at a level of reporting referred to as a “Reporting Unit”. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. SFAS No. 142 requires a two step impairment test as of measurement date to: (1) identify potential goodwill impairment and (2) measure the amount of the goodwill impairment loss to be recognized, if applicable. At December 31, 2008 the Bank had approximately $10.3 million of intangible assets, of which $9.6 million was goodwill, created as a result of its past acquisition of Marshall Savings Bank. Monarch Community Bank utilizes a third party to provide testing of the goodwill. It has been determined that as of December 31, 2008 there is no impairment.

Acquired intangible assets at year end were as follows:

	(In thousands of Dollars)
	Gross		Accumulated		Net
	Amount		Amortization		Carrying
2008
Amortized intangible assets:
Core deposit premium resulting from bank and branch acquistions
Total	$	2,081	$	1,400	$	681
2007
Amortized intangible assets:
Core deposit premium resulting from bank and branch acquistions
Total	$	2,081	$	1,219	$	862

Aggregate amortization expense was $181,000, $230,000 and $291,000 for 2008, 2007, and 2006 respectively.

Year Ending
December 31
2009	$	149
2010		142
2011		142
2012		142
Thereafter		106
Total	$	681

16

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3 — Securities

The amortized cost and fair value of securities, with gross unrealized gains and losses, follows (000s omitted):

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
2008
Available-for-sale securities:
U.S. government agency obligations	$	5,698	$	63	$	—		$	5,761
Mortgage-backed securities		739		—		(5	)		734
Obligations of states and political subdivisions		2,375		58		(12	)		2,421
Total available-for-sale securities	$	8,812	$	121	$	(17	)	$	8,916
Held-to-maturity securities:
Municipal securities	$	37	$	—	$	—		$	37

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
2007
Available-for-sale securities:
U.S. government agency obligations	$	7,692	$	42	$	(4	)	$	7,730
Mortgage-backed securities		932		—		(14	)		918
Obligations of states and political subdivisions		2,381		55		—			2,436
Total available-for-sale securities	$	11,005	$	97	$	(18	)	$	11,084
Held-to-maturity securities:
Municipal securities	$	238	$	1	$	(5	)	$	234

17

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3 — Securities (Continued)

The amortized cost and estimated market values of securities at December 31, 2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers will have the right to call or prepay obligations with or without call or prepayment penalties (000s omitted):

	Held to Maturity				Available for Sale
	Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value
Due in one year or less	$	—	$	—	$	2,998	$	3,051
Due in one through five years		37		37		2,151		2,188
Due after five years through ten years		—		—		2,924		2,943
Due after ten years		—		—		—		—
Total	$	37	$	37		8,073		8,182
Mortgage-backed securities						739		734
Total available-for-sale securities					$	8,812	$	8,916

For the years ended December 31, 2008, 2007 and 2006, proceeds from sales of securities available for sale amounted to $5,691,000, $4,428,000, and $2,543,000, respectively. Gross realized gains amounted to $2,000, $2,000, and $0, respectively. Gross realized losses amounted to $0, $19,000, and $20,000, respectively. The tax benefit (provision) applicable to these net realized gains and losses amounted to $500, $4,250, and $5,000, respectively.

18

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3 — Securities (Continued)

Information pertaining to securities with gross unrealized losses at December 31, 2008 and 2007, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less than Twelve Months				Twelve Months and Over
	Gross				Gross
	Unrealized		Estimated		Unrealized		Estimated
	Losses		Market Value		Losses		Market Value
2008
Available-for-sale securities:
Mortgage-backed securities	$	5	$	734	$	—	$	—
Obligations of states and political subdivisions		12		528		—		—
Total available-for-sale securities	$	17	$	1,262	$	—	$	—
2007
Available-for-sale securities:
U.S. government agency obligations	$	—	$	—	$	4	$	1,996
Mortgage-backed securities		—		—		14		918
Total available-for-sale securities	$	—	$	—	$	18	$	2,914
Held-to-maturity securities:
Municipal securities	$	5	$	203	$	—	$	—

Management evaluates securities for other-than-temporary impairment on a periodic basis as economic or market concerns warrant such evaluation. Consideration is given to the length of time the security has been in a loss position, the financial condition and near-term prospects of the issuer and the intent and ability of the Corporation to retain its investment in the issuer to allow for recovery of fair value.

Other securities, consisting primarily of restricted Federal Home Loan Bank stock, are recorded at cost, which approximates market value. Monarch Community Bank had $5.7 and $8.6 million in pledged securities as collateral for Federal Home Loan Bank Advances at December 31, 2008 and 2007 respectively.

19

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4 — Loans

A summary of the balances of loans follows (000s omitted):

	December 31,
	2008		2007
Mortgage loans on real estate:
One-to-four family	$	124,855	$	126,780
Multi-family		5,728		5,594
Commercial		75,730		56,714
Construction or land development		9,499		6,409
Total real estate loans		215,812		195,497
Consumer loans:
Home equity		20,677		20,430
Other		5,737		7,014
Total consumer loans		26,414		27,444
Commercial business loans		8,609		4,228
Subtotal		250,835		227,169
Less: Allowance for loan losses		2,719		1,824
Net deferred loan fees		574		548
Loans, net	$	247,542	$	224,797

20

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4 — Loans (Continued)

The following is an analysis of the allowance for loan losses (000s omitted):

	December 31,
	2008			2007			2006
Balance — Beginning	$	1,824		$	2,024		$	2,925
Provision for loan losses		2,712			971			—
Loans charged-off		(2,021	)		(1,402	)		(1,185	)
Recoveries of loans previously charged off		204			231			284
Balance — Ending	$	2,719		$	1,824		$	2,024

The following is a summary of information pertaining to impaired loans (000s omitted):

	December 31,
	2008		2007
Impaired loans with a valuation allowance	$	2,394	$	424
Valuation allowance related to impaired loans	$	364	$	90
Total non-accrual loans	$	2,571	$	760
Total loans past-due ninety days or more and still accruing	$	—	$	105

There are no impaired loans without a valuation allowance as of December 31, 2008 and 2007. The following is a summary of our average investment in impaired loans (000s omitted):

	December 31,
	2008		2007		2006
Average investment in impaired loans	$	1,661	$	1,748	$	2,709

Interest income recognized on impaired loans was not significant for the years ended December 31, 2008, 2007, and 2006. No additional funds are committed to be advanced in connection with impaired loans.

21

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 5 – Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $175,641,000 and $178,449,000 at December 31, 2008 and 2007, respectively.

The fair value of mortgage servicing rights approximates $1,913,000 and $1,769,000 at December 31, 2008 and 2007, respectively. The fair value was determined by discounting estimated net future cash flows from mortgage servicing activities using an 8.0% discount rate and estimated prepayment speeds of 7.0 to 11.6 based on current Freddie Mac experience. The impairment valuation allowance is $0 as of December 31, 2008, 2007, and 2006. There has been no activity in the impairment valuation allowance during the years ended December 31, 2008, 2007, and 2006.

The following summarizes mortgage servicing rights capitalized and amortized (000s omitted):

	December 31,
	2008			2007			2006
Mortgage servicing rights — Beginning	$	1,016		$	1,129		$	1,358
Mortgage servicing rights capitalized		252			246			153
Mortgage servicing rights scheduled amortization and direct writedown for loan payoffs		(406	)		(359	)		(382	)
Mortgage servicing rights — Ending	$	862		$	1,016		$	1,129

Note 6 – Foreclosed Assets

Foreclosed assets consisted of the following (000s omitted):

	December 31,
	2008		2007
Real estate owned	$	749	$	885
Real estate in judgment and subject to redemption		1,327		630
Total	$	2,076	$	1,515

22

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 6 — Foreclosed Assets (Continued)

Expenses applicable to foreclosed and repossessed assets include the following (000s omitted):

	December 31,
	2008			2007			2006
Net loss (gain) on sales of real estate	$	(68	)	$	(138	)	$	67
Operating expenses		219			207			346
Total	$	151		$	69		$	413

Note 7 — Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment follows (000s omitted):

					Depreciable
	December 31,				Life
	2008		2007		(in Years)
Land	$	566	$	566
Buildings and improvements		5,550		5,494		5-40
Furniture, fixtures and equipment		2,779		2,581		2-15
Total bank premises and equipment		8,895		8,641
Less accumulated depreciation and amortization		4,439		3,966
Net carrying amount	$	4,456	$	4,675

Depreciation expense totaled $473,000, $483,000, and $528,000 in 2008, 2007, and 2006, respectively.

23

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 8 — Deposits

The following is a summary of interest bearing deposit accounts (000s omitted):

	December 31,
	2008		2007
Balances by account type:
Demand and NOW accounts	$	16,057	$	17,927
Money market		41,156		26,014
Passbook and statement savings		18,489		19,426
Total transactional accounts		75,702		63,367
Certificates of deposit:
$100,000 and over		46,621		46,023
Under $100,000		55,950		54,937
Total certificates of deposit		102,571		100,960
Total	$	178,273	$	164,327

The remaining maturities of certificates of deposit outstanding are as follows (000s omitted):

	December 31, 2008
	Less than		$100,000 &
	$100,000		greater
Less than one year	$	35,431	$	23,316
One to two years		6,984		8,506
Two to three years		6,038		2,300
Three to four years		2,880		10,637
Four to five years		4,617		1,862
Total	$	55,950	$	46,621

Note 9 — Federal Home Loan Bank Advances and Fed Funds Purchased

The Bank has an unsecured federal funds line of credit with a correspondent bank allowing for overnight borrowings up to $3.0 million.  The federal funds purchased had an interest rate of .25% at December 31, 2008.

The Bank has Federal Home Loan Bank advances of $60,178,000 and $59,330,000 at December 31, 2008 and 2007, respectively, which mature through 2013. At December 31, 2008, the interest rates on fixed rate advances ranged from 2.53% to 6.21%. At December 31, 2007 the interest rates on fixed rate advances ranged from 4.02% to 6.21%.

24

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9 — Federal Home Loan Bank Advances and Fed Funds Purchased (Continued)

The total advances outstanding included one floating rate advance in the amount of $1 million with an interest rate of .65% as of December 31, 2008. At December 31, 2007, the Bank had no floating rate advances. The weighted average interest rate of all advances was 4.45 and 5.10% at December 31, 2008 and 2007, respectively.

At December 31, 2008, the Bank had one putable advance of $3,000,000 with an interest rate of 2.47%, which is included in the total outstanding advances noted below. At December 31, 2007, the Bank had two putable advances totaling $10,000,000 with a weighted average interest rate of 3.68%.

The Bank has provided a pledge of all of the Bank’s eligible residential mortgage loans and certain securities as collateral for all FHLB debt. The amount of the residential loans totaled $137,370,000 and $117,643,000 as of December 31, 2008 and 2007, respectively.

