Monarch Community Bancorp (MCBF) 10-Q 2007 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, 2007

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large accelerated filero Accelerated filero Non-accelerated filerþ

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: At July 30, 2007, there were 2,531,373 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, 2007 and December 31, 2006	1
Condensed Consolidated Statements of Income — Six Months Ended June 30, 2007 and 2006	2
Condensed Consolidated Statements of Changes in Stockholder’s Equity — Six Months Ended June 30, 2007 and 2006	3
Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2007 and 2006	4
Notes to Condensed Consolidated Financial Statements	5 - 7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	7 - 13
Item 3 — Quantitative and Qualitative Disclosures about Market Risk	14
Item 4 — Controls and Procedures	14
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings	15
Item 1A — Risk Factors	15
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3 — Defaults Upon Senior Securities	15
Item 4 — Submission of Matters to a Vote of Security Holders	15
Item 5 — Other Information	15
Item 6 — Exhibits	15
SIGNATURES	16
CERTIFICATIONS	17-20
Management Continuity Agreement with Scott McQueen
Rule 13a-14(a) Certification of the Corporation's President and Chief Executive Officer
Rule 13a-14(a) Certification of the Corporation's Chief Financial Officer
Section 1350 Certification

PART I—FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

	(Unaudited)
	June 30,			December 31,
	2007			2006
	(Dollars in thousands,
	except per share data)
Assets
Cash and due from banks	$	6,314		$	7,433
Federal Home Loan Bank overnight time and other interest bearing deposits		7,922			7,864
Total cash and cash equivalents		14,236			15,297
Securities — Available for sale		12,446			13,706
Securities — Held to maturity		218			228
Other securities		4,237			4,237
Real estate investment — Limited partnership, at equity		904			979
Loans held for sale		803			937
Loans, net		227,362			230,247
Foreclosed assets, net		1,316			1,680
Premises and equipment		4,973			5,261
Goodwill		9,606			9,606
Core deposit intangible		970			1,092
Other assets		6,532			6,717
Total assets	$	283,603		$	289,987
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	17,899		$	15,733
Interest bearing		164,815			176,839
Total deposits		182,714			192,572
Federal Home Loan Bank advances		57,476			54,476
Accrued expenses and other liabilities		2,660			2,953
Total liabilities		242,850			250,001
Commitments and Contingencies		—			—
Stockholders’ Equity
Common stock — $0.01 par value, 20,000,000 shares authorized, 2,531,673 shares issued and outstanding at June 30, 2007 and 2,533,781 shares issued and outstanding at December 31, 2006		25			25
Additional paid-in capital		26,210			26,191
Retained earnings		15,923			15,319
Accumulated other comprehensive income		(92	)		(63	)
Unearned compensation		(1,313	)		(1,486	)
Total stockholders’ equity		40,753			39,986
Total liabilities and stockholders’ equity	$	283,603		$	289,987

See accompanying notes to condensed consolidated financial statements.

1

Condensed Consolidated Statements of Income (Unaudited)

	Three Months			Three Months		Six Months			Six Months
	Ended			Ended		Ended			Ended
	June 30,			June 30,		June 30,			June 30,
	2007			2006		2007			2006
	(Dollars in thousands, except per share data)
Interest Income
Loans, including fees	$	4,070		$	3,930	$	8,149		$	7,656
Investment securities		205			201		412			408
Federal funds sold and overnight deposits		121			103		262			202
Total interest income		4,396			4,234		8,823			8,266
Interest Expense
Deposits		1,541			1,275		3,170			2,418
Federal Home Loan Bank advances		767			774		1,491			1,547
Total interest expense		2,308			2,049		4,661			3,965
Net Interest Income		2,088			2,185		4,162			4,301
Provision for Loan Losses		245			—		470			—
Net Interest Income After Provision for Loan Losses		1,843			2,185		3,692			4,301
Noninterest Income
Fees and service charges		628			579		1,228			1,037
Loan servicing fees		110			112		221			229
Net gain on sale of loans		138			92		331			160
Net gain (loss) on sale of securities		(19	)		—		(19	)		—
Other income (loss)		112			20		208			129
Total noninterest income		969			803		1,969			1,555
Noninterest Expenses
Salaries and employee benefits		1,034			1,293		2,140			2,572
Occupancy and equipment		247			254		513			514
Data processing		179			181		366			350
Amortization of mortgage servicing rights		87			104		173			205
Professional services		145			136		250			257
Amortization of core deposit intangible		54			69		122			155
NOW account processing		47			41		91			84
ATM/Debit card processing		49			63		93			119
Foreclosed property expense		16			98		39			155
Other general and administrative		334			303		596			594
Total noninterest expense		2,192			2,542		4,383			5,005
Income — Before income taxes		620			446		1,278			851
Income Taxes		156			130		320			205
Net Income	$	464		$	316	$	958		$	646
Earnings Per Share
Basic	$	0.19		$	0.12	$	0.40		$	0.25
Diluted	$	0.19		$	0.12	$	0.40		$	0.25

