Monarch Community Bancorp (MCBF) 10-Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2005

or
o	Transition report under Section 13 or 15(d) of the Exchange Act
	For the transition period from ________ to ________

Commission file number: 000-49814

MONARCH COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes:o No:þ

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: At July 27, 2005, there were 2,708,692 shares of the issuer’s Common Stock outstanding.

Monarch Community Bancorp, Inc.

Index

PART I — FINANCIAL INFORMATION
Item 1 — Condensed Financial Statements:
Condensed Consolidated Balance Sheets — June 30, 2005 and December 31, 2004	1
Condensed Consolidated Statements of Income — Three and Six Months Ended June 30, 2005 and 2004	2
Condensed Consolidated Statements of Changes in Stockholder’s Equity — Six Months Ended June 30, 2005 and 2004	3
Condensed Consolidated Statements of Cash Flow — Six Months ended June 30, 2005 and 2004	4
Notes to Condensed Consolidated Financial Statements	5
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	6 - 11
Item 3 — Quantitative and Qualitative Disclosures about Market Risk	12
Item 4 — Controls and Procedures	13
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings	14
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3 — Defaults Upon Senior Securities	14
Item 4 — Submission of Matters to a Vote of Security Holders	14
Item 5 — Other Information	14
Item 6 — Exhibits	14
SIGNATURES	15
Rule 13a-14(a) Certification of President and Chief Executive Officer
Rule 13a-14(a) Certification of Chief Financial Officer
Section 1350 Certification

PART I—FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS

     Condensed Consolidated Balance Sheets

	(unaudited)
	June 30,			December 31,
	2005			2004
	(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks	$	9,418		$	9,529
Federal Home Loan Bank overnight time and other interest bearing deposits		9,787			6,120
Total cash and cash equivalents		19,205			15,649
Securities-Available for sale		12,728			8,057
Securities-Held to maturity		257			267
Other investments		4,830			4,720
Real Estate Investment — Limited partnership, at equity		1,204			1,278
Loans held for sale		949			361
Loans, net of allowance for loan losses		211,712			219,317
Accrued interest and late charges		1,200			1,138
Foreclosed assets, net		2,038			1,960
Premises and equipment		5,922			6,444
Deferred income taxes		629			612
Goodwill		9,606			9,606
Core deposit		1,556			1,752
Other assets		4,595			5,969
Total assets	$	276,431		$	277,130
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	7,424		$	5,198
Interest-bearing		162,046			162,535
Total deposits		169,470			167,733
Federal Home Loan Bank advances		61,659			65,955
Accrued expenses and other liabilities		5,282			4,023
Total liabilities		236,411			237,711
Commitments and contingent liabilities		—			—
Stockholder’s equity
Common stock-$0.01 par value authorized-20,000,000 shares issued and outstanding-2,708,692 shares at June 30, 2005 and 2,709,220 shares at December 31, 2004		27			27
Additional paid in capital		28,053			28,059
Retained earnings		14,021			13,529
Accumulated other comprehensive income		(32	)		2
Unearned Compensation		(2,049	)		(2,198	)
Total stockholder’s equity		40,020			39,419
Total liabilities and stockholder’s equity	$	276,431		$	277,130

See accompanying notes to condensed consolidated financial statements

1

Condensed Consolidated Statements of Income

	Three Months		Three Months			Six Months			Six Months
	Ended		Ended			Ended			Ended
	June 30,		June 30,			June 30,			June 30,
	2005		2004			2005			2004
			(Dollars in thousands, except per share data)
Interest Income
Loans, including fees	$	3,538	$	3,373		$	7,101		$	5,914
Investment securities		170		151			326			307
Federal funds sold and overnight deposits		55		30			102			76
Total interest income		3,763		3,554			7,529			6,297
Interest Expense
Deposits		784		703			1,508			1,309
Federal Home Loan bank advances		812		882			1,634			1,680
Total interest expense		1,596		1,585			3,142			2,989
Net Interest Income		2,167		1,969			4,387			3,308
Provisions for Loan Losses		—		450			(385	)		450
Net Interest Income after Provision for Loan Losses		2,167		1,519			4,772			2,858
Noninterest Income
Fees and service charges		531		447			997			673
Loan servicing fees		116		101			229			158
Net gain on sale of loans		123		277			260			445
Other income (loss)		66		141			(145	)		175
Total noninterest income		836		966			1,341			1,451
Noninterest Expenses
Salaries and employees benefits		1,254		1,223			2,531			2,133
Occupancy and equipment		282		238			573			435
Data processing		165		174			337			273
Mortgage banking		111		76			215			111
Professional fees		161		142			298			241
Amortization of core deposit intangible		86		110			196			110
NOW account processing		50		33			99			65
ATM/Debit card processing		56		52			107			74
Foreclosed property expense		31		57			67			103
Other general and administrative		336		303			655			540
Total noninterest expense		2,532		2,408			5,078			4,085
Income — Before Income Taxes		471		77			1,035			224
Income Taxes		120		(19	)		272			25
Net Income	$	351	$	96		$	763		$	199
Earnings Per Share
Basic	$	0.13	$	0.04		$	0.29		$	0.08
Diluted	$	0.13	$	0.04		$	0.29		$	0.08