The contractual maturities of advances are as follows (000s omitted):

Year Ending
December 31
2009	$	15,660
2010		8,168
2011		16,175
2012		13,116
2013		7,059
Total	$	60,178

Note 10 — Income Taxes

Allocation of income taxes between current and deferred portions is as follows (000s omitted):

	December 31,
	2008			2007			2006
Current expense	$	371		$	955		$	280
Deferred expense (recovery)		(270	)		(394	)		264
Total tax expense	$	101		$	561		$	544

25

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 — Income Taxes (Continued)

The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:

	Percent of Pretax Income (Loss)
	December 31,
	2008			2007			2006
Statutory federal tax rate		34.00	%		34.00	%		34.00	%
Increase (decrease) resulting from:
Nondeductible expenses		2.50	%		0.84	%		1.30	%
Tax exempt income		-18.70	%		-3.49	%		-2.73	%
Low income housing credit		-20.40	%		-5.93	%		-4.18	%
Other		27.90	%		-1.09	%		-2.39	%
Reported tax expense		25.30	%		24.33	%		26.00	%

The components of the net deferred tax asset are as follows (000’s omitted):

	December 31,
	2008		2007
Deferred tax assets:
Provision for loan losses	$	297	$	120
Net deferred loan fees		195		186
Deferred compensation		334		345
Unrealized loss on available for sale securities		—		—
General business tax credit carryforward		480		525
Depreciation		224		144
Other		311		432
Total deferred tax assets		1,841		1,752
Deferred tax liabilities:
Mortgage servicing rights	$	274	$	323
Original issue discount		72		61
Net purchase premiums		673		769
Unrealized gain on available for sale securities		35		27
Other		133		180
Total deferred tax liabilities		1,187		1,360
Net deferred tax asset	$	654	$	392

26

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10 — Income Taxes (Continued)

The Corporation has qualified under a provision of the Internal Revenue Code which permits it to deduct from taxable income a provision for bad debts in excess of such provision charged to income in the consolidated financial statements. Accordingly, retained earnings at December 31, 2008 and 2007 include approximately $1,592,000 for which no provision for federal income taxes has been made. Unrecognized deferred taxes on this amount are approximately $541,000. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then applicable rates. The general business credits of $340,000 expire between 2026 and 2028.

The Corporation has recorded an estimate of the tax credit through December 31, 2008. The Corporation’s share of tax credits generated by the investee partnership approximated $191,000, in 2008, 2007, and 2006.

Note 11 — Off-Balance Sheet Activities

Credit Related Financial Instruments - The Corporation is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing need of its customer. These financial instruments include commitments to extend credit, and unfunded commitments under lines of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Corporation’s exposure to credit loss is represented by the contractual amount of these commitments. The Corporation follows the same credit policies in making commitments as it does for on-balance sheet instruments.

The following financial instruments were outstanding whose contract amounts represent credit risk (000s omitted):

	Contract Amount
	December 31,
	2008		2007
Commitments to grant loans	$	6,907	$	9,568
Unfunded commitments under lines of credit		18,952		20,296
Unfunded commitments under letters of credit		10		16

The above commitments include fixed rate and variable rate loan commitments and lines of credit with interest rates ranging between 3.25% and 11.50% at December 31, 2008, and 5.25% and 11.50% at December 31, 2007.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management’s credit evaluation of the customer.

27

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11 — Off-Balance Sheet Activities (Continued)

Unfunded commitments under commercial lines of credit and revolving credit lines are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized and usually do not contain a specified maturity date and may be drawn upon to the total extent to which the Corporation is committed.

Collateral Requirements - To reduce credit risk related to the use of credit related financial instruments, the Corporation might deem it necessary to obtain collateral. The amount and nature of the collateral obtained is based on the Corporation’s credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant, and equipment and real estate.

Note 12 — Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, which are shown in the table below. Management believes, as of December 31, 2008 and 2007, that the Bank has met all of the capital adequacy requirements to which they are subject.

As of December 31, 2008, the most recent notification from the FDIC categorized the Bank as well capitalized, under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s capital category.

A reconciliation of the Bank’s equity to major categories of capital is as follows (000s omitted):

	December 31,
	2008			2007
Equity per consolidated bank balance sheet	$	36,186		$	38,309
Less: intangible and disallowed assets		(10,440	)		(11,207	)
Tier 1 Capital		25,746			27,102
Plus: Allowance for loan losses **		2,719			1,824
Total Capital	$	28,465		$	28,926

** Limited to 1.25% of risk weighted assets

28

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 12 — Regulatory Matters (Continued)

Regulatory capital balances and ratios are as follows (000s omitted):

											To be Well Capitalized
						To Comply With					Under Prompt
						Minimum Capital					Corrective Action
	Actual					Requirements					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2008:
Total Capital (to Risk-Weighted Assets)	$	28,465		12.54	%	$	18,155		8.00	%	$	22,693		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	25,746		11.35	%	$	9,077		4.00	%	$	13,616		6.00	%
Tier 1 Capital (to Average Assets)	$	25,746		9.26	%	$	13,903		5.00	%	$	13,903		5.00	%
As of December 31, 2007:
Total Capital (to Risk-Weighted Assets)	$	28,926		14.17	%	$	16,326		8.00	%	$	20,408		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	$	27,102		13.28	%	$	8,163		4.00	%	$	12,245		6.00	%
Tier 1 Capital (to Average Assets)	$	27,102		10.20	%	$	13,291		5.00	%	$	13,291		5.00	%

Note 13 — Restrictions on Dividends, Loans and Advances

Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Corporation.

The amount of total dividends which may be paid at any date is generally limited to the retained earnings of the Bank. However, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum standards.  At December 31, 2008, the Bank’s retained earnings available for the payment of dividends, without approval from the regulators, totaled $4,632,000. Accordingly, $31,554,000 of the Corporation’s investment in the Bank was restricted at December 31, 2008.

Loans or advances made by the Bank to the Corporation are generally limited to 10 percent of the Bank’s capital stock and surplus.  Accordingly, at December 31, 2008, Bank funds available for loans or advances to the Corporation amounted to $3,149,000.

29

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 14 — Retirement Plans

The Corporation is part of a non-contributory, multi-employer defined benefit pension plan covering substantially all employees. Effective April 1, 2004 employees’ benefits under the plan were frozen. The plan is administered by the trustees of the Financial Institutions Retirement Fund. Because it is a multi-employer plan, there is no separate valuation of plan benefits or segregation of plan assets specifically for the Corporation. During 2008, 2007 and 2006, the Corporation recognized expense for this plan of $166,000, $205,000, and $246,000, respectively.

The Corporation has a Defined Contribution Retirement plan for all eligible employees. The Corporation has a matching contribution agreement to match 25% of the first 6% of an employee’s salary (reduced from a 50% match effective October 1, 2006). During 2008, 2007 and 2006, the Corporation recognized expense for this plan of $33,000, $32,000, and $63,000, respectively.

The Corporation has a nonqualified deferred-compensation plan (included as part of the other liabilities section of the consolidated balance sheet) to provide retirement benefits to the Directors, at their option, in lieu of annual directors’ fees and meeting fees. Undistributed benefits are increased by an annual earnings rate which is based on the higher of the Company’s return on average equity or 5.0%. The value of benefits accrued to participants was $424,000 and $420,000 at December 31, 2008 and 2007, respectively. The expense for the plan, including the increase due to the annual earnings credit was $21,000, $19,000, and $20,000, for 2008, 2007, and 2006, respectively.

The Corporation has a liability for the directors’ deferred compensation plan. This plan does not allow for future deferrals and all benefits are being paid out to participants over a 180 month term. Undistributed benefits are increased by an annual earnings rate based on an index which was 6.08% as of December 31, 2008. The present value of benefits accrued to participants (also included as part of the other liabilities section of the balance sheet) is $560,000 and $598,000 at December 31, 2008 and 2007, respectively.

Note 15 — Related Party Transactions

Extensions of credit to principal officers, directors and their affiliates totaled $3,239,000 and $518,000 for the years ending December 31, 2008 and 2007, respectively. During the year ending December 31, 2008, total principal additions were $3,329,000 and total principal payments were $608,000, and during the year ending December 31, 2007, total principal additions were $261,000 and total principal payments were $625,000. Deposits from related parties and their affiliates held by the Bank at December 31, 2008 and 2007 amounted to $954,000 and $744,000 respectively.

30

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 16 — 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. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents - The carrying amounts of cash and short-term instruments approximate fair values. The carrying amounts of interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Securities - Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

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

Loans Receivable - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flows analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

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.

31

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 16 — Fair Value of Financial Instruments (Continued)

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.

Fed Funds Purchased - The carrying amounts of fed funds purchased approximate fair value.

Accrued Interest - The carrying amounts of accrued interest approximate fair value.

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

	December 31,
	2008				2007
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Assets:
Cash and cash equivalents	$	6,272	$	6,272	$	13,842	$	13,842
Securities — Held to maturity		37		37		238		234
Securities — Available for sale		8,916		8,916		11,084		11,084
Other securities		4,237		4,237		4,237		4,237
Loans held for sale		860		864		422		428
Net loans		247,542		250,068		224,797		226,760
Accrued interest and late charges receivable		1,300		1,300		1,364		1,364
Liabilities:
Federal Home Loan Bank advances		60,178		63,252		59,330		60,409
Fed funds purchased		1,000		1,000		—		—
Deposits		192,156		192,045		177,936		177,754
Accrued interest payable		526		526		544		544

Note 17 — Employee Stock Ownership Plan (ESOP)

As part of the conversion (Note 1), the Corporation implemented an employee stock ownership plan (ESOP) covering substantially all employees. The Corporation provided a loan to the ESOP, which was used to purchase 185,150 shares of the Corporation’s outstanding stock at $10 per share. In December 2006, the Board of Directors approved an amendment to the ESOP plan revising the vesting, allocation and loan repayment guidelines of the plan. As a result of the amendment, the loan bears interest equal to 4.75% and will be repaid over a period of fifteen years ending on December 31, 2016. Dividends on the allocated shares are distributed to participants and the dividends on the unallocated shares are used to pay debt service.

32

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 17 — Employee Stock Ownership Plan (ESOP) (Continued)

The scheduled maturities of the loan are as follows (000’s omitted):

	Year Ending
	December 31
2009	$	89
2010		94
2011		98
2012		103
2013		108
Thereafter		356
Total	$	848

The Corporation has committed to make contributions to the ESOP sufficient to support debt service of the loan. The ESOP shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active participants. The shares pledged as collateral are included in unearned compensation in the equity section of the balance sheet. As shares are released they become outstanding for earnings per share computations.