See accompanying notes to condensed consolidated financial statements.

2

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

												Accumulated
	Common Stock					Additional						Other
	Number					Paid in			Retained			Comprehensive			Unearned
	of Shares			Amount		Capital			Earnings			Income			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					46									(46	)		—
Vesting of restricted shares																164			164
2,182 shares repurchased at $11.40/share		(2	)				(24	)											(24	)
Repurchase of 50,000 shares							(599	)											(599	)
Stock option expenses							43												43
Comprehensive Income:
Net Income										646									646
Change in unrealized loss on securities available-for-sale,													(66	)					(66	)
Total comprehensive income																			580
Dividends paid ($0.12/share)		—			—		—			(320	)		—			—			(320	)
Balance- June 30, 2006		2,712		$	27	$	27,616		$	14,727		$	(221	)	$	(1,729	)	$	40,420
Balance- January 1, 2007		2,534		$	25	$	26,191		$	15,319		$	(63	)	$	(1,486	)	$	39,986
Vesting of restricted shares																173			173
2,108 shares repurchased at $11.83/share		(2	)				(24	)											(24	)
Stock option expenses							43												43
Comprehensive Income:
Net Income										958									958
Change in unrealized loss on securities available-for-sale,													(29	)					(29	)
Total comprehensive income																			929
Dividends paid ($0.14/share)		—			—		—			(354	)		—			—			(354	)
Balance- June 30, 2007		2,532		$	25	$	26,210		$	15,923		$	(92	)	$	(1,313	)	$	40,753

See accompanying notes to condensed consolidated financial statements.

3

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2007			2006
	(Dollars in thousands)
Cash Flows From Operating Activities
Net Income	$	958		$	646
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		534			647
Provision for loan losses		470			—
Stock option expense		43			43
Gain on sale of foreclosed assets		(114	)		(8	)
Mortgage loans originated for sale		(13,850	)		(7,560	)
Proceeds from sale of mortgage loans		13,716			7,816
Gain on sale of mortgage loans		(331	)		(160	)
Loss on sale of available for sale securities		19			—
Earned stock compensation		173			—
Loss on disposal of equipment		6			164
Net change in:
Deferred loan fees		10			(55	)
Accrued interest receivable		95			15
Other assets		6			657
Accrued expenses and other liabilities		(286	)		2,417
Net cash provided by operating activities		1,449			4,622
Cash Flows From Investing Activities
Activity in available-for-sale securities:
Purchases		(3,819	)		(1,993	)
Proceeds from sales of securities		2,928			—
Proceeds from maturities of securities		2,101			2,862
Activity in held-to-maturity securities:
Purchases		—			(4	)
Proceeds from maturities of securities		—			10
Loan originations and principal collections, net		2,727			(15,815	)
Proceeds from sale of foreclosed assets		748			1,479
Proceeds from sale of premises and equipment		102			—
Purchase of premises and equipment		(61	)		(88	)
Net cash provided by (used in) investing activities		4,726			(13,549	)
Cash Flows From Financing Activities
Net increase (decrease) in deposits		(9,858	)		7,009
Repurchase of common stock		(24	)		(623	)
Dividends paid		(354	)		(320	)
Proceeds from FHLB advances		13,500			10,000
Repayment of FHLB advances		(10,500	)		(8,970	)
Net cash provided by financing activities		(7,236	)		7,096
Net Increase in Cash and Cash Equivalents		(1,061	)		(1,831	)
Cash and Cash Equivalents- Beginning		15,297			16,286
Cash and Cash Equivalents —End	$	14,236		$	14,455
Supplemental Cash Flow Information:
Cash paid for:
Interest		4,733			3,891
Income taxes		450			—
Noncash investing activities:
Loans transferred to foreclosed assets		278			1,201
Issuance of common stock in connection with the 2003 Recognition and Retention Plan		—			46