See accompanying notes to condensed consolidated financial statements

2

Condensed Consolidated Statements of Changes in Stockholders’ Equity

	Common Stock											Accumulated
	Number					Additional						Other
	of					Paid in			Retained			Comprehensive			Unearned
	Shares			Amount		Capital			Earnings			Income			Compensation			Total
						(Dollars in thousands, except per share data)
Balance January 1, 2004		2,399		$	24	$	23,352		$	16,567		$	75		$	(2,588	)	$	37,430
Issuance of 310,951 shares of common stock at $14.75/share in connection with purchase of MSB Financial, Inc.		311			3		4,583												4,586
Vesting of restricted shares																221			221
797 shares repurchased at $14.15/share		(1	)				(11	)											(11	)
Comprehensive Income:
Net Income										199									199
Change in unrealized gain on securities available for sale													(152	)					(152	)
Total Comprehensive Income																			47
Dividends paid ($0.10/share)										(255	)		—						(255	)
Balance June 30, 2004		2,709		$	27	$	27,924		$	16,511		$	(77	)	$	(2,367	)	$	42,029
Balance January 1, 2005		2,709		$	27	$	28,059		$	13,529		$	2		$	(2,198	)	$	39,419
Issuance of 1,000 shares of common stock at $12.10/share in connection with Restricted Stock Plan		1					12									(12	)	$	—
Vesting of restricted shares																161			161
1,528 shares repurchased at $12.10/share		(2	)				(18	)											(18	)
Comprehensive Income:
Net Income										763									763
Change in unrealized gain (loss) on securities available for sale													(34	)					(34	)
Total Comprehensive Income																			729
Dividends paid ($0.10/share)										(271	)								(271	)
Balance June 30, 2005		2,708		$	27	$	28,053		$	14,021		$	(32	)	$	(2,049	)	$	40,020

See accompanying notes to condensed consolidated financial statements

3

Condensed Consolidated Statements of Cash Flows

	Six Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2005			2004
	(Dollars in thousands)
Cash Flows from Operating Activities
Net Income	$	763		$	199
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		310			214
Provision for Loan Losses		(385	)		450
Amortization		324			402
Stock dividends on other securities		(100	)		(89	)
(Gain) Loss on sale of foreclosed assets		20			(34	)
Mortgage loans originated for sale		(12,306	)		(13,952	)
Proceeds from sale of mortgage loans		11,978			13,899
Gain on sale of mortgage loans		(260	)		(445	)
(Gain) Loss on disposal of premises and equipment		(45	)		—
Net change in:
Deferred loan fees		47			(353	)
Accrued interest receivable		(62	)		99
Other assets		1,233			311
Accrued expenses and other liabilities		1,408			2,399
Net cash provided by (used in) operating activities		2,925			3,100
Cash Flows from Investing Activities
Proceeds from maturities of HTM securities		10			10
Proceeds from sale and maturities of AFS securities		1,188			4,045
Purchases of available for sale securities		(5,922	)		(4,499	)
Purchases of other securities		(10	)		(21	)
Proceeds from maturities of other securities		—			5
Loan originations and principal collections, net		6,368			(6,861	)
Proceeds from sale of foreclosed assets		1,477			1,358
Proceeds from sale of premises and equipment		343		��	—
Purchases of premises and equipment		(86	)		(87	)
Acquisition, net of cash acquired		—			(12,779	)
Net cash provided by (used in) investing activities		3,368			(18,829	)
Cash Flows from Financing Activities
Net increase (decrease) in deposits		1,737			716
Proceeds of FHLB advances		1,000
Repayment of FHLB advances		(5,197	)		(131	)
Issuance of Common Stock		12			4,586
Repurchase of Common Stock		(18	)		(11	)
Issuance of dividend		(271	)		(255	)
Net cash provided by (used in) financing activities		(2,737	)		4,905
Net increase (decrease) in cash and cash equivalents		3,556			(10,824	)
Cash and cash equivalents -January 1		15,649			27,331
Cash and cash equivalents -June 30	$	19,205		$	16,507
Supplemental Cash Flow Information:
Cash paid for interest		3,308			3,033
Cash paid for income taxes		—			—
Noncash investing activity — loans transferred to foreclosed assets		1,575			1,271