The ESOP shares as of December 31 were as follows (000s omitted except shares):

	2008			2007
Allocated shares		101,833			92,575
Shares released for allocation		9,258			9,258
Shares distributed		(29,504	)		(27,810	)
Unreleased shares		74,059			83,317
Total ESOP shares		155,646			157,340
Fair value of unallocated shares	$	259		$	942

Total compensation expense applicable to the ESOP amounted to approximately $108,000, $136,000, and $241,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

33

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 18 — Stock Compensation Plans

The Corporation has a Recognition and Retention Plan (RRP) which authorizes up to 92,575 shares to be issued to employees and directors. 92,275 shares of restricted stock have been issued to employees and directors since 2003. Under the plan, the shares vest 20% per year for five years. Shares forfeited total 0 in 2008 and 3,326 in 2007. No shares of restricted stock were issued in 2008 or 2007. During 2008, 17,289 shares vested and are no longer restricted for a total of 78,925 vested shares as of December 31, 2008. During 2007, 17,589 shares vested and are no longer restricted for a total of 67,458 vested shares as of December 31, 2007. Compensation expense applicable to the RRP amounted to $229,000, $229,000 and $230,000 for the years ended December 31, 2008, 2007 and 2006 respectively.

The Company’s Employee Stock Option Plan (the Plan), which is stockholder approved, permits the grant of stock options to its employees for up to 231,438 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its stockholders.  Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on five years of continuous service and have ten year contractual terms.

The fair value of each option award is estimated on the date of grant using a Black Scholes option valuation model that uses the weighted average assumptions noted in the following table.  Expected volatilities are based on the Company’s stock price and dividend history. The Company uses historical data to estimate option exercise and employee termination within the valuation model.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

There were no options granted in 2008. The fair value of each option granted in 2007 was $2.05. The fair value of each option granted in 2006 was $2.41. As of December 31, 2008, there was $19,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.6 years. The fair value is estimated on the date of the grant using the following weighted average assumptions:

	2007		2006
Dividend yield		1.8%		1.6%
Expected life		5 years		5 years
Expected volatility		22.3%		23.0%
Risk-free interest rate		3.02%-4.80%		3.02%-4.80%

34

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 18 — Stock Compensation Plans (continued)

A summary of changes of the status of the Corporation’s stock option plan is presented below (000s omitted except per share data):

	2008				2007
			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	Shares		Price		Shares		Price
Outstanding at beginning of year		175	$	13.21		192	$	13.09
Granted		—		—		1		10.12
Exercised		—		—		—		—
Forfeited/expired		13		13.00		18		11.91
Outstanding at end of year		162	$	13.22		175	$	13.21
Exercisable at year-end		152	$	13.20		129	$	13.18

A summary of changes in exercisable stock options December 31, 2008 and 2007 is as follows:

	2008		2007
Beginning of year		129		101
Newly Vested		23		28
Exercised		—		—
End of year		152		129

A summary of outstanding and exercisable stock options at December 31, 2008 is as follows:

Outstanding			Exercisable
Exercise Price	Number		Remaining		Number
Per share	Outstanding		Life (in Months)		Exercisable
$ 14.00		39,836		69		31,868
$ 13.10		5,000		72		4,000
$ 13.00		115,426		52		115,426
$ 11.15		1,500		84		900
$ 10.12		500		97		100

35

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 19 — Condensed Financial Statements of Parent Company

The following represents the condensed financial statements of Monarch Community Bancorp, Inc. (“Parent”) only. The Parent-only financial information should be read in conjunction with the Corporation’s consolidated financial statements.

     Condensed Balance Sheet (000s omitted)

	December 31,		December 31,
	2008		2007
Assets
Cash	$	469	$	758
Investments		123		323
Investment in Monarch Community Bank		36,186		38,309
Other assets		140		28
Total assets	$	36,918	$	39,418
Liabilities and Stockholders’ Equity
Accrued expenses	$	648	$	332
Stockholders’ equity		36,270		39,086
Total liabilities and stockholders’ equity	$	36,918	$	39,418

     Condensed Income Statement (000s omitted)

	December 31,			December 31,			December 31,
	2008			2007			2006
Income — Interest on investments
Income — Interest on investments	$	15		$	23		$	83
Dividends from Monarch Community Bank		2,638			3,261			—
Operating expense		217			385			204
Income (loss) — Before equity in undistributed net income of subsidiary		2,436			2,899			(121	)
Equity in undistributed net income of subsidiary		(2,138	)		(1,154	)		1,669
Net income	$	298		$	1,745		$	1,548

36

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 19 — Condensed Financial Statements of Parent Company (Continued)

     Condensed Statement of Cash Flows (000s omitted)

	December 31,			December 31,			December 31,
	2008			2007			2006
Cash flows from operating activities:
Net income	$	298		$	1,745		$	1,548
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization		1			1			2
Allocation of ESOP and RRP		335			371			464
(Increase) decrease in other assets		(112	)		139			(10	)
Decrease in accrued expenses		326			54			(3	)
Undistributed net income of subsidiary		2,138			1,154			(1,669	)
Net cash provided by operating activities		2,986			3,464			332
Cash flows from investing activities:
Purchase of securities		(7	)		(30	)		(83	)
Proceeds from sales and maturities of securities		208			20			439
Net cash (used in) provided by investing activities		201			(10	)		356
Cash flows from financing activities:
Repurchase of common stock		(2,704	)		(2,496	)		(2,149	)
Dividends received		—			—			—
Dividends paid		(772	)		(723	)		(630	)
Net cash (used in) provided by financing activities		(3,476	)		(3,219	)		(2,779	)
Net increase (decrease) in cash		(289	)		235			(2,091	)
Cash at beginning of year		758			523			2,614
Cash at end of year	$	469		$	758		$	523

37

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 20 — Subsequent events -The Troubled Asset Relief Program Capital Purchase Program

On October 14, 2008, the United States Department of the Treasury (the “Treasury”) announced the Capital Purchase Program (“CPP”). This program was instituted by the Treasury pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides up to $700 billion to the Treasury to, among other things, take equity ownership positions in financial institutions. The minimum investment amount is 1% of an institution’s risk-weighted assets. The maximum amount is the lesser of $25 billion or 3% of its risk-weighted assets. The CPP is intended to encourage financial institutions in the United States to build capital and thereby increase the flow of financing to businesses and consumers.

Under the CPP, the Treasury will purchase shares of senior preferred stock from banks, bank holding companies, and other financial institutions (“TARP Preferred Shares”). TARP Preferred Shares will qualify as Tier 1 capital for regulatory purposes and rank senior to a participating institution’s common stock. TARP Preferred Shares will pay a cumulative dividend of 5% per annum for the first five years they are outstanding and thereafter at a rate of 9% per annum. TARP Preferred Shares generally will be non-voting, but will have limited voting rights on matters that could adversely affect the shares. The Treasury’s consent will be required for any increase in dividends on common stock or certain repurchases of common stock until the third anniversary of the date of the Treasury’s investment unless prior to such third anniversary either the TARP Preferred Shares are redeemed in whole or the Treasury has transferred all the TARP Preferred Shares to third parties.

SEC reporting companies whose common stock is traded on a national securities exchange, like the Company, participate in the “public” version of the CPP. Public institutions that participate in the program must issue to the Treasury warrants to purchase additional shares of common stock with an aggregate market price equal to 15% of the TARP Preferred Shares purchased by the Treasury. The exercise price of the warrants will be a per share price equal to the 20 trading-day average closing price for shares of the participating institution’s common stock for the 20 trading-days ending the day prior to Treasury’s approval of the institution’s CPP application. The warrants will have a term of 10 years and will be transferable by Treasury.

Subject to certain exceptions, the Company will be required to register the TARP Preferred Shares, the TARP Warrants, and the common stock underlying the TARP Warrants with the SEC following the completion of the transaction. Institutions that participate in the CPP and their senior executive officers must agree to comply with the standards for executive compensation and corporate governance set forth in Section 111 of EESA for the period during which the Treasury holds preferred stock or warrants issued under the program. The description above of the TARP Preferred Shares and related elements of the CPP is intended only to summarize the program.

38

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The Company’s TARP Application

The Company filed an application on November 14, 2008 to participate in the “public” company version of the CPP, seeking a $6.8 million investment, the maximum permitted under the program. For the Company, the minimum amount of investment would be approximately $2.3 million. The application was preliminarily approved by the Treasury on December 15, 2008. On February 6, 2009, the Company completed the sale of $6.8 million of preferred stock and a warrant to purchase common stock to the Treasury under U.S. Treasury’s Capital Purchase Program under the Emergency Economic Stabilization Act of 2008.

The Company issued and sold (1) 6,785 shares of Fixed Rate Cumulative Perpetual Preferred Stock Series A, liquidation preference of $1,000 per share (the “Series A Preferred Shares”), and (2) a ten-year warrant (the “Warrant”) to purchase up to 260,962 shares of the Company’s common stock (“Common Stock”) at an exercise price of $3.90 per share, or an aggregate purchase price of $1.0 million in cash. Cumulative dividends on the Series A Preferred Shares will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. The issuance of the Series A Preferred Shares and the Warrant was exempt from registration as a transaction by an issuer not involving any public offering under Section 4(2) of the Securities Act of 1933.

The TARP Preferred Shares issued by the Company will qualify as Tier 1 capital and will rank senior to our common stock, the only class of equity securities we currently have outstanding. The primary effect of a CPP investment in the Company would be to materially increase our regulatory capital ratios. The following tables present our actual capital ratios as of December 31, 2008 and our capital ratios on a pro forma basis to illustrate the effects of issuing TARP Preferred Shares at the maximum and minimum program levels.

	December 31, 2008
	Actual			Pro forma
Tier I leverage ratio		9.26	%		10.70	%
Tier I risk-based capital ratio		11.35	%		13.06	%
Total risk-based captial ratio		12.54	%		14.26	%

The TARP Preferred Shares are non-voting, other than class voting rights on matters that could adversely affect the shares. The Company would be prohibited from paying or declaring dividends on any junior preferred shares, preferred shares with equal ranking, or common shares unless all accrued and unpaid dividends for all past dividend periods have been declared and paid in full. The Company also would be prohibited from repurchasing or redeeming any junior or pari passu preferred shares or common shares during periods dividends on the TARP Preferred Shares are unpaid.