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. The Bank converted to a stock savings institution effective August 29, 2002. In connection with the conversion, the Corporation sold 2,314,375 shares of its common stock in a subscription offering.

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

BASIS OF PRESENTATION

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

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

The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes required by generally accepted accounting principles in annual consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Corporation’s Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.

The results of operations for the six month period ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year period.

ALLOWANCE FOR LOAN LOSSES

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

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

The allowance for loan losses is based on estimates of losses inherent in the loan portfolio. Actual losses can vary significantly from the estimated amounts. Our methodology as described permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management’s judgment, significant factors which affect the 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.

RECLASSIFICATIONS

Certain 2006 amounts have been reclassified to conform to the 2007 presentation.

5

EARNINGS PER SHARE

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

	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Basic earnings per share
Numerator:
Net income	$	464		$	316		$	958		$	646
Denominator:
Weighted average common shares outstanding		2,532			2,711			2,533			2,709
Less: Average unallocated ESOP shares		(93	)		(111	)		(93	)		(111	)
Less: Average non-vested RRP shares		(33	)		(60	)		(38	)		(58	)
Weighted average common shares outstanding for basic earnings per share		2,406			2,540			2,402			2,540
Basic earnings per share	$	0.19		$	0.12		$	0.40		$	0.25
Diluted earnings per share
Numerator:
Net income	$	464		$	316		$	958		$	646
Denominator:
Weighted average common shares outstanding for basic earnings per share		2,406			2,540			2,402			2,540
Add: Dilutive effects of restricted stock and stock options		—			—			—			—
Weighted average common shares and dilutive
potential common shares outstanding		2,406			2,540			2,402			2,540
Diluted earnings per share	$	0.19		$	0.12		$	0.40		$	0.25

RECENT ACCOUNTING PRONOUNCEMENTS

None.

6

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

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

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

FORWARD-LOOKING STATEMENTS

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of an acquisition over the fair value of net identifiable tangible and intangible assets acquired. Under the provisions of 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.

7

FINANCIAL CONDITION

Assets

Total assets decreased 2.2%, to $283.6 million at June, 30, 2007 compared to $290.0 million at December 31, 2006. Management attributes this decrease to a reduction in the loan portfolio as a result of efforts to originate mortgage loans to be sold in the secondary market and the brokering of loans to third parties.

Securities

Securities decreased to $12.7 million at June 30, 2007 compared to $13.9 million at December 31, 2006. The decrease was attributable to the maturity and sales of $5.0 million in securities which was offset by purchases of $3.8 million in securities. Purchases made in the first quarter of 2007 were made in order to increase interest yield and the duration of the portfolio.