See accompanying notes to condensed consolidated financial statements

4

MONARCH COMMUNITY BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Monarch Community Bancorp, Inc. (the “Corporation”) was incorporated in 2002 under Maryland law to hold all of the common stock of Monarch Community Bank (the “Bank”), formerly known as Branch County Federal Savings and Loan Association. Prior to August 29, 2002, the Bank was a federally chartered and insured mutual savings institution, which converted to a stock savings institution effective August 29, 2002. In connection with the conversion, on August 29, 2002, the Corporation sold 2,314,375 shares of its common stock in a subscription offering. Fifty percent of the net proceeds from this offering were used to purchase all of the common stock of the Bank.

On April 15, 2004, the Corporation completed the 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 Corporation 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 Corporation’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 lives of the corresponding assets and liabilities. Goodwill recorded for the acquisition amounted to $9.6 million. 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 in Michigan. The Bank operates six full service offices and one drive-through only office. The Bank owns 100% of Community Services Group, Inc., which invests in other entities, including 100% ownership of First Insurance Agency, a minority ownership in a title agency, and a majority ownership in a limited liability company that reinsures private mortgage insurance. 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.

BASIS OF PRESENTATION

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

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

The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes required by generally accepted accounting principles in annual consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Corporation’s Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission.

The results of operations for the six month period ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year period.

5

EARNINGS PER SHARE

Earnings per share are based on the weighted average number of shares outstanding during each period. Diluted earnings per share show the dilutive effect of stock-based compensation. The weighted average share reconciliation is as follows:

	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
Weighted average shares outstanding		2,708,825			2,658,659			2,709,022			2,529,104
Less: Average nonvested RRP shares		(59,119	)		(72,412	)		(63,361	)		(78,793	)
Weighted average for basic EPS		2,649,707			2,586,247			2,645,660			2,450,311
Dilutive effect of restricted stock and stock options		—			51,037			—			26,294
Weighted average for dilutive EPS		2,649,707			2,637,284			2,645,660			2,476,605

STOCK-BASED COMPENSATION

The Corporation accounts for stock option plans using the intrinsic value method. No compensation cost related to stock options was recognized during 2005 or 2004, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at the date of the grant. Had compensation cost for stock options been measured using the fair value method, the Corporation’s net income and basic and diluted earnings per share would have been the pro forma amounts indicated below (000s omitted except per share data):

	Six months ended
	June 30,		June 30,
	2005		2004
As reported net income	$	763	$	199
less: additional stock-based compensation determined under the fair value method, net of tax		44		24
	$	719	$	175
As reported earnings per share	$	0.29	$	0.08
Proforma earnings per share	$	0.27	$	0.07
As reported earnings per diluted share	$	0.29	$	0.08
Proforma earnings per diluted share	$	0.27	$	0.07

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

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

6

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

FORWARD-LOOKING STATEMENTS

In addition to historical information, the following discussion contains “forward-looking statements” that involve risks and uncertainties. All statements regarding the expected financial position, business and strategies are forward-looking statements and the Corporation intends for them to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to the Corporation or management, are intended to identify forward-looking statements. The Corporation believes that the expectations reflected in these forward-looking statements are reasonable based on our current beliefs and assumptions; however, these expectations may prove to be incorrect. Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, changes in the relative difference between short and long-term interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, including levels of non-performing assets, demand for loan products, deposit flows, competition, demand for financial services in our market area, our operating costs and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements.