39

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The Company’s TARP Application (Continued)

At issuance of the TARP Preferred Shares, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of stock junior to the TARP Preferred Shares or pari passu with the TARP Preferred Shares will be subject to restrictions, including the Company’s restrictions against increasing dividends from the last quarterly cash dividend per share ($0.09), the last cash dividend declared on the Company’s common stock prior to October 14, 2008, the date Treasury announced the CPP. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted. These restrictions will terminate on the earlier of: (a) the third anniversary of the date of the issuance of the TARP Preferred Shares, and (b) the date on which the TARP Preferred Shares have been redeemed in whole or Treasury has transferred all of the TARP Preferred Shares to third parties. In addition, the ability of the Company to declare or pay dividends or distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of stock junior to the TARP Preferred or ranking pari passu with the TARP Preferred Shares will be subject to further restrictions if the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on the TARP Preferred Shares.

Contemporaneous with the issuance of the TARP Preferred Shares, the Company issued the Treasury warrants (“Warrants”) to purchase shares of the Company’s common stock equal to 15% of the value of the TARP Preferred Shares. These shares are referred to herein as “TARP Warrant Shares.” The initial exercise price of the Warrants is $3.90

The Warrants have a term of 10 years. The TARP Preferred Shares, TARP Warrant Shares, and Warrants would be freely transferable and, subject to certain exceptions the Company is required to file a registration statement with the SEC covering of such securities within 30 days of closing the transaction with Treasury. If the Company fails to pay dividends on the TARP Preferred Shares for a total of six quarters, whether or not consecutive, Treasury will have the right to elect two members of the Company’s Board of Directors, voting together with any other holders of preferred shares ranking pari passu with the TARP Preferred Shares. These directors would serve on the Board of Directors until such time as the Company has paid in full all dividends not previously paid, at which time these directors’ terms of office would immediately terminate.

At December 31, 2008, the Company and its bank subsidiary had capital ratios in excess of those required to be considered “well-capitalized” under banking regulations. Nevertheless, the Board believed it was prudent for the Company to apply for capital available under the CPP because (i) it believes that the cost of capital under this program is significantly lower than the cost of capital otherwise available to the Company at this time, and (ii) despite being well-capitalized, additional capital under the program would provide the Company and its bank subsidiary additional flexibility to meet future capital needs that may arise.

40

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Pro Forma Financial Statements

The following un-audited pro forma financial information of Monarch Community Bancorp as of December 31, 2008 and for the fiscal year ended December 31, 2007 show the effects of $6.8 million of TARP Preferred Shares issued to the U.S. Treasury pursuant to the program.

There is the possibility that participation in the program will impact future net income available to our common shareholders due to future dividends and accretion charges related to the preferred stock issued to Treasury.

The Company presently plans to contribute $4 million to its bank subsidiary and to retain the remainder of the proceeds at the parent company level for general corporate purposes.
The Company’s bank subsidiary intends to use the additional capital to fund prudent loan growth in its markets and to further strengthen its capital position.

This financial data should be read in conjunction with our audited financial statements and the related notes filed as part of our Annual Report on Form 10-K for the year ended December 31, 2008.

41

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

	December 31,
	2008			2007			Adjusted
Assets
Cash and due from banks	$	5,595		$	7,691		$	5,595
Federal Home Loan Bank overnight time and other interest bearing deposits		677			6,151			677
Total cash and cash equivalents		6,272			13,842			6,272
Securities — Available for sale (1)		8,916			11,084			15,701
Securities — Held to maturity		37			238			37
Other securities		4,237			4,237			4,237
Loans held for sale		860			422			860
Loans, net		247,542			224,797			247,542
Foreclosed assets, net		2,076			1,515			2,076
Premises and equipment		4,456			4,675			4,456
Goodwill		9,606			9,606			9,606
Core deposit		681			862			681
Other assets		7,124			7,930			7,124
Total assets	$	291,807		$	279,208		$	298,592
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	13,883		$	13,609		$	13,883
Interest-bearing		178,273			164,327			178,273
Total deposits		192,156			177,936			192,156
Federal Home Loan Bank advances		60,178			59,330			60,178
Fed funds purchased		1,000			—			1,000
Accrued expenses and other liabilities		2,203			2,856			2,203
Total liabilities		255,537			240,122			255,537
Commitments and Contingencies		—			—			—
Stockholders’ Equity
Senior preferred stock, $1,000 par value; 5,000,000 shares authorized (2)		—			—			6,785
Discount on senior preferred stock (3)		—			—			(56	)
Warrant to purchase common stock (4)		—			—			56
Common stock — $0.01 par value
20,000,000 shares authorized, 2,046,102 shares issued and outstanding at December 31, 2008 and 2,321,585 shares issued and outstanding at December 31,2007		20			23			20
Additional paid-in capital		21,152			23,828			21,152
Retained earnings		15,867			16,341			15,867
Accumulated other comprehensive income (loss)		69			52			69
Unearned compensation		(838	)		(1,158	)		(838	)
Total stockholders’ equity		36,270			39,086			43,055
Total liabilities and stockholders’ equity	$	291,807		$	279,208		$	298,592

42

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.	The pro forma financial information above assumes the proceeds from the issuance of the preferred stock will be used to purchase investment securities. The Company initially plans to invest the proceeds in a mix of mortgage-backed securities (MBS), bonds and municipals. It is expected that the MBS will provide cash flow for subsequent investment in loans. It is estimated that the Company will earn a pre-tax yield of approximately 4.59% on such investments and the average life will be five years.
2.	Reflects the issuance of the preferred stock.
3.	The Company will allocate the estimated proceeds from the issuance based on the relative fair value of the warrants as compared to the fair value of the preferred stock. The fair value of the warrants is determined under a Black-Scholes model (as described in note 4) The fair value of the preferred stock is determined based on assumptions regarding the discount rate (market rate) on the preferred stock (currently estimated at 12%). The Company will then accrete the discount over a period of 5 years with corresponding charges to retained earnings using the effective yield method (approximately 8%).
4.	Reflects the Company’s estimate of the relative fair value of the warrants to be issued to Treasury. As mentioned in note 3, the Company used the Black-Scholes pricing model. This model includes assumptions regarding Monarch Community Bancorp’s common stock price, estimated dividend yield, stock price volatility, as well as assumptions regarding a risk-free interest rate. Additionally, based on this pro forma, it is estimated that the warrants will have an exercise price equal to $3.9 per share, which is expected to result in approximately $1.0 million in proceeds to the Company upon exercise. It is estimated the Company will issue a warrant to Treasury to purchase approximately 260,962 shares of its common stock.

43

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

	Year Ended December 31,
	2008 Actual		2007 Actual			2006 Actual			2008 Adjusted
Interest Income
Loans, including fees	$	16,457	$	16,369		$	16,107		$	16,457
Investment securities (1)		637		787			800			948
Federal funds sold and overnight deposits		102		389			380			102
Total interest income		17,196		17,545			17,287			17,507
Interest Expense
Deposits		5,861		6,107			5,418			5,861
Federal Home Loan Bank advances		2,675		3,115			3,189			2,675
Total interest expense		8,536		9,222			8,607			8,536
Net Interest Income		8,660		8,323			8,680			8,971
Provision for Loan Losses		2,712		971			—			2,712
Net Interest Income After Provision for Loan Losses		5,948		7,352			8,680			6,259
Noninterest Income
Fees and service charges		2,314		2,477			2,195			2,314
Loan servicing fees		443		444			447			443
Net gain on sale of loans		627		668			362			627
Net loss on sale of investment securities		2		(17	)		(20	)		2
Net gain on sale of premises and equipment		—		49			—			—
Other income		217		325			138			217
Total noninterest income		3,603		3,946			3,122			3,603
Noninterest Expense
Salaries and employee benefits		4,584		4,522			4,967			4,584
Occupancy and equipment		1,032		1,008			1,020			1,032
Data processing		777		731			704			777
Mortgage banking		406		359			382			406
Professional services		401		591			441			401
Amortization of intangible assets		181		230			291			181
NOW account processing		176		180			171			176
ATM/Debit card processing		200		192			233			200
Repossessed property expense		219		207			346			219
Other general and administrative		1,176		972			1,155			1,176
Total noninterest expense		9,152		8,992			9,710			9,152
Income - Before income taxes		399		2,306			2,092			710
Income Taxes (2)		101		561			544			178
Net Income	$	298	$	1,745		$	1,548		$	532
Dividends on preferred stock (3)		—		—			—			339
Amortization of discount on preferred stock (4)		—		—			—			11
Net Income available to common	$	298	$	1,745		$	1,548		$	182
Earnings Per Share
Basic (5)	$	0.14	$	0.73		$	0.63		$	0.08
Diluted (5)	$	0.14	$	0.73		$	0.63		$	0.08

44

Monarch Community Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.	Reflects estimated additional interest income resulting from the investment of proceeds the Company may receive under the TARP program. The Company initially plans to invest the proceeds in a mix of mortgage-backed securities (MBS), bonds and municipals. It is expected that the MBS will provide cash flow for subsequent investment in loans. It is estimated that the Company will earn a pre-tax yield of approximately 4.59% on such investments and the average life will be five years. The Company anticipates making such an investment in an effort to minimize the impact the cost of the preferred equity is expected to have on income available to common shareholders.
2.	Provisions for income taxes are adjusted to reflect the estimated additional income tax the Company may have to accrue for given the expected increases in interest income. This pro forma assumes a tax rate of 25.0%.
3.	Reflect required quarterly dividend payments the Company can expect to make under the terms of the program. Dividends reflected in the pro forma information above are equivalent to 5% of the preferred equity assumed to be issued.
4.	Amortization related to the discount on the preferred stock is expected to take place over a period of five years. The Company will accrete the value of the discount to preferred equity with corresponding charges made to retained earnings.
5.	Diluted shares and corresponding earnings per share have been adjusted to reflect the estimated impact that the aforementioned items in notes 3 and 4 as well as the dilutive nature the issuance of the warrants is expected to have. For purposes of this pro forma the Company assumed the warrants were issued and exercisable on January 1, 2008. This pro forma also assumes the treasury stock method was used in determining the estimated diluted shares outstanding for the periods presented and corresponding earnings per share. Estimated proceeds from the assumed exercise of the warrants were determined using an estimated exercise price of $3.90 per share.