Loans

The Bank’s net loan portfolio decreased by $2.9 million, or 1.3%, from $230.2 million at December 31, 2006 to $227.4 million at June 30, 2007. The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:

	June 30, 2007					December 31, 2006
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real Estate Loans:
One-to-four family	$	133,988		58.2	%	$	141,679		60.8	%
Multi-family		5,597		2.4			6,008		2.6
Commercial		49,194		21.4			44,513		19.1
Construction or development		8,985		3.9			9,529		4.1
Total real estate loans		197,764		85.9			201,729		86.6
Other loans:
Consumer loans:
Automobile		1,304		0.6			1,509		0.6
Home equity		20,441		8.9			19,077		8.3
Manufactured housing		433		0.2			495		0.2
Other		6,295		2.7			7,083		3.0
Total consumer loans		28,473		12.4			28,164		12.1
Commercial Business Loans		3,888		1.7			2,969		1.3
Total other loans		32,361		14.1			31,133		13.4
Total Loans		230,125		100.0	%		232,862		100.0	%
Less:
Allowance for loan losses		2,182					2,024
Net deferred loan fees		581					591
Loans in process		—					—
Total Loans, net	$	227,362				$	230,247

One-to-four family loans decreased $7.7 million represented by $5.3 million decrease in adjustable rate mortgages and a $2.4 million decrease in all other mortgages (including fixed rate and balloon mortgages). This is the result of the Bank focusing its residential lending efforts on originating loans to be sold on the secondary market or brokered to third parties. The decrease in mortgage loans is partially offset by an increase of $4.7 million in commercial real estate loans. The Bank expects future loan growth to come primarily from commercial real estate lending.

The allowance for loan losses was $2,182,000 at June 30, 2007 and $2,024,000 at December 31, 2006, an increase of $158,000. This is due to provisions for loan losses during the first six months of 2007 ($470,000) offsetting net charge offs ($311,000). Net charge-offs for the quarter ended June 30, 2007 consisted of $207,000 of one-to-four family mortgage loans, $93,000 of consumer loans (including overdrafts), $9,000 of commercial business loans and $3,000 of commercial real estate loans. See “Provision for Loan Losses” below for further explanation regarding charge-offs.

8

Deposits

Total deposits decreased $9.9 million, or 5.1%, from $192.6 million at December 31, 2006 to $182.7 million at June 30, 2007. The decrease can be attributed to a $13.3 million decrease in certificates of deposit, a $.5 million decrease in interest bearing demand and NOW accounts and a $0.4 million decrease in all other types of deposits combined, offset by increases of $2.1 million in money markets, and $2.2 million in non-interest bearing accounts. The decrease in certificates of deposit was primarily a result of improved liquidity, additional borrowings, and less reliance on brokered deposits. Brokered deposits have been managed to provide additional liquidity or reduce excess liquidity depending on current conditions. Management expects future deposit growth to come from increased sales and marketing efforts to attract lower cost local savings and checking accounts as well as product enhancement.

Federal Home Loan Bank Advances

Total Federal Home Loan Bank (FHLB) advances increased from $54.5 million at December 31, 2006 to $57.4 million at June 30, 2007. Total proceeds from and repayments of FHLB advances for the six months ended June 30, 2007 were $13.5 million and $10.5 million, respectively. Management is attempting to reduce its reliance on borrowed funds through the growth of deposits. Should this strategy not succeed, management anticipates the need for future borrowings to fund loan growth. See “Net Interest Income” below, and also see “Liquidity” later in this report regarding available borrowings.

Equity

Total equity was $40.8 million at June 30, 2007 compared to $40.0 million at December 31, 2006. This represents 14.4% and 13.8% of total assets at June 30, 2007 and December 31, 2006, respectively. The increase in equity resulted from $958,000 in year-to-date net income, offset by $354,000 in dividend payments and an increase in other comprehensive loss resulting from a lower market value of available for sale securities. Management considers its equity position to be strong.

As of July 30, 2007, the previously disclosed going private transaction should result in a repurchase of approximately 180,000 shares totaling approximately $2.4 million.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income before the provision for loan losses for the quarter ended June 30, 2007 decreased $97,000 compared to the same period one year ago. The decrease came from a $266,000 increase in interest expense on deposits, offset by an increase of $140,000 in income on loans and a $22,000 increase in interest income on investment securities, federal funds sold and overnight deposits combined. The Bank’s net interest margin decreased to 3.25% for the quarter ended June 30, 2007 from 3.52% for the quarter ended June 30, 2006 as our deposit costs increased more than our loan yields. Interest income from loans represented 92.58% of total interest income for the quarter ended June 30, 2007 compared to 92.82% for the same period in 2006.