CRITICAL ACCOUNTING POLICIES

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

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

Goodwill.The original value of Goodwill was determined by allocating the purchase price to the estimated fair value of assets acquired and liabilities assumed. Periodically, Goodwill is tested for impairment in accordance with SFAS No. 142. This test involves calculating the estimated fair value of the reporting unit. Thus, the carrying value of Goodwill is subject to a high degree of estimation and management judgment.

FINANCIAL CONDITION

Total Assets

Assets decreased $.7 million to $276.4 million at June 30, 2005 compared to $277.1 million at December 31, 2004. Management attributes the lack of growth to difficulties in growing core deposits and declines in the loan portfolio because of lack of loan demand as well as the loan sale discussed below.

Securities

Securities increased to $13.0 million at June 30, 2005 compared to $8.3 million at December 31, 2004. The increase was attributable to the purchase of securities utilizing overnight funds as part of the ongoing management of the Bank’s liquidity and investment portfolio.

Loans

The Bank’s net loan portfolio decreased by $7.6 million, or 3.5%, from $219.3 million at December 31, 2004 to $211.7 million at June 30, 2005. The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:

7

	June 30, 2005					December 31, 2004
	Amount		Percent			Amount		Percent
			(Dollars in thousands)
Real estate loans:
One-to four-family	$	136,722		63.4	%	$	141,251		62.4	%
Multi-family		3,497		1.6			4,042		1.8
Commercial		34,352		15.9			42,746		18.9
Construction or development		7,742		3.6			8,853		3.9
Total real estate loans		182,313		84.6			196,892		86.9
Other loans:
Consumer loans:
Automobile		2,560		1.2			2,631		1.2
Home equity		15,806		7.3			14,234		6.3
Manufactured housing		693		0.3			784		0.3
Other		7,606		3.5			6,645		2.9
Total consumer loans		26,665		12.4			24,294		10.7
Commercial business loans		6,564		3.0			5,330		2.4
Total other loans		33,229		15.4			29,624		13.1
Total loans		215,542		100.0	%		226,516		100.0	%
Less:
Allowance for loan losses		3,178					6,385
Net deferred loan fees		652					808
Loans in process		—					6
Total loans, net	$	211,712				$	219,317

During the quarter ended June 30, 2005, the Bank sold $6.2 million of one-to-four family and commercial real estate loans and properties which had been foreclosed upon for $4.0 million. The Bank had previously established reserves for losses totaling $2.2 million on this group of assets so no additional loss provisions were necessary as a result of this transaction. The purpose of the loan sale was to reduce the amount of problem assets on the Bank’s books so management could continue to focus on returning the Bank to profitability.

In addition to the sale, the decreases noted in the table above were due to repayments and payoffs on existing loans exceeding new loan production including payoffs of certain problem loans that management encouraged. One-to-four family loans have declined as new loan production has declined along with the mortgage market and as management seeks to eliminate the origination of subprime loans. Commercial real estate loans have declined due to the loan sale, the payoff of some problem credits and the payoff of performing loans that were refinanced elsewhere. The Commercial lending department and management have spent a significant amount of time during the six months ended June 30, 2005 working on improving the credit quality of the commercial loan portfolio and this has contributed to the lack of new commercial loan origination. Management expects future growth in the loan portfolio to come from increased originations of commercial real estate and business loans, as well as expanded geographic outreach facilitated by the acquisition. The introduction of online mortgage origination is expected to expand the Bank’s mortgage lending activities within its current market area by offering convenience to borrowers and realtors and may lead to some originations in areas contiguous to the Bank’s current market.

Deposits

Total deposits increased $1.7 million, or 1.0%, from $167.7 million at December 31, 2004 to $169.4 million at June 30, 2005. The increase consisted of a $1.2 million increase in checking and savings accounts and a $3.6 million increase in certificates of deposit which was offset by a $3.1 million decrease in money market accounts. Of the increase in certificates of deposit, $2.0 million was in the form of brokered deposits. Brokered deposits have been utilized to provide additional liquidity or reduce excess liquidity depending on current conditions. The decrease in money market accounts was attributed to the Bank lagging behind the market as interest rates have increased during the first six months of 2005. Management expects future deposit growth to come from increased sales and marketing efforts to attract lower cost savings and checking accounts, as well as product enhancement including the introduction of internet banking.