45

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain income and expense and per share data on a quarterly basis for the three-month periods indicated:

	Year Ended December 31, 2008
	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr
	(Dollars in thousands, except per share data)
Interest income	$	4,285	$	4,295	$	4,297	$	4,319
Interest expense		2,213		2,126		2,112		2,085
Net interest income		2,072		2,169		2,185		2,234
Provision for loan losses		308		448		731		1,225
Net interest income after provision for loan losses		1,764		1,721		1,454		1,009
Noninterest income		1,000		933		898		772
Noninterest expense		2,322		2,321		2,258		2,251
Income before income taxes		442		333		94		(470	)
Income tax expense		110		85		37		(131	)
Net Income	$	332	$	248	$	57	$	(339	)
Earnings per share:
Basic	$	0.15	$	0.12	$	0.03	$	(0.17	)
Diluted	$	0.15	$	0.12	$	0.03	$	(0.17	)
Cash dividends declared per share	$	0.09	$	0.09	$	0.09	$	0.09

	Year Ended December 31, 2007
	1st Qtr		2nd Qtr		3rd Qtr		4th Qtr
	(Dollars in thousands, except per share data)
Interest income	$	4,427	$	4,396	$	4,377	$	4,345
Interest expense		2,353		2,308		2,304		2,257
Net interest income		2,074		2,088		2,073		2,088
Provision for loan losses		225		245		219		282
Net interest income after provision for loan losses		1,849		1,843		1,854		1,806
Noninterest income		1,000		969		1,040		937
Noninterest expense		2,191		2,192		2,266		2,343
Income before income taxes		658		620		628		400
Income tax expense		164		156		157		84
Net Income	$	494	$	464	$	471	$	316
Earnings per share:
Basic	$	0.21	$	0.19	$	0.19	$	0.14
Diluted	$	0.21	$	0.19	$	0.19	$	0.14
Cash dividends declared per share	$	0.07	$	0.07	$	0.07	$	0.08

46

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None

ITEM 9A (T). Controls and Procedures

An evaluation of the Registrant’s disclosure controls and procedures (as defined in Section 13(a)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2008 was carried out under the supervision and with the participation of the Registrant’s Chief Executive Officer, Chief Financial Officer and several other members of the Registrant’s senior management. The Registrant’s Chief Executive Officer and Chief Financial Officer concluded that the Registrant’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Registrant in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Registrant’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

Monarch Community Bancorp, Inc. and Subsidiaries Management’s Report on Internal Control Over Financial Reporting

The management of Monarch Community Bancorp, Inc. and Subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. Monarch Community Bancorp, Inc. and Subsidiaries internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of its financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective, provide only reasonable assurance with respect to financial statement preparation and presentation.

Management of Monarch Community Bancorp, Inc. and Subsidiaries assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we believe that, as of December 31, 2008, the Company’s internal control over financial reporting is effective based on those criteria.

Dated: March 30, 2009

/s/ Donald L. Denney  

Donald L. Denney 

President and Chief Executive Officer 

/s/ Rebecca S. Crabill  

Rebecca S. Crabill 

Vice President and Chief Financial Officer 

47

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

ITEM 9B. Other Information — Not Applicable

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

Information required by this Item 10 is incorporated herein by reference from the definitive proxy statement for the annual meeting of shareholders, to be held in April 2009, under the captions “Election of Directors”, ”The Audit Committee”, ”Audit Committee Financial Expert”, ”Compliance with Section 16”, “Code of Ethics”, and “Role and Composition of the Board of Directors”, a copy of which will be filed not later than 120 days after the close of the fiscal year.

ITEM 11. Executive Compensation

Information concerning executive compensation is incorporated herein by reference from the definitive proxy statement for the annual meeting of shareholders, to be held in April 2009, under the caption “Executive Compensation”, a copy of which will be filed not later than 120 days after the close of the fiscal year. The “Compensation Committee Report”, and “Compensation Committee Interlocks and Insider Participation”, are not required for smaller reporting companies.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive proxy statement for the annual meeting of shareholders, to be held in April 2009, under the captions “Security Ownership of Shareholder Holding 5% or More” and “Security Ownership of Directors, Nominees for Directors, Most Highly Compensated Executive Officers and All Directors and Officers as a Group”, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Equity Compensation Plan Information

The following table summarizes our equity compensation plans as of December 31, 2008:

	Number of				Number of
	securities to be				securities
	issued upon		Weighted-average		remaining available
	exercise of		exercise price of		for future issuance
	outstanding options		outstanding options		under equity
Plan Category	warrants and rights		warrants and rights		compensation plans
Equity compensation plans approved by security holders (1)		162,262		13.22		69,176
Equity compensation plans not approved by security holders		—		—		—

(1) Includes 2003 Stock Option and Incentive Plan and 2003 Recognition and Retention Plan approved at the 2003 Annual Meeting of Shareholders

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

Information concerning certain relationships and related transactions is incorporated herein by reference from the definitive proxy statement for the annual meeting of stockholders, to be held in April 2009, under the captions “Transactions with Certain Related Persons” and “Role and Composition of the Board of Directors”, a copy of which will be filed not later than 120 days after the close of the fiscal year.

48

ITEM 14. Principal Accountant Fees and Services

Information concerning principal accountant fees and services is incorporated herein by reference from the definitive proxy statement for the annual meeting of stockholders, to be held in April 2009, under the caption “Item 2. Ratification of Auditors”, a copy of which will be filed not later than 120 days after the close of the fiscal year.

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

Documents Filed As Part Of This Annual Report on Form 10-K

1.	Financial Statement — See the Financial Statements included in Item 8.
2.	Financial Statement Schedules — Financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is included in the financial statements.
3.	Exhibits — The exhibits filed as part of this Annual Report on Form 10-K are identified in the Exhibit Index, which Exhibit Index specifically identifies those exhibits that describe or evidence all management contracts and compensation plans or arrangements required to be filed as exhibits to this report. Such Exhibit Index is incorporated herein by reference.

49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MONARCH COMMUNITY BANCORP, INC.
Dated: March 30, 2009	By:	/s/ Donald L. Denney
		Donald L. Denney,
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.

Signature	Title	Date
/s/ Donald L. Denney Donald L. Denney	President and Chief Executive Officer (Principal Executive Officer)	March 30, 2009
/s/ Stephen M. Ross Stephen M. Ross	Chairman of the Board	March 30, 2009
/s/ Rebecca S. Crabill Rebecca S. Crabill	Vice President and Chief Financial Officer (Principal Accounting Officer)	March 30, 2009
/s/ Harold A. Adamson Harold A. Adamson	Director	March 30, 2009
/s/ Karl F. Loomis Karl F. Loomis	Director	March 30, 2009
/s/ James W. Gordon James W. Gordon	Director	March 30, 2009
/s/ Martin L. Mitchell Martin L. Mitchell	Director	March 30, 2009
/s/ Gordon L. Welch Gordon L. Welch	Director	March 30, 2009
/s/ Craig W. Dally Craig W. Dally	Director	March 30, 2009
/s/ Richard L. Dobbins Richard L. Dobbins	Director	March 30, 2009

50

Exhibit Index

		Reference to
		Prior Filing or
Exhibit		Exhibit Number
Number	Document	Attached Hereto
3.1 (i)	Registrant’s Articles of Incorporation		*
3.1 (ii)	Articles Supplementary (Incorporated by reference from Form 8-K filed 2/9/09)
3.2 (i)	Registrant’s Bylaws		*
3.2 (ii)	Amendment to bylaws (incorporated by reference from Form 8-K filed on 9/25/06)
4.1	Registrant’s Specimen Stock Certificate		*
4.2	Warrant to Purchase 260,962 shares of Common Stock issued to the U.S. Treasury (Incorporated by reference from Form 8-K filed on 2/12/09)
10.1	Employment Agreement between Monarch Community Bancorp, Inc and Donald L. Denney (incorporated by reference from Form 8-K filed on 9/25/2006)
10.2	Management Continuity Agreement between Monarch Community Bancorp, Inc. and William C. Kurtz and Andrew J. Van Doren (incorporated by reference from Form 8-K filed on 12/21/2004)
10.3	Registrant’s Employee Stock Ownership Plan		*
10.4	Registrant’s 2003 Stock Option and Incentive Plan		**
10.5	Registrant’s Recognition and Retention Plan		**
10.6	Form of Stock Option Agreement		***
10.7	Management Continuity Agreement with Rebecca S. Crabill (Incorporated by reference from Form 8-K filed on 02/27/08)
10.8	Letter Agreement dated February 6, 2009 including the Securities Purchase Agreement —Standard Terms Incorporated by reference therein between the Company and the U.S. Treasury (incorporated by reference from Form 8-K filed on 2/12/09)
10.9	Form of Waiver of Senior Executive Officers (incorporated by reference from Form 8-K, filed on 2/12/09)
10.10	Form of Amendment Agreement (incorporated by reference from Form 8-K filed on 2/12/09)
10.11	Amendment to Employment Agreement with Don L. Denney
10.12	Amendment to Employment Agreement with Andrew J. Van Doren
10.13	Amendment to Employment Agreement with Rebecca S. Crabill
11	Statement re computation of per share earnings	See Note 1 of the Notes to Consolidated Financial Statements contained in this report
12	Statements re computation of ratios	None
13	Annual Report to Security Holders	Not required
14	Registrant’s Code of Conduct		14
16	Letter re: change in certifying accountant	None
18	Letter re: change in accounting principles	None
21	Subsidiaries of the registrant		21
22	Published report regarding matters submitted to vote of security holders	None
23	Consent of Plante & Moran, PLLC		23
24	Power of Attorney	Not required
31.1	Rule 13a-14(a) Certification of the Company’s President and Chief Executive Officer		31.1
31.2	Rule 13a-14(a) Certification of the Company’s Chief Financial Officer		31.2
32	Section 1350 Certification.		32

*	Filed on March 27, 2002 as an exhibit to the Registrant’s Registration Statement on Form SB-2 (File No. 333-85018), and incorporated herein by reference.
**	Filed on March 19, 2003 as part of Registrant’s Schedule 14A (File No. 000-49814), and incorporated by reference
***	Incorporated by reference from Annual Report on Form 10-KSB for the year ended December 31, 2004

51

EX-10.11

Exhibit 10.11

Amendment #1 To The
Monarch Community Bancorp, Inc.

Employment Agreement

          THIS AMENDMENT (the “Amendment”), is made and entered into as of December 31, 2008 by and between Monarch Community Bancorp, Inc., on its behalf and on behalf of all of its subsidiaries and affiliated corporations or associations (“Affiliates”), located at 375 North Willowbrook Road, Coldwater, Michigan 49036 (collectively referred to as the “Company”), and Donald L. Denney (“Executive”).

          WHEREAS, the Executive serves as President and Chief Executive Officer of the Company and the Company’s Affiliate, Monarch Community Bank (the “Bank”) pursuant to the terms of an employment agreement dated September 20, 2006 (the “Agreement”); and

          WHEREAS, the Company and the Executive wish to amend the Agreement to satisfy the requirements of Section 409A of the Internal Revenue Code; and

          WHEREAS, except as otherwise provided in this Amendment, the Agreement shall continue in full force and effect.

          NOW, THEREFORE, in consideration of the premises and of the covenants herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, the Bank and the Executive agree to amend the Agreement as follows:

1. Section 6 of the Agreement is amended to provide as follows:

6. Expenses. During the Term of this Agreement, Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred (in accordance with the policies and procedures of the Company and the Bank) in performing services under this Agreement, provided that Executive properly accounts for expenses in accordance with the policies of the Company and the Bank. Reimbursement under this section will be paid no later than March 15 of the calendar year following the calendar year in which the expenses were incurred.

