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

FORWARD-LOOKING STATEMENTS

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

OVERVIEW

Following Monarch Community Bank's Safety and Soundness examination which was completed in early 2010, the Board of Directors of Monarch Community Bank stipulated to the terms of a formal enforcement action ("Consent Order") with Federal Deposit Insurance Corporation ("FDIC") and the Office of Financial and Insurance Regulation for the State of Michigan ("OFIR"). The Consent Order, which was effective May 6, 2010, contains specific actions needed to address certain findings from their examination and to address our current financial condition. Following Monarch Community Bank's most recent Safety and Soundness examination, there were no changes to the existing formal enforcement action ("Consent Order").

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

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

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

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

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

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

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

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

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

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

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

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

FINANCIAL CONDITION

Summary

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

Securities

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

Loans

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



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

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

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

     Total other loans                 15,835         10.6          18,227         11.9

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


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

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

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

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

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

Deposits

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

We have used brokered certificates of deposit to diversify our sources of funds and improve pricing at certain terms compared to the local market and advances available from Federal Home Loan Bank of Indianapolis. Due to the fact that the Bank's regulatory capital ratios are less than the levels necessary to be considered "well capitalized", it may not obtain new brokered funds as a funding source without prior approval of the FDIC and is subject to rate restrictions that limit the amount that can be paid on all types of retail deposits. The maximum rates the Bank can pay on all types of retail deposits are limited to the national average rate, plus 75 basis points. We have compared the Bank's current rates with the national rate caps and reduced any rates over the rate cap to fall within those caps. There has been no material impact to our deposit balances resulting from the rate caps.

Federal Home Loan Bank Advances

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

Equity

Total equity was $10.6 million at March 31, 2012 compared to $11.1 million at December 31, 2011. This represents 4.93% and 5.35% of total assets at March 31, 2012 and December 31, 2011, respectively. Decreases in equity for the three months ended March 31, 2012 included net losses of $401,000 and $100,000 in accrued dividend payments and accrued interest on dividend payments on the Preferred stock. The annual 5% dividend on the Preferred Stock with the amortization of the discount will reduce net income (or increase the net loss) applicable to common stock by approximately $350,000 annually. Effective February 2010, the Corporation deferred regularly scheduled dividend payments on the $6.7 million in par outstanding on its Series A fixed rate, cumulative perpetual preferred stock (aggregate liquidation preference of $6.8 million) which was issued to the U.S. Treasury in February 2009. At March 31, 2012 the dividend payable to the Treasury Department totaled $816,000. The suspension of dividend payments is permissible under the terms of the TARP Capital Purchase Program, but the dividend is a cumulative dividend and failure to pay dividends for six dividend periods would trigger board of director appointment rights for the holder of the Series A Preferred Stock, (see further discussion under "Capital Resources").

RESULTS OF OPERATIONS

Net Interest Income

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

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

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

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

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

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


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

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

Net interest income                                       $    1,673                                     $    1,776

Net interest spread                                                         3.37 %                                         3.00 %

Net interest margin                                                         3.35 %                                         2.97 %

Rate/Volume Analysis

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

                                                   Three Months Ended March 31,
                                                          2012 vs. 2011

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

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


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

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

  Net interest income                                                           $      (103 )

Provision for Loan Losses

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

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

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

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

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


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

Non-interest Income

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

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

Non-interest Expense

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

Federal Income Tax Expense

An income tax benefit was not recognized for the first three months of 2012. A $138,500 tax benefit for the three months of 2012, primarily associated with the $401,000 net losses before income taxes, was offset by a corresponding increase in the valuation allowance on deferred tax assets. A significant component of . . .