Net interest income before the provision for loan losses for the six months ended June 30, 2007 decreased $139,000 compared to the same period one year ago. The decrease came primarily from a $752,000 increase in deposit interest expense offset by a $557,000 increase in total interest income, and a $56,000 decrease in interest expense on FHLB advances. The Bank’s net interest margin decreased to 3.22% for the six months ended June 30, 2007 from 3.49% for the six months ended June 30, 2006 as our deposit and borrowing costs increased more than our asset yields.

Our deposit costs increased primarily from offering certificates of deposit and money market accounts at high interest rates that increased the Bank’s cost of funds. Interest income from loans represented 92.4% of total interest income for the six months ended June 30, 2007 compared to 92.6% for the same period in 2006. The Bank’s ability to maintain its net interest margin is heavily dependent on future loan demand and its ability to attract core deposits to offset the effect of higher cost certificates of deposit and borrowings.

9

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,
	2007							2006
	Average		Interest					Average		Interest
	Outstanding		Earned/		Yield/			Outstanding		Earned/		Yield/
	Balance		Paid		Rate			Balance		Paid		Rate
	(dollars in thousands)
Fed Funds and overnight deposits	$	10,266	$	262		5.15	%	$	6,644	$	202		6.13	%
Investment securities		14,334		318		4.47			13,724		281		4.13
Other securities		4,174		94		4.54			4,773		127		5.37
Loans receivable		229,480		8,149		7.16			221,616		7,656		6.97
Total earning assets	$	258,254	$	8,823		6.89		$	246,757	$	8,266		6.76
Demand and NOW Accounts	$	32,601	$	34		0.21		$	29,178		35		0.24
Money market accounts		23,069		428		3.74			17,109		231		2.72
Savings accounts		22,559		47		0.42			26,293		55		0.42
Certificates of deposit		110,521		2,662		4.86			105,758		2,097		4.00
Federal Home Loan Bank Advances		54,362		1,490		5.53			56,976		1,547		5.48
Total interest bearing liabilities	$	243,112		4,661		3.87		$	235,314		3,965		3.40
Net interest income			$	4,162						$	4,301
Net interest spread						3.02	%						3.37	%
Net interest margin						3.22	%						3.49	%

Provision for Loan Losses

The Bank recorded a $225,000 provision for loan losses for the quarter ended June 30, 2007 whereas the Bank recorded no provision for loan losses for the quarter ended June 30, 2006. Net charge-offs for the quarter ended June 30, 2007 totaled $160,000 compared to $203,000 for the quarter ended June 30, 2006.

The Bank recorded a $470,000 provision for loan losses for the six months June 30, 2007 whereas the Bank recorded no provision for loan losses for the six months ended June 30, 2006. The level of non-performing assets, (see table to follow) net charge-offs and additional loan impairment were primary considerations in determining the need for the provision. Net charge-offs for the six months ended June 30, 2007 totaled $311,000 compared to $305,000 for the six months ended June 30, 2006.

The following table presents non-performing assets and certain asset quality ratios at June 30, 2007 and December 31, 2006.

	June 30, 2007			December 31, 2006
	(Dollars in thousands)
Non-performing loans	$	1,489		$	468
Real estate in judgment		468			895
Foreclosed and repossessed assets		856			785
Total non-performing assets	$	2,813		$	2,148
Non-performing loans to total loans		0.65	%		0.20	%
Non-performing assets to total assets		0.99	%		0.74	%
Allowance for loan losses to non-performing loans		146.59	%		432.48	%
Allowance for loan losses to net loans receivable		105.50	%		0.88	%

The increase in non-performing loans from December 31, 2006 to June 30, 2007 is the result of an increase in problem loans within the Bank’s residential mortgage portfolio. While Management believes its loan underwriting has improved significantly over the last several years, poor local economy has had a negative impact on the loan portfolio. The Bank had 18 non-performing loan relationships as of June 30, 2007 compared to 10 non-performing loan relationships as of December 31, 2006. If the level of non-performing assets and/or net charge-offs significantly increases and/or asset quality does not continue to stabilize, additional provisions for loan losses may be needed. The stabilization of our asset quality remains a high priority for management.