2. Section 7(d) of the Agreement is amended to provide as follows:

     (d) Conferences and Continuing Education. Executive shall be permitted to attend appropriate industry-wide and statewide banking conventions and professional development meetings necessary to keep Executive abreast of developments in the industry. All reasonable expenses of attending such meetings, including the attendance by Executive’s spouse, shall be at the expense of the Company. Reimbursement under this section will be paid no later than March 15 of the calendar year following the calendar year in which the expenses were incurred.

3. Section 10(b) of the Agreement is amended to provide as follows:

     (b) Termination of Employment by the Board of Directors Without Cause. In the event the Board of Directors terminates Executive’s employment without “Cause” (as defined in Section 10(d)) prior to a Change of Control (as defined in Section 10(e)), Executive shall be entitled to a lump sum payment, within 30 days after Executive’s termination of employment, in an amount equal to his Base Salary and to continue to participate in the Company’s health care plan for one (1) year following the date of termination of employment. In the event, after the termination of Executive’s employment, coverage of Executive under the Company’s health care plan does not qualify under the federal tax laws for the same tax treatment as coverage of active employees of the Company, or if the insurer for the health care plan prohibits Executive’s continued participation in such plan, the Company shall, in its discretion, either provide substantially equivalent health care coverage to Executive or pay to Executive a lump sum payment in an amount in cash equal to the cost to the Company of Executive’s continued participation in the Company’s health care plan no later than the March 15 of the calendar year following the calendar year in which Executive’s employment terminates.

4. Section 10(e)(i) of the Agreement is amended to provide as follows:

     (i) If, following a Change of Control, this Agreement is terminated by the Company without Cause or by Executive for “Good Reason,” Executive shall be entitled to a lump sum payment, within 30 days after Executive’s termination of employment, in an amount equal to his Base Salary and to continue to participate in the Company’s health care plan for a period of two (2) years following such termination. In the event of termination by Executive for Good Reason, Executive shall provide notice to the Chairman of the Board of Directors specifying the facts and circumstances surrounding his belief that “Good Reason” exists and the Company shall have the right to cure those matters within thirty (30) days from the date of notice. In the event, after the termination of Executive’s employment, coverage of Executive under the Company’s health care plan does not qualify under the federal tax laws for the same tax treatment as coverage of active employees of the Company, or if the insurer for the health care plan prohibits Executive’s continued participation in such plan, the Company shall, in its discretion, either provide substantially equivalent health care coverage to Executive or pay to Executive a lump sum payment in an amount in cash equal to the cost to the Company of Executive’s continued participation in the Company’s health care plan no later than the March 15 of the calendar year following the calendar year in which Executive’s employment terminates.

5. A new Section 20 is added to the Agreement to provide as follows:

     20. Compliance with Section 409A. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee as of

2

his employment termination as determined pursuant to Section 409A of the Code, payments under this Agreement that are made upon such termination of employment may not, to the extent required by Section 409A of the Code, commence to Executive until the six month anniversary of the date that Executive’s employment with the Company terminates and the first payment to Executive shall be a lump sum payment of the amount that would have otherwise been payable to Executive had a delay in payment not been required pursuant to Section 409A of the Code. The remainder of the payments to Executive will be made in accordance with the Company’s or its successor’s regular payroll practices then in effect. The parties intend, however, that this Agreement shall be exempt from the 409A as either a separation pay arrangement under Treas. Reg. 1.409A-1(b)(9) or a short term deferral of compensation under 1.409A-1(b)(4).

          IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.

MONARCH COMMUNITY BANCORP, INC.			EXECUTIVE
By:	/s/ Stephen M. Ross		/s/ Donald L. Denney
	Stephen M. Ross		DONALD L. DENNEY
	Its:	Chairman

Witness: /s/ Andrew J. Van Doren

3

EX-10.12

Exhibit 10.12

AMENDMENT #1 TO
MANAGEMENT CONTINUITY AGREEMENT

          This Amendment #1 to Management Continuity Agreement (the “Amendment”) is entered into as of the 31st day of December, 2008 between Monarch Community Bancorp, Inc., a Maryland corporation (the “Company”), and Andrew J. Van Doren (“Executive”).

          WHEREAS, the Executive is currently employed by the Company’s affiliate, Monarch Community Bank (the “Bank”), as its Senior Vice President, Chief Compliance Officer and General Counsel; and

          WHEREAS, the Company and Executive have previously entered into a Management Continuity Agreement dated December 16, 2004 (the “Agreement”) to provide certain security to Executive in connection with a change in control of the Company or the Bank and hereby wish to amend the Agreement to satisfy the requirements of Section 409A of the Internal Revenue Code (“Section 409A”); and

          WHEREAS, except as otherwise provided in this Amendment, the Agreement shall continue in full force and effect.

          NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:

1. The last sentence of Section 3.3 of the Agreement is amended to provide as follows:

The preceding events shall only provide the basis for “Good Reason” if Executive provides notice of such events within one hundred twenty (120) days of their occurrence in the manner required by Section 5.1 of this Agreement and, within 30 days after receiving notice, the Company fails to remedy the condition.

2. Section 4.2 is amended to provide as follows:

4.2 Section 162(m). Should payments be precluded from deduction by the Company under Section 162(m) of the Code, the Company may defer until the first day, in no event later than March 15, of the tax year following the year in which determination is made that payments will be non-deductible under 162(m) (the “Determination Year”) only those amounts necessary to maintain the tax deductibility of compensation paid to Executive in the Determination Year.

3. A new Section 14 is added to the Agreement to provide as follows:

     14. Compliance with Section 409A. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee as of his employment termination as determined pursuant to Section 409A of the Internal Revenue Code (“Section 409A”), payments under this Agreement that are made upon

such termination of employment may not, to the extent required by Section 409A, commence to Executive until the six month anniversary of the date that Executive’s employment with the Company terminates and the first payment to Executive shall be a lump sum payment of the amount that would have otherwise been payable to Executive had a delay in payment not been required pursuant to Section 409A. The remainder of the payments to Executive will be made in accordance with the Company’s or its successor’s regular payroll practices then in effect. The parties intend, however, that this Agreement shall be exempt from Section 409A as either a separation pay arrangement under Treas. Reg. 1.409A-1(b)(9) or a short term deferral of compensation under 1.409A-1(b)(4).

          IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.

MONARCH COMMUNITY BANCORP, INC.			EXECUTIVE
By:	/s/ Donald L. Denney		/s/ Andrew J. Van Doren
	Donald L. Denney		Andrew J. Van Doren
	Its:	President and Chief Executive Officer

2

EX-10.13

Exhibit 10.13

AMENDMENT #1 TO
MANAGEMENT CONTINUITY AGREEMENT

          This Amendment #1 to Management Continuity Agreement (the “Amendment”) is entered into as of the 31st day of December, 2008 between Monarch Community Bancorp, Inc., a Maryland corporation (the “Company”), and Rebecca S. Crabill (“Executive”).

          WHEREAS, the Executive is currently employed by the Company’s affiliate, Monarch Community Bank (the “Bank”), as its Senior Vice President and Chief Financial Officer; and

          WHEREAS, the Company and Executive have previously entered into a Management Continuity Agreement dated February 21, 2008 (the “Agreement”) to provide certain security to Executive in connection with a change in control of the Company or the Bank and hereby wish to amend the Agreement to satisfy the requirements of Section 409A of the Internal Revenue Code (“Section 409A”); and

          WHEREAS, except as otherwise provided in this Amendment, the Agreement shall continue in full force and effect.

          NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:

1. The last sentence of Section 3.3 of the Agreement is amended to provide as follows:

The preceding events shall only provide the basis for “Good Reason” if Executive provides notice of such events within one hundred twenty (120) days of their occurrence in the manner required by Section 5.1 of this Agreement and, within 30 days after receiving notice, the Company fails to remedy the condition.

2. Section 4.2 is amended to provide as follows:

4.2 Section 162(m). Should payments be precluded from deduction by the Company under Section 162(m) of the Code, the Company may defer until the first day, in no event later than March 15, of the tax year following the year in which determination is made that payments will be non-deductible under 162(m) (the “Determination Year”) only those amounts necessary to maintain the tax deductibility of compensation paid to Executive in the Determination Year.

3. A new Section 14 is added to the Agreement to provide as follows:

     14. Compliance with Section 409A. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee as of his employment termination as determined pursuant to Section 409A of the Internal Revenue Code (“Section 409A”), payments under this Agreement that are made upon

such termination of employment may not, to the extent required by Section 409A, commence to Executive until the six month anniversary of the date that Executive’s employment with the Company terminates and the first payment to Executive shall be a lump sum payment of the amount that would have otherwise been payable to Executive had a delay in payment not been required pursuant to Section 409A. The remainder of the payments to Executive will be made in accordance with the Company’s or its successor’s regular payroll practices then in effect. The parties intend, however, that this Agreement shall be exempt from Section 409A as either a separation pay arrangement under Treas. Reg. 1.409A-1(b)(9) or a short term deferral of compensation under 1.409A-1(b)(4).

          IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.

MONARCH COMMUNITY BANCORP, INC.			EXECUTIVE
By:	/s/ Donald L. Denney		/s/ Rebecca S. Crabill
	Donald L. Denney		Rebecca S. Crabill
	Its:	President and Chief Executive Officer

2

EX-14

Exhibit 14

Monarch Community Bancorp, Inc. /Monarch Community Bank

Code of Conduct

     I. INTRODUCTION

          This Code of Conduct (the “Code”) of Monarch Community Bancorp, Inc. (the “Company”), Monarch Community Bank (the “Bank”) and any subsidiary of either the Company or the Bank (collectively, the “Corporation”) contains standards for the transaction of business consistent with applicable laws and regulations and standards of honesty, ethics, and integrity. Each director, officer, employee, and agent of the Corporation (collectively, “Covered Persons” and each a “Covered Person”) must follow the standards set forth in the Code.

          Covered Persons must act professionally and appropriately and avoid conflicts of interest through informed judgment and careful regard for the standards of conduct and responsibilities set forth in the Code. In all situations, Covered Persons must exercise good judgment in discharging their responsibilities.

          Covered Persons must report any known or suspected violation of the Code. Compliance with the Code is the responsibility of each Covered Person.

     II. SAFEGUARDING CONFIDENTIAL INFORMATION

          Safeguarding of confidential information of the Corporation, its current and prospective customers, and shareholders is vital to the Corporation’s business. Consistent with the Gramm- Leach-Bliley Act of 1999, the Corporation has adopted and maintains administrative, technical and physical safeguards for confidential information of its customers. For more information about these safeguards, ask the Bank’s Privacy Officer.