8

Federal Home Loan Bank Advances

Federal Home Loan Bank (FHLB) advances decreased $4.3 million from December 31, 2004 to June 30, 2005.The decrease was the result of the Bank repaying maturing advances. Management is attempting to reduce it reliance on borrowed funds through the growth of deposits but should this strategy not succeed management anticipates future borrowings to fund loan growth. See “Net Interest Income” discussion below.

Equity

Total equity was $40.0 million at June 30, 2005 compared to $39.4 million at December 31, 2004. This represents 14.5% and 14.3% of total assets at June 30, 2005 and December 31, 2004, respectively. The increased equity was primarily the result of earnings for the six months ended June 30, 2005 exceeding the dividend payments. Management considers its equity position to be strong and has no plans or intentions to increase equity other than by continued profitable operations.

RESULTS OF OPERATIONS

Net Interest Income

Generally, the acquisition of MSB Financial has had the effect of reducing the yields on the Bank’s earning assets and the cost of its interest bearing liabilities with a resulting overall increase in the net interest margin. For this reason, comparability between 2005 and 2004 is difficult given the increases in short term market interest rates during 2005.

Net interest income before the provision for loan losses for the quarter ended June 30, 2005 totaled $2.2 million and represented an increase of $198,000 compared to the same period one year ago. The Bank’s net interest margin increased to 3.54% for the quarter ended June 30, 2005 from 3.38% for the quarter ended June 30, 2004. Interest income from loans represented 94.0% of total interest income for the quarter ended June 30, 2005 compared to 94.9% for the same period in 2004.

Net interest income before the provision for loan losses for the six months ended June 30, 2005 totaled $4.4 million and represented an increase of $1.0 million, or 32.6%, compared to the same period a year ago. This increase was primarily due to the increased earning assets acquired from MSB Financial during the second quarter of 2004. The Bank’s net interest margin increased to 3.56% for the six months ended June 30, 2005 from 3.16% for the six months ended June 30, 2004. Interest income from loans represented 94.3% of total interest income for the six months ended June 30, 2005 compared to 93.9% for the same period in 2004.

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

	Six Months Ended June 30,
	2005							2004
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
	(dollars in thousands)
Fed Funds and overnight deposits	$	6,204	$	102		3.32	%	$	14,973	$	76		1.02	%
Investment securities		12,581		227		3.64			19,665		240		2.45
Other securities		4,733		99		4.22			3,546		67		3.79
Loans receivable		222,837		7,101		6.43			171,440		5,914		6.92
Total earning assets	$	246,355	$	7,529		6.16		$	209,624	$	6,297		6.02
Demand and NOW Accounts	$	36,154	$	40		0.22		$	18,717		51		0.55
Money market accounts		17,739		90		1.02			11,833		71		1.20
Savings accounts		29,342		61		0.42			18,078		51		0.57
Certificates of deposit		89,031		1,318		2.99			70,672		1,136		3.22
Federal Home Loan Bank Advances		63,672		1,634		5.18			60,141		1,680		5.60
Total interest bearing liabilities	$	235,938		3,143		2.69		$	179,441		2,989		3.34
Net interest income			$	4,386						$	3,308
Net interest spread						3.48	%						2.68	%
Net interest margin						3.56	%						3.16	%

9

Provision for Loan Losses

The Bank recorded $0 provision for loan losses for the quarter ended June 30, 2005 compared to a $450,000 provision for the quarter ended June 30, 2004. The decreased provision in 2005 was possible due to improvements in non-performing loans as detailed below. Net charge-offs for the quarter ended June 30, 2005 totaled $2.3 million compared to $1.4 million for the quarter ended June 30, 2004. The increased level of charge offs in 2005 was the result of the Bank continuing to aggressively deal with problem loans as evidenced by the sale of loans previously discussed which resulted in a $2.2 million charge-off. See “Loans” discussion above.

The provision for loan losses for the six months ended June 30, 2005 was a recovery of $385,000 compared to a $450,000 provision for the same period in 2004. The reversal of provisions was possible due to the Bank receiving payoffs in 2005 on two loan relationships totaling $1.5 million for which the Bank had previously provided loan loss allowances of $535,000. Net charge-offs for the six months ended June 30, 2005 totaled $2.8 million compared to $1.4 million for the six months ended June 30, 2004.

The allowance for loan losses was $3,178,000 at June 30, 2005 and $6,385,000 at December 31, 2004, a reduction of $3.2 million due to the charge-offs resulting from the loan sale and the reversal of provisions previously discussed.