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Non-interest Income

Noninterest income increased $166,000 or 20.7%, to $969,000 for the quarter ended June 30, 2007 as compared to $803,000 for the quarter ended June 30, 2006. Fees and service charges increased to $628,000 from $579,000 for the same period a year ago as a result of the Bank developing new mortgage banking relationships with six brokerage companies since the end of June 2006 which resulted in an increase of $52,000 in brokerage fee income for the quarter ended June 30, 2007. This increase in brokerage fee income was offset by a decrease of $3,000 in all other fees and service charges combined compared to the same period a year ago. Gain on sale of loans increased to $138,000 from $92,000 for the same quarter a year ago as mortgage banking activities increased compared to the same quarter in 2006 due to higher than expected sales of loans (51 for the quarter ended June 30, 2007 compared to 38 for the quarter ended June 30, 2006). Other income increased $73,000 for the quarter ended June 30, 2007 as compared to the same period in 2006. This was primarily due to the Bank gaining $43,000 on sale of foreclosed assets as compared to a net loss of $24,000 for the same period a year ago.

Non-interest income increased $414,000 or 26.7%, to $1.9 million for the six months ended June 30, 2007 as compared to $1.5 million for the six months ended June 30, 2006. Fees and service charges increased to $1.2 million, from $1.0 million for the same period a year ago primarily due to a $92,000 increase in loan related fees (from $453,000 to $546,000) and a $91,000 increase in deposit related fees (from $812,000 to $903,000). Loan related fees increased due to the reasons mentioned in the preceding paragraph, brokerage fee income increased to $109,000 for the six months ended June 30, 2007 compared to $5,000 for the same period a year ago. The brokerage fee income was offset by a decrease in consumer loan origination fees of $8,000 and a decrease in commercial loan fees of $10,000 for the six months ended June 30, 2007 as compared to the same period a year ago. The increase in deposit related fees was a result of a $81,000 increase in NSF fees (from $575,000 to $656,000), a $13,000 increase in ATM/Debit Card income, and a $2,000 decrease in all other deposit related fee income.

Gain on sale of loans increased $171,000 (from $160,000 to $331,000) from the same six months a year ago as mortgage banking activities have sharply increased in the last nine months. The Bank sold 112 loans for the six months ended June 30, 2007 compared to 66 for the six months ended June 30, 2006 due to increased management focus on originating loans to be sold in the secondary market. Other income increased $59,000 for the six months ended June 30, 2007 compared to the same period in 2006 primarily due to an increase in income from the sale of foreclosed assets of $78,000. This increase was offset by the $19,000 loss on the sale of securities as management replaced two federal agency securities and one taxable municipal security with three federal agency securities earning higher interest rates. Management expects to recover this loss with the increase in interest income from the new securities by the end of 2007.

Non-interest Expense

Noninterest expense decreased $350,000 or 13.8%, for the quarter ended June 30, 2007 compared to the quarter ended June 30, 2006. Salaries and employee benefits decreased $259,000 as a result of downsizing certain department staffing levels in the fourth quarter of 2006. Occupancy and equipment expense decreased $7,000 for those same periods due to decreased maintenance costs and depreciation expense. Foreclosed property expenses decreased $82,000 for the quarter ended June 30, 2007 compared to the same period in 2006. Management recorded $0 in writedowns of foreclosed properties in the second quarter of June 2007 compared to $42,000 in writedowns in the second quarter of 2006. The Bank had a $40,000 decrease in foreclosed property operating expenses for the same respective periods. Amortization of core deposit intangible decreased $15,000 for the quarter ended June 30, 2007 as amortization of this asset continues to slow from year to year. Management expects to see an expense of $18,000 per month for the remainder of 2007.