          Covered Persons play a vital role in protecting the confidential information of the Corporation’s customers. Covered Persons should discuss with his or her supervisor or the Privacy Officer the specific security responsibilities that apply to their job or other responsibilities.

          Covered Persons must protect nonpublic personal information about the Corporation’s customers and must not disclose such information to the Corporation’s affiliates and nonaffiliated third parties, except as required or permitted by applicable laws and regulations. In addition, Covered Persons must not discuss confidential information of the Corporation’s customers with anyone inside the Corporation who does not have a business need for the information or with anyone outside the Corporation, such as a family member or friend. A Covered Person’s obligation to safeguard confidential information continues to apply after his or her employment or other service with the Corporation has ended.

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          Covered Persons must also safeguard the Corporation’s proprietary information, including, without limitation, trademarks, patents, trade secrets, copyrights, customer lists, customer information, reports, studies, records, data, computer software, and other non-public information about the Corporation and its business, relationships, customers, and prospective customers. Proprietary information is entrusted to Covered Persons as representatives of the Corporation. Covered Persons may not use proprietary information other than in connection with Corporation business. All proprietary information of the Corporation is the Corporation’s property and Covered Persons may not use or disclose such information to any third party absent express written authorization from the Corporation. A Covered Person’s obligation to safeguard proprietary information continues to apply after his or her employment or other service with the Corporation has ended.

          Employees must also comply with all confidentiality and other relevant sections of the Employee Handbook.

     III. ENSURING INTEGRITY OF RECORDS

          Covered Persons must ensure that all records created or maintained in the ordinary course of business are accurate, complete, and maintained with reliability and integrity. This includes all accounting and audit records, loan documents, transaction records, time records, phone records, electronic records, and all other records that are generated and maintained in the ordinary course of business. All documents requiring notarization must be in full compliance with notary requirements. All records must accurately reflect transactions in a timely manner. Errors must be corrected promptly. Covered Persons must not falsify or otherwise cause records to be inaccurate.

     IV. INTERNAL CONTROL OVER ASSETS

          Covered Persons must comply with all Corporation policies and procedures established for the safeguarding of Corporation assets and proper reporting and disclosure of financial information. At a minimum, Covered Persons must adhere to the following standards:

A.	No undisclosed or unrecorded asset is to be established for any purpose;
B.	No false entry is to be made in the books of the Corporation for any reason, and no entry is to be used for any purpose other than the purpose described in the supporting documents;
C.	No payment is to be approved or made with the intention that any part of it is to be used for any purpose other than the purpose described in the supporting documents; and
D.	Any Covered Person who knows of any unrecorded assets of the Corporation or any prohibited act described in this Section IV must

Page 2 of 12

promptly report it to the Chief Executive Officer or Chief Financial Officer.

     V. CANDOR IN DEALING WITH AUDITORS, REGULATORS, AND LEGAL COUNSEL

          Covered Persons must respond completely, honestly, and candidly in communications with the Corporation’s auditors, regulators, and legal counsel. Incomplete or false communications with the Corporation’s auditors, regulators, or legal counsel are strictly prohibited.

     VI. ANTI-BRIBERY

          Covered Persons must observe standard loan procedures in all transactions, including loan committee review.

          No Covered Person may solicit for himself or herself or for a third party other than the Corporation itself, anything of value from anyone in return for any business, service, or confidential information of the Corporation.

          No Covered Person may accept anything of value (other than bona fide salaries, wages, fees or other compensation paid, or expenses paid or reimbursed, in the usual course of business of the Corporation) from anyone in connection with the business of the Corporation either before or after a transaction is discussed or consummated. Any Covered Person who is offered or receives something of value from anyone beyond what is authorized in these guidelines must disclose this fact in writing to the Donald L. Denney, President and CEO, Andrew J. Van Doren, Vice President and General Counsel, or Stephen Ross, Chairman of the Board.

          Exceptions to the above:

          Covered Persons may accept small gifts or other items of value from customers, vendors, or those attempting to become vendors of the Corporation as long as they are properly disclosed and the dollar value is considered nominal. Gifts valued up to $50 may be accepted without prior approval. Gifts to Directors and to officers who are Vice President (“Officers”) and above estimated to be of a value between $50 and $200 may be accepted with disclosure to the Chief Executive Officer. Gifts to Directors and to Officers (as defined above) exceeding $200 must receive the approval of the Chairman of the Board or the Board of Directors before acceptance. Gifts to employees who are not Officers (as defined above) exceeding $50 must receive the approval of the Chief Executive Officer or the Chief Operating Officer before acceptance.

          Following are examples of the types of gifts Covered Persons may accept from individuals or companies doing or seeking to do business with the Corporation:

• Meals, gratuities, amenities, or favors based on obvious family or personal relationships

Page 3 of 12

• Meals, refreshments, travel arrangements, accommodations, or entertainment of reasonable value in the course of a meeting or other bona fide business occasion

• Loans from other financial institutions when made on customary terms for the purpose of financing usual and proper activities (Insiders must refer to the bank’s insider policy for additional guidance and regulatory requirements concerning loans from correspondent banks.)

• Advertising or promotional material of reasonable value (pens, note pads, calendars, etc.)

• Discounts or rebates on merchandise or services that are available to other similar customers

• Gifts of reasonable value related to commonly recognized events or occasions such as a promotion, wedding, retirement, holiday, or other special occasion

• Civic, charitable, education, or religious organizational awards for recognition of service and accomplishment

• Other benefits or items of value, when approved in writing on a case-by-case basis.

The Compliance Officer will keep all Policy Disclosure Forms from Covered Persons.

          The observance of these standards is mandatory for all Covered Persons. Observance also is for a Covered Person’s personal benefit, because federal bank bribery law provides that a person convicted of improperly receiving something with a value of over $1000 can be fined up to 3 times the item’s value and imprisoned for 30 years; if the value is less than $1000 the penalty can be a fine and/or a year in prison.

     VII. CONFLICTS OF INTEREST

A. In General. Except for wages, salary, or other direct or indirect compensation paid in the normal course of the Corporation’s business, no Covered Person may directly or indirectly benefit personally from his or her position or connection as a director, officer, employee, or agent of the Corporation or from any other activity of the Corporation. For example:

1. No Covered Person may have any interest, direct or indirect, in any organization which is seeking or doing business with the Corporation or which is the competitor of the Corporation except:

a. When such interest comprises securities in a widely held corporation which are traded regularly in recognized security markets and such interest is not in excess of 1% of any class of securities of such a corporation, or

b. When such interest has been fully disclosed in writing to senior management of the Corporation for a determination as to the substantiality of such interest and the propriety of retaining it.

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2. No Covered Person may serve as an officer, director, employer, or consultant of another company or organization which:

a. Is a competitor of the Corporation;

b. Is seeking or doing business with the Corporation;

c. Is in substantial default to the Corporation on any loan, contract or other obligation;

d. Is involved in a substantial dispute or litigation with the Corporation; or

e. Otherwise presents a conflict of interest, except with the knowledge and written consent of senior management of the Corporation. If a Covered Person receives written consent to so serve, and at any time learns of a conflict of interest or potential conflict of interest arising from this position, (s)he must immediately disclose this fact to senior management of the Corporation.

3. No Covered Person, without written authorization of senior management of the Corporation, shall use or reveal any confidential information received in a Corporation capacity except as is authorized by applicable law or regulation or use or permit others to use Corporation property or services for personal purposes.

4. Every Covered Person has an obligation immediately to report in writing to senior management of the Corporation any potential conflict of interest which may arise at any time for any reason, with respect to his/her association with the Corporation.

B. Employees. Employees must also comply with all outside employment and other relevant sections of the Employee Handbook.

C. Principal Shareholders. Principal shareholders are shareholders who, directly or indirectly own, control or have power to vote more than 10% of any class of the Corporation’s voting securities. At the point at which a shareholder becomes a principal shareholder, senior management must advise the principal shareholder of the need for full disclosure of their direct or indirect involvement in any loan or other transaction with the Corporation. This includes a statement that the FDIC urges disclosure of any involvement in any project or business activity that could pose a conflict of interest with the Corporation.

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D. Political and Civic Activities. The Corporation encourages employees to participate in activities outside of the Bank, including charitable or political activities. However, federal law prohibits the Bank from making political contributions. To ensure the Bank’s separation from any political contributions, employees are prohibited, while on Bank property or while on duty, from soliciting other employees for political contributions on behalf of candidates for public office, political action committees, or political parties. Management may disseminate to employees materials from banking related political action committees, however, directors, officers and employees may not coerce other employees into contributions to such political action committees. However, the Federal Election Commission does permit the use of Corporation funds and assets for limited political purposes, such as:

1. Establishing political action committees to solicit contributions to separate political funds to be utilized for political purposes;

2. Communicating direct political messages to shareholders; or

3. Implementing non-partisan voter registration campaigns.

While the Bancorp/Bank may support certain charitable organizations, directors, officers and employees may not coerce other employees into contributions to such organizations.

E. Investment in Corporation Stock. Covered Persons that elect to purchase and hold stock of the Corporation are encouraged to do so as a long-term investment. Speculation or trading in the Stock of the Corporation based on inside information is strictly prohibited. “Inside information” means material, non-public information about the Corporation that a reasonably prudent person would consider important in making an investment decision. Covered Persons who are subject to the Corporation’s Insider Trading Policy shall also comply with that Policy.

F. Fiduciary Appointment. Covered Persons must obtain the Chief Executive Officer’s approval before accepting any appointment to act as a fiduciary or co fiduciary (personal representative, conservator, guardian, or trustee) for a customer of the Corporation, unless the customer is a member of the Covered Person’s Immediate Family. “Immediate Family” means parents, spouses, children, or siblings.

G. Beneficiary or Legacy under a Will or Trust. Covered Persons must report to the Compliance Officer any gift of a beneficial interest or legacy under wills or trusts of customers of the Corporation, unless the customer is a member of the Covered Person’s Immediate Family.

H. Prohibited Lending Practices. Covered Persons are not permitted to approve credit to members of their Immediate Family or to customers in which the

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Covered Person or a member of the Covered Person’s Immediate Family is a director, officer, member, manager, or partner or has a controlling interest. All such credit applications must be approved in accordance with the Bank’s Loan Policies

I. Board Consideration of Potential Conflicts. The Board of Directors of the Company or the Bank or the Bank’s Director Loan Committee, as appropriate, will specifically consider any proposed loan or other transaction into which the Corporation is asked to enter, which presents a potential conflict of interest. The Board will note its deliberations and its decision in the minutes of the meeting at which such loan or transaction is considered.