The following table presents non-performing assets and certain asset quality ratios at June 30, 2005 and December 31, 2004.

	June 30, 2005			December 31, 2004
	(Dollars in thousands)
Non-performing loans	$	1,175		$	4,231
Real estate in judgment		1,257			726
Foreclosed and repossessed assets		795			1,243
Total non-performing assets	$	3,227		$	6,200
Non-performing loans to total loans		.56	%		1.87	%
Non-performing assets to total assets		1.17	%		2.23	%
Allowance for loan losses to non-performing loans		270.5	%		150.9	%
Allowance for loan losses to loans receivable		1.47	%		2.82	%

The decrease noted above in non-performing loans is the result of the loan sale and continued aggressive collection efforts. The improvement of asset quality remains a priority of management and may affect the Bank’s ability to grow its loan portfolio in the future.

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

Noninterest Income

Noninterest income decreased by $130,000 to $836,000 for the quarter ended June 30, 2005 as compared to $966,000 for the quarter ended June 30, 2004. Fees and service charges increased $84,000, or 18.8%, due primarily to an increase in NSF fees as the Company introduced its Bounce Protection program late in 2004. Gain on sale of loans decreased to $123,000 from $277,000 for the same period a year ago as mortgage banking activities decreased in 2005 compared to the same period in 2004 due to slackening demand in the local mortgage market. Management believes this downward trend will continue for the balance of 2005. Other income (loss) decreased $75,000 for the quarter ended June 30, 2005 as compared to the quarter ended June 30, 2004. Earnings from an investment in a mortgage life insurance re-insurer declined $44,000 as the investment was sold during 2004. Net losses on sales of real estate owned were $27,000 for the quarter ended June 30, 2005 compared to net gains of $33,000 for the quarter ended June 30, 2004.The

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Company realized gains on sales of fixed assets of $33,000 due primarily to the sale of its Jonesville Branch building during the second quarter of 2005. The branch had been formally closed in the first quarter of 2005 with all customer deposit and loan relationships being retained by other branches of the Bank.

For the six months ended June 30, 2005, noninterest income decreased $110,000. Fees and service charges increased $324,000, or 48.1%. This increase was due to the Bounce Protection program mentioned above, as well as increased fees due to the impact of the acquisition. Loan servicing fees increased 44.9% due to the increased servicing portfolio resulting from the acquisition. Gains from loans sales decreased $185,000 due to the overall reduction in mortgage loan activity in 2005 compared to 2004, as well as the shift in customer preference to adjustable rate mortgages which the Company retains in the loan portfolio. Other income (loss) decreased $320,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. In addition to the reasons discussed in the paragraph above, the decrease is due to a write down of $275,000 the Bank experienced on a REO property it acquired along with MSB Financial. The property had been valued, based on appraisal, at $775,000. During the second quarter of 2005, the Company sold the property for $500,000. Increases in Investment service income of $11,000 and earnings on bank owned life insurance of $24,000 helped offset the losses mentioned. These two revenue sources started with the acquisition of MSB Financial and thus did not contribute for the entire six months ended June 30, 2004.

Noninterest Expense

Noninterest expense increased by $124,000 for the quarter ended June 30, 2005 compared to the quarter ended June 30, 2004, an increase of 5.1%. Salaries and benefits increased $31,000 as an increase in health insurance costs of $48,000 offset decrease in most other benefit costs. Occupancy and equipment increased $44,000 due to increased depreciation expense. Mortgage banking increased $35,000 due to more rapid amortization of servicing assets. Professional fees increased $ 19,000 as audit fees increased $42,000 but were offset by a decrease in employee recruiting costs of $31,000. Real estate owned expenses declined $26,000 for the three months ended June 30, 2005 compared to the same period in 2004 as the Company chose to do fewer improvements to REO properties prior to disposing of them. Other operating expenses increased $33,000. Within other operating expenses, courier costs increased $11,000 as the Company switched to an outside contractor but had used a Bank employee in the past to courier documents between Bank branches. Also with other operating expenses, telephone increased $9,400 due to increased long distance communication between the Bank’s branches. Michigan single business tax increased $17,000 for the quarter ended June 30, 2005 compared to the same period in 2004.