Non-interest expense decreased $622,000 or 12.4%, for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. Salaries and employee benefits decreased $356,000 as a result of downsizing certain department staffing levels in the fourth quarter of 2006. The Bank has 81 full-time equivalent employees as of June 30, 2007 compared to 88 full-time equivalent employees as of June 30, 2006. Professional services expense decreased $16,000 primarily from reduced regulatory examination expense. Repossessed property expense decreased $116,000 for the six months ended June 30, 2007 compared to the same period in 2006 as the level of foreclosed properties decreased from $2.6 million as of June 30, 2006 to $1.3 million as of June 30, 2007. Amortization of core deposit intangible decreased $33,000 for the six months ended June 30, 2007 as compared to the same period a year ago. Other general and administrative expense decreased $74,000 primarily due to a $72,000 reduction in advertising and promotion expense due to a reduced marketing effort in 2007. Expense control and revenue enhancement continue to be priorities for management as efforts continue on improving efficiency.

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Federal Income Tax Expense

The Company’s provision for federal income taxes increased $26,000 for the quarter ended June 30, 2007 compared to the same period in 2007. The effective tax rate for the quarter ended June 30, 2007 was 25.0% of income before tax as compared to 29.1% for the same period in 2006.

The Company’s provision for federal income taxes increased $115,000 for the six months ended June 30, 2007 compared to the same period in 2006 as our net income before taxes increased $427,000. The effective tax rate for the six months ended June 30, 2007 was 25.0% of income before tax as compared to 24.1% for the same period 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.

LIQUIDITY

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

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, the Bank maintains a strategy of investing in various investments and lending products. The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. Certificates of deposit scheduled to mature in one year or less at June 30, 2007 totaled $64.7 million. Management believes that a significant portion of these certificates of deposit will remain with the Bank provided the Bank pays a rate of interest that is competitive both in the local and national markets.

If necessary, additional funding sources include additional deposits and Federal Home Loan Bank advances. Deposits can be obtained in the local market area and from out of market sources; however, this may require the Bank to offer interest rates higher than those of the competition. At June 30, 2007 and based on current collateral levels, the Bank could borrow an additional $16.6 million from the Federal Home Loan Bank at prevailing interest rates. This borrowing capacity can be increased in the future if the Bank pledges additional collateral to the Federal Home Loan Bank. The Company anticipates that it will continue to have sufficient funds, through deposits and borrowings, to meet its current commitments.

The Bank’s total cash and cash equivalents decreased by $1.1 million during the six months ended June 30, 2007 compared to a $1.8 million decrease for the same period in 2006. The primary sources of cash for the six months ended June 30, 2007 were $2.7 million of principal collections net of loan originations, $5.0 million in sales and maturities of available-for-sale investment securities, $13.5 million in proceeds from FHLB advances, compared to a $7 million increase in deposits, and $2.9 million in proceeds from maturities of available-for-sale investment securities and $10 million in proceeds from FHLB advances for the six months ended June 30, 2006. The primary uses of cash for the six months ended June 30, 2007 were $9.9 million decrease in deposits, $3.8 million in purchases of available-for-sale securities, and $10.5 million in repayments of FHLB advances compared to $15.8 million in loan originations in excess of principal collections, $9.0 million in repayments of FHLB advances, and $2.0 million in purchases of available-for-sale investment securities for the six months ended June 30, 2006. Management expects cash flows for the remainder of 2007 to follow a similar pattern to what has occurred in the first six months, with the exception of an outflow of $2.4 million to repurchase shares in connection with the going private transaction. Management expects to utilize current liquidity for the repurchase.