     VIII. ANTITRUST COMPLIANCE

          Covered Persons are prohibited from entering into arrangements or relationships with competitors of the Corporation for the purpose of or that have the effect of setting or controlling prices, rates, trade practices, marketing policies, or disclosing future plans or business strategies of the Corporation that have not been disclosed generally to the public.

     IX. TIE-IN ARRANGEMENTS

          The Corporation shall not and Covered Persons shall not cause the Corporation in any manner to extend credit, lease or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition or requirement that:

A. The customer obtain some additional credit, property, or service from the Corporation or its affiliates, other than a loan, discount, deposit, or trust service;

B. The customer provide some additional credit, property, or service to the Company
or its affiliates, other than those related to and usually provided in connection with a loan, discount, deposit, or trust service; or

C. The customer shall not obtain some other credit, property, or service from a competitor of the Corporation or its affiliates, other than a condition or requirement that the Corporation shall reasonably impose in a credit transaction to assure the soundness of the credit.

     X. SOCIAL SECURITY NUMBER PRIVACY

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          The Corporation treats the social security numbers that it obtains as confidential and otherwise complies with the Social Security Number Privacy Act. The Corporation prohibits the unauthorized or unlawful use or disclosure of social security numbers. Covered Persons are required to take steps to maintain the confidentiality of any customer, employee or other social security numbers. Covered Persons may not:

• publicly display social security numbers; or

• use or transmit more than four sequential digits of a social security number over the Internet or computer system or network unless the connection is secure or the transmission is encrypted; or

• include more than four sequential digits of a social security number in or on any document mailed or otherwise sent to an individual if the numbers are visible on the envelope or packaging.

          Covered Persons also may not include more than four sequential digits of a social security number in any document mailed to a person unless authorized or required by law or unless it is for an administrative purpose, in the ordinary course of business, to do any of the following:

• Verify an individual’s identity, identify an individual, or do another similar administrative purpose related to an existing or proposed account, transaction, product, service, or employment;

• Investigate an individual’s claim, credit, criminal, or driving history;

• Detect, prevent, or deter identity theft or another crime;

• Lawfully pursue or enforce a person’s legal rights, including, but not limited to, an audit, collection, investigation, or transfer of a tax, employee benefit, debt, claim, receivable, or account or an interest in a receivable or account; or

• Provide or administer employee or health insurance or membership benefits, claims, or retirement programs or to administer the ownership of shares of stock or other investments. Records and information containing social security numbers are accessible only to authorized individuals who have a valid, demonstrable need to obtain such records or information.

          All records containing Social Security numbers shall be kept in accordance with the Corporation’s Information Security Program.

          Covered persons should immediately report any suspected unauthorized disclosures of social security numbers to the Bank’s Security Officer or Compliance Officer. The Corporation will immediately investigate any suspected security breaches or

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violations. Where appropriate, the Corporation will notify law enforcement officials. The Corporation will take appropriate action against any Covered Person who violates this policy, up to and including suspending or terminating employment or other service with the Corporation. To minimize the damage, Covered Persons are required to immediately report any actions by them which may have resulted in an actual or suspected security breach or unauthorized or improper disclosure of social security numbers. The Corporation will take into consideration whether Covered Persons promptly self-reported their own actions.

          Covered Persons should direct any questions or issues about the application or enforcement of these security measures to the Security Officer or Compliance Officer.

     XI. POLICY PROHIBITING HARASSMENT

          The Corporation prohibits unlawful harassment on the basis of legally protected status (such as harassment based on national origin, race, color, disability, sex, age, familial status, height, weight, marital status, religion veteran status) regardless of whether it is committed by Covered Persons, customers, visitors or others. Sexual harassment is any unwelcome sexual advances, requests for sexual favors and other verbal or physical conduct or communication of a sexual nature when:

a. submission to such conduct or communication is made either explicitly or implicitly a condition of employment; or

b. submission to or rejection of such conduct or communication is used as the basis for decisions affecting employment; or

c. such conduct or communication has the purpose or effect of unreasonably interfering with another’s work performance or has the purpose or effect of creating an intimidating, hostile or offensive work environment.

          Examples of sexual harassment include, but are not limited to: threatening adverse action if sexual favors are not granted, promising preferential treatment in return for sexual favors, unwelcome sexual advances, unnecessary physical contact, offensive remarks, including unwelcome comments about appearance, obscene jokes or other inappropriate use of sexually explicit or offensive language, and the display of sexually suggestive objects or pictures. Other forms of illegal harassment are any verbal or physical conduct or communication that shows hostility or aversion toward another because of his/her race, disability, religion, national origin, age, veteran status or other legally protected status when such conduct or communication has the purpose or effect of:

a. unreasonably interfering with or adversely affecting another’s work performance; or

b. creating an intimidating, hostile or offensive work environment.

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          Examples of such harassment include, but are not limited to: epithets, slurs, negative stereotyping or threatening, intimidating, or hostile acts that relate to race, age, religion, national origin, disability, veteran status, etc., and written material that is posted or displayed at work that shows hostility or aversion toward another because of race, age, religion, national origin, disability, veteran status, etc.

          Any Corporation Employee who believes that he or she has been a victim of or witness to harassment should follow the procedures contained in the Employee Handbook. Any other individual who believes he or she has been the victim of or witness to harassment should immediately notify the Chief Executive Officer Denney or General Counsel Van Doren. The Corporation will investigate all reports of harassment promptly and take appropriate corrective action, as warranted.

          Any Covered Person who is determined to have engaged in harassment in violation of this policy will be subject to appropriate action. For employees, this may include suspension or termination of employment. For others, it may include termination of their service to or relationship with the Corporation.

          Retaliation in any form against an individual who makes a report or who cooperates in an investigation of alleged harassment under this policy is also prohibited. Any Covered Person who is determined to have retaliated against another will be subject to appropriate action. For employees, this may include suspension or termination of employment. For others, it may include termination of their service to or relationship with the Corporation.

     XII. OBSERVING APPLICABLE LAWS

          The Corporation places a high priority on compliance with all applicable laws and regulations. Covered Persons who knowingly violate applicable laws or regulations or the

          Corporation’s policies and procedures regarding compliance with laws and regulations shall be subject to disciplinary action, including termination.

     XIII. ADMINISTRATION OF THE CODE

          The Boards of Directors of the Company and the Bank have adopted the Code and delegated to their respective Chief Executive Officers the responsibility for its administration throughout their respective institutions. Each Covered Person is responsible for knowing, understanding, and complying with the Code at all times. All Covered Persons are provided with a copy of the Code at the time of their hiring or orientation and shall sign and deliver to the Bank’s Human Resources manager, an acknowledgement of receipt in form provided in the Code both at the time of their hire or orientation and after any material changes to the Code are announced by the Corporation. Newly appointed officers of the Corporation are required to submit a statement of personal interest as evidence of their compliance with the Code. Directors and Executive Officers are required to submit an annual statement of personal interest, as required under the Bank’s Extension of Credit to Insider’s Policy. Each director, officer and employee

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will receive his or her own copy of this policy annually and will sign a written acknowledgement of its receipt and an agreement to comply with the policy. All auditors and attorneys engaged by the Corporation shall receive a copy of this policy, and such auditor or attorney’s engagement by the Corporation shall be subject to the requirements of this policy. Supervising officers are expected to make reasonable efforts to ensure that Covered Persons whom they supervise comply with the Code.

     XIV. MONITORING COMPLIANCE WITH THE CODE

          The Corporation’s Audit Committee shall monitor compliance with the Code with an effective audit program designed to identify operational weaknesses and to ensure corrective action and compliance with applicable laws, regulations, the Code, and internal policies.

     XV. REPORTING VIOLATIONS OF THE CODE OR OTHER QUESTIONABLE ACTIVITY

          Covered Persons are obligated to report violations of the Code and other questionable activity in accordance with the Corporation’s Complaint Procedure, which is attached as Addendum I. The Corporation will not permit retaliation of any kind against Covered Persons making good faith reports of violations of the Code.

     XVI. PENALTIES FOR VIOLATIONS OF THE CODE

          Covered Persons who are found to have violated the Code will be subject to disciplinary action and penalties, including possible termination of an employment or other relationship or service with the Corporation.

     XVII. TRAINING

          The Corporation shall provide Covered Persons with initial and periodic training on complying with the Code.

     XVIII. UPDATING THE CODE

          The Corporation shall review the Code annually and update the Code from time to time to account for new business activities, changes in business conditions or as changes in applicable laws and regulations may dictate. The Corporation reserves the right to modify or amend the Code at any time without prior notice.

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Employee Acknowledgement

I have received and read the Monarch Community Bank Code of Conduct Policy. I understand its contents and that I must abide by the policies stated there.

(Employee Signature)	(Date)
(Print Name)

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EX-21

Exhibit 21

Monarch Community Bancorp, Inc. Listing of Subsidiaries

		Ownership
Subsidiary	Location	Interest
Monarch Community Bank	Coldwater, MI	Wholly Owned
First Insurance Agency	Coldwater, MI	Wholly Owned

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Monarch Community Bancorp, Inc.
375 North Willowbrook Road
Coldwater, MI 49036

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-10554 Form S-8 No. 333-105548 and Form S-3 No. 333-157735) of Monarch Community Bancorp, Inc., of our report dated March 3, 2009, with respect to the consolidated financial statements of Monarch Community Bancorp, Inc. included in this Form 10-K for the year ended December 31, 2008.

Grand Rapids, Michigan
March 25, 2009

48

EX-31.1

Exhibit 31.1

Rule 13a-14(a) CERTIFICATION

I, Donald L. Denney, certify that:

1.	I have reviewed this annual report on Form 10-K of Monarch Community Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have;

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting purposes;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluations; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2009	By:	/s/ Donald L. Denney
		Donald L. Denney
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Rule 13a-14(a) CERTIFICATION

I, Rebecca S. Crabill, certify that:

1.	I have reviewed this annual report on Form 10-K of Monarch Community Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have;

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting purposes;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluations; and
c.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2009	By:	/s/ Rebecca S. Crabill
		Rebecca S. Crabill
		Vice President, Chief Financial Officer (Principal Financial Officer)

EX-32

Exhibit 32

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as an officer of Monarch Community Bancorp, Inc. (the “Company”) that the Annual Report of the Company on Form 10-K for the period ended December 31, 2008 fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and results of operations of the Company for such period.

Date: March 30, 2009	By:	/s/ Donald L. Denney
		Donald L. Denney
		President and Chief Executive Officer (Principal Executive Officer)
Date: March 30, 2009	And:	/s/ Rebecca S. Crabill
		Rebecca S. Crabill
		Vice President, Chief Financial Officer (Principal Financial Officer)