For the six months ended June 30, 2005, noninterest expense increased $993,000 to $5.1 million compared to $4.1 million for the six months ended June 30, 2004. The primary reason for the increase was the additional 30 staff members and 3 branches acquired from MSB Financial. Those additional expenses were present for the entire six months ended June 30, 2005 compared to only 2¹/2 months in 2004. Professional fees increased $57,000 in 2005 because of additional audit and supervisory exam fees. The Company anticipates audit fees will continue to increase due to Sarbanes-Oxley Section 404 requirements. Loan delivery fees which had been part of other operating expenses decreased $45,000 for the six months ended June 30, 2005 compared to the same period in 2004. These delivery fees are now netted out of the proceeds of a loan sale and serve to reduce the gain on sale. Michigan single business tax increased to $71,000 for the six months ended June 30, 2005 compared to $37,000 for the six months ended June 30, 2004.

Federal Income Tax Expense

The provision for federal income tax increased for both the three months and six months ended June 30, 2005 compared to the same periods in 2004 due to the increased profits for those periods in 2005.

LIQUIDITY

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

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, the Company maintains a strategy of investing in various investments and lending products. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. Certificates of deposit scheduled to mature in one year or less at June 30, 2005 totaled $54.8 million. Management believes that a significant portion of these certificates of deposit will remain with the Company provided the Bank pays a rate of interest that is competitive both in the local and national markets.

If necessary, additional funding sources include additional deposits and Federal Home Loan Bank advances. Deposits can be obtained in the local market area and from out of market sources; however, this may require the Company to offer interest rates higher

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than those of the competition. At June 30, 2005 and based on current collateral levels, the Company could borrow an additional $18.4 million from the Federal Home Loan Bank at prevailing interest rates. This borrowing capacity can be increased in the future if the Company pledges additional collateral to the Federal Home Loan Bank. The Company anticipates that it will continue to have sufficient funds, through deposits and borrowings, to meet its current commitments.

The Bank’s total cash and cash equivalents increased by $3.6 million during the six month period ended June 30, 2005 compared to a $10.8 million decrease for the same period in 2004. A major reason for the difference was the acquisition of MSB Financial during the six months ended June 20, 2004 which used $8.2 million in cash. The primary provider of cash for the six months ended June 30, 2005 was an increase in cash due to loan origination net of collections of $6.4 million compared to a decrease in cash of $6.9 million for the six months ended June 30, 2004. FHLB advance repayments net of new borrowings utilized $4.2 million during the six months ended June 30, 2005. Management expects its primary source of funds to be new deposit balances and its primary use of funds to be growth in loan balances.

CONTRACTUAL OBLIGATIONS

The Company has certain obligations and commitments to make future payments under contracts. At June 30, 2005, the aggregate contractual obligations and commitments are:

     Contractual obligations

	Payments due by period
			Less than		1-3		3-5		After
	Total		One year		Years		Years		5 Years
	(in thousands)
Certificates of deposit	$	86,423	$	54,832	$	25,054	$	6,412	$	125
FHLB advances		61,659		8,066		19,762		12,313		21,518
Total	$	148,082	$	62,898	$	44,816	$	18,725	$	21,643

Other commitments

	Amount of commitment expiration per period
			Less than		1-3		3-5		After
	Total		One year		Years		Years		5 Years
	(in thousands)
Commitments to grant loans	$	2,745	$	2,745	$	—	$	—	$	—
Unfunded commitments under HELOCs		15,164		797		2,549		3,639		8,179
Unfunded commitments under Commercial LOCs		1,083		1,057		26		—		—
Letters of credit		114		54		60		—		—
Total	$	19,106	$	4,653	$	2,635	$	3,639	$	8,179

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

CAPITAL RESOURCES

The Bank is subject to various regulatory capital requirements. As of June 30, 2005, the Bank met the regulatory standards to be classified as “well capitalized.” The Bank’s regulatory capital ratios as of June 30, 2005 were as follows: tangible capital, 9.07%; leverage capital, 9.07%; and total risk-based capital, 14.51%. The regulatory capital requirements to be considered well capitalized are 3.0%, 5.0%, and 10.0%, respectively. Management considers the Bank’s capital to be adequate to support anticipated growth and does not anticipate needing to seek additional capital in the foreseeable future.

ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure is interest rate risk (“IRR”). Interest rate risk refers to the risk that changes in market interest rates might adversely affect the Company’s net interest income or the economic value of its portfolio of assets, liabilities, and off-balance sheet contracts. Interest rate risk is primarily the result of an imbalance between the price sensitivity of the Company’s assets and its liabilities (including off-balance sheet contracts). Such imbalances can be caused by differences in the maturity,

12

repricing and coupon characteristics of assets and liabilities, and options, such as loan prepayment options, interest rate caps and floors, and deposit withdrawal options. These imbalances, in combination with movement in interest rates, will alter the pattern of the Company’s cash inflows and outflows, affecting the earnings and economic value of the Company.

The Company’s primary tool for assessing IRR is the Office of Thrift Supervision Net Portfolio Value (“NPV”) Model. The model uses scenario analysis to evaluate the IRR risk exposure of the Bank by estimating the sensitivity of the Bank’s portfolios of assets, liabilities, and off-balance sheet contracts to changes in market interest rates. To measure the sensitivity of the Bank’s NPV to changes in interest rates, the NPV model estimates what would happen to the economic value of each type of asset, liability, and off-balance sheet contract under six different interest rate scenarios. The model estimates the NPV that would result following instantaneous, parallel shifts in the Treasury yield curve of -300, -200, -100, +100, +200, +300 basis points. The OTS utilizes guidelines based on the model to determine the level of IRR for the Bank. The levels, from least risk to most risk, are; minimal, moderate, significant, high and imminent threat. Based on the model, as of December 31, 2004 and March 31, 2005, the Bank’s IRR level was regarded as “minimal”. Data from the model as of June 30, 2005 is not yet available but management does not believe its IRR position has significantly changed since March 31, 2005.

The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates as of December 31, 2004. 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:

																					Fair
	2005			2006			2007			2008			2009			Thereafter			Total		Value
RATE-SENSITIVE ASSETS
Overnight deposits	$	6,120		$	—		$	—		$	—		$	—		$	—		$	6,120	$	6,120
Average interest rate		1.85	%
Securities		1,535			770			2,761			—			2,968			267			8,301		8,325
Average interest rate		2.06	%		3.05	%		3.42	%					4.21	%		4.30	%
Gross Loans		23,112			5,483			9,915			6,380			10,889			170,737			226,516		229,128
Average interest rate		6.00	%		7.63	%		7.33	%		7.02	%		6.60	%		6.46	%
RATE-SENSITIVE LIABILITIES
Savings & interest bearing demand deposits		76,134			—			—			—			—			—			76,134		76,134
Average interest rate		0.51	%
Certificates of deposit		56,171			13,297			10,918			4,164			1,714			137			86,401		87,380
Average interest rate		2.51	%		3.64	%		4.45	%		3.52	%		3.47	%		3.24	%
FHLB advances		9,393			8,585			6,146			20,153			160			21,518			65,955		68,155
Average interest rate		5.01	%		5.22	%		6.43	%		5.67	%		5.64	%		4.97	%

ITEM 4. CONTROLS AND PROCEDURES

     An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2005, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

     The Company 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 Company’s business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

13

OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

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

None

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

1. Election of Directors with terms ending in 2008

	For		Withhold
Harold A. Adamson		2,324,562		95,590
Lauren L. Bracy		2,223,998		195,854
James R. Vozar		2,194,470		225,382

     The following are the names of the directors (and remaining terms) whose terms continued after the meeting:

	Term
	Expires
Martin M. Mitchell		2006
Stephen M. Ross		2006
Gordon L. Welch		2006
Craig W. Dally		2007
Donald L. Denney		2007
Richard L. Dobbins		2007

2. Ratification of the appointment of Plante & Moran, PLLC as independent auditors for the fiscal year ending December 31, 2005:

For: 2,364,520 Against: 53,032 Abstain: 2,300

Item 5. OTHER INFORMATION

Not applicable

Item 6. EXHIBITS

See the index to exhibits.

14

SIGNATURES

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

	MONARCH COMMUNITY BANCORP, INC.
Date: August 11, 2005	By:	/s/ Donald L. Denney
		Donald L. Denney
		President and Chief Executive Officer
Date: August 11, 2005	And:	/s/ William C. Kurtz
		William C. Kurtz
		Senior Vice President and Treasurer

15

INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
31.1	Rule 13a-14(a) Certification of the Company’s President and Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Company’s Chief Financial Officer.
32	Section 1350 Certification.

16