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CONTRACTUAL OBLIGATIONS

The Corporation has certain obligations and commitments to make future payments under contracts. At June 30, 2007, the aggregate contractual obligations and commitments are:

Contractual Obligations

	Payments Due by Period
			Less than		1-3		3-5		After
	Total		1 year		years		years		5 years
	(Dollars in Thousands)
Certificates of deposit	$	99,531	$	64,681	$	26,191	$	8,659	$	—
FHLB advances		57,476		17,146		14,813		15,342		10,175
Total	$	157,007	$	81,827	$	41,004	$	24,001	$	10,175

Other Commitments

	Amount of commitment expiration per period
			Less than		1-3		3-5		After
	Total		1 year		years		years		5 years
	(Dollars in Thousands)
Commitments to grant loans		7,478	$	7,478	$	—	$	—	$	—
Unfunded commitments under HELOCs		16,430		842		4,392		4,292		6,904
Unfunded commitments under Commercial LOCs		5,537		1,401		2,688		1,107		341
Letters of credit		3		3		—		—		—
Total	$	29,448	$	9,724	$	7,080	$	5,399	$	7,245

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, 2007, the Bank met the regulatory standards to be classified as “well capitalized.” The Bank’s regulatory capital ratios as of June 30, 2007 were as follows: Tier 1 leverage ratio 10.66%, Tier 1 risk-based capital ratio 14.36%; and total risk-based capital, 15.44%. The regulatory capital requirements to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively. After the repurchase of shares in connection with the going private transaction the Bank will remain well capitalized. Management believes the Bank’s capital after the share repurchase will be adequate to support anticipated future growth.

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ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK

The Corporation’s primary market risk exposure is interest rate risk (“IRR”). Interest rate risk refers to the risk that changes in market interest rates might adversely affect the Corporation’s net interest income or the economic value of its portfolio of assets, liabilities, and off-balance sheet contracts. Interest rate risk is primarily the result of an imbalance between the price sensitivity of the Corporation’s assets and its liabilities (including off-balance sheet contracts). Such imbalances can be caused by differences in the maturity, repricing and coupon characteristics of assets and liabilities, and options, such as loan prepayment options, interest rate caps and floors, and deposit withdrawal options. These imbalances, in combination with movement in interest rates, will alter the pattern of the Corporation’s cash inflows and outflows, affecting the earnings and economic value of the Corporation.

The Corporation’s primary tool for assessing IRR is a model that uses scenario analysis to evaluate the IRR exposure of the Bank by estimating the sensitivity of the Bank’s portfolios of assets, liabilities, and off-balance sheet contracts to changes in market interest rates. To measure the sensitivity of the Bank’s NPV to changes in interest rates, the NPV model estimates what would happen to the economic value of each type of asset, liability, and off-balance sheet contract under six different interest rate scenarios. The model estimates the NPV that would result following instantaneous, parallel shifts in the Treasury yield curve of -300, -200, -100, +100, +200, +300 basis points. Management considers the IRR of the company to be moderate as of June 30, 2007.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2007 was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer, Chief Financial Officer and several other members of the Corporation’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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PART II-OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Corporation. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

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 2010

Craig W. Dally
Donald L. Denney
Richard L. Dobbins For: 2,042,869
For: 2,074,030
For: 2,079,913 Withheld: 117,058
Withheld: 85,897
Withheld: 80,014

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

Harold A. Adamson
Lauren L. Bracy
James R. Vozar
Stephen M. Ross
Martin M. Mitchell
Gordon L. Welch Term Expires: 2008
Term Expires: 2008
Term Expires: 2008
Term Expires: 2009
Term Expires: 2009
Term Expires: 2009

     2. Ratification of appointment of Plante & Moran, LLP as independent auditors for the fiscal year ending December 31, 2007:

For: 2,120,834 Against: 35,594 Abstain: 3,499

Item 5. OTHER INFORMATION

Not applicable

Item 6. EXHIBITS

See the index to exhibits.

15

SIGNATURES

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

	MONARCH COMMUNITY BANCORP, INC.
Date: August 14, 2007	By:	/s/Donald L. Denney
		Donald L. Denney
		President and Chief Executive Officer
Date: August 14, 2007	And:	/s/William C. Kurtz
		William C. Kurtz
		Senior Vice President,
		Chief Financial Officer
		(Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit No	Description of Exhibit
10.1	Management Continuity Agreement with Scott McQueen
31.1	Rule 13a-14(a) Certification of the Corporation’s President and Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Corporation’s Chief Financial Officer.
32	Section 1350 Certification.

17