|                                                   
|---------------------------------------------------
|UNITED STATES                                      
|SECURITIES AND EXCHANGE COMMISSION                 
|Washington, DC 20549                               
|                                                   
|FORM 10-Q                                          
|                                                   
|x                                                  
|For the quarterly period ended September 30, 2006  
|or                                                 
|o                                                  
|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: x   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 filer o  Accelerated filer
 o  Non-accelerated filer x
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes: o  No: x
  State the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practical date: At October 24, 2006, there were 2,533,902 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  September 30, 2006 and
      December 31, 2005                                     |       
|                                                                                               |                                                                                                                            |       
|                                                                                               | Condensed Consolidated Statements of Income  Three and Nine Months
      Ended September 30, 2006 and 2005                |       
|                                                                                               |                                                                                                                            |       
|                                                                                               | Condensed Consolidated Statements of Changes in Stockholders Equity 
      Nine Months Ended September 30, 2006 and 2005 |       
|                                                                                               |                                                                                                                            |       
|                                                                                               | Condensed Consolidated Statements of Cash Flows  Nine Months Ended
      September 30, 2006 and 2005                      |       
|                                                                                               |                                                                                                                            |       
|                                                                                               | Notes to Condensed Consolidated Financial Statements                                                                       |       
|                                                                                               |                                                                                                                            |       
|Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                            | 7 - 14
|                                                                                               |                                                                                                                            |       
|Item 3  Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                            | 14    
|                                                                                               |                                                                                                                            |       
|Item 4  Controls and Procedures                                                               |                                                                                                                            | 15    
|                                                                                               |                                                                                                                            |       
|PART II  OTHER INFORMATION                                                                    |                                                                                                                            |       
|                                                                                               |                                                                                                                            |       
|Item 1  Legal Proceedings                                                                     |                                                                                                                            | 16    
|                                                                                               |                                                                                                                            |       
|Item 1A  Risk Factors                                                                         |                                                                                                                            | 16    
|                                                                                               |                                                                                                                            |       
|Item 2  Unregistered Sales of Equity Securities and Use of Proceeds                           |                                                                                                                            | 16    
|                                                                                               |                                                                                                                            |       
|Item 3  Defaults Upon Senior Securities                                                       |                                                                                                                            | 16    
|                                                                                               |                                                                                                                            |       
|Item 4  Submission of Matters to a Vote of Security Holders                                   |                                                                                                                            | 16    
|                                                                                               |                                                                                                                            |       
|Item 5  Other Information                                                                     |                                                                                                                            | 16    
|                                                                                               |                                                                                                                            |       
|Item 6  Exhibits                                                                              |                                                                                                                            | 16    
|                                                                                               |                                                                                                                            |       
|SIGNATURES                                                                                     |                                                                                                                            | 17    

|
|



|PART IFINANCIAL INFORMATION                 
|---------------------------------------------
|                                             
|Item 1.        CONDENSED FINANCIAL STATEMENTS
|Condensed Consolidated Balance Sheets        

|                                                                                                                                                                                                                           |       |             |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | ----------- | - | -----
|
|                                                                                                                                                                                                                           |       |             |   |      
|
|**Assets**                                                                                                                                                                                                                 |       |             |   |      
|Cash and due from banks                                                                                                                                                                                                    | $     | 7,039       |   | $    
|Federal Home Loan Bank overnight time and
      other interest bearing deposits                                                                                                                                            |       | 9,053       |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|Total cash and cash equivalents                                                                                                                                                                                            |       | 16,092      |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|Securities  Available for sale                                                                                                                                                                                            |       | 13,713      |   |      
|Securities  Held to maturity                                                                                                                                                                                              |       | 233         |   |      
|Other securities                                                                                                                                                                                                           |       | 4,442       |   |      
|Real estate investment  Limited partnership, at equity                                                                                                                                                                    |       | 1,017       |   |      
|Loans held for sale                                                                                                                                                                                                        |       | 70          |   |      
|Loans, net                                                                                                                                                                                                                 |       | 233,939     |   |      
|Foreclosed assets, net                                                                                                                                                                                                     |       | 2,317       |   |      
|Premises and equipment                                                                                                                                                                                                     |       | 5,429       |   |      
|Goodwill                                                                                                                                                                                                                   |       | 9,606       |   |      
|Core deposit intangible                                                                                                                                                                                                    |       | 1,161       |   |      
|Other assets                                                                                                                                                                                                               |       | 6,458       |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|Total assets                                                                                                                                                                                                               | **$** | **294,477** |   | **$**
|                                                                                                                                                                                                                           |       |             |   |      
|**Liabilities and Stockholders Equity**                                                                                                                                                                                   |       |             |   |      
|**Liabilities**                                                                                                                                                                                                            |       |             |   |      
|Deposits:                                                                                                                                                                                                                  |       |             |   |      
|Noninterest-bearing                                                                                                                                                                                                        | $     | 14,658      |   | $    
|Interest-bearing                                                                                                                                                                                                           |       | 175,607     |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|Total deposits                                                                                                                                                                                                             |       | 190,265     |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|Federal Home Loan Bank advances                                                                                                                                                                                            |       | 60,117      |   |      
|Accrued expenses and other liabilities                                                                                                                                                                                     |       | 4,821       |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|Total liabilities                                                                                                                                                                                                          |       | 255,203     |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|**Commitments and Contingencies**                                                                                                                                                                                          |       |            |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|**Stockholders Equity**                                                                                                                                                                                                   |       |             |   |      
|Common stock  $0.01 par value, 20,000,000 shares authorized, 2,711,202
        shares issued and 2,533,902 shares outstanding at September 30,
        2006, 2,710,596 shares issued and outstanding at December 31, 2005 |       | 27          |   |      
|Additional paid-in capital                                                                                                                                                                                                 |       | 28,224      |   |      
|Retained earnings                                                                                                                                                                                                          |       | 14,901      |   |      
|Accumulated other comprehensive income                                                                                                                                                                                     |       | (90         | ) |      
|Treasury stock, at cost                                                                                                                                                                                                    |       | (2,110      | ) |      
|Unearned compensation                                                                                                                                                                                                      |       | (1,678      | ) |      
|                                                                                                                                                                                                                           |       |             |   |      
|Total stockholders equity                                                                                                                                                                                                 |       | 39,274      |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|Total liabilities and stockholders equity                                                                                                                                                                                 | **$** | **294,477** |   | **$**
|                                                                                                                                                                                                                           |       |             |   |      
|                                                                                                                                                                                                                           |       |             |   |      
|See accompanying notes to condensed consolidated financial statements.                                                                                                                                                    

|1
|-



|Condensed Consolidated Statements of Income (Unaudited)
|-------------------------------------------------------
|                                                       

|                                                                       | Three Months
      Ended 
      Sept. 30, 
      2006 |          | Three Months
      Ended 
      Sept. 30, 
      2005 |       | Nine Months
      Ended 
      Sept. 30, 
      2006 |  | Nine Months
      Ended 
      Sept. 30, 
      2005 |         
|---------------------------------------------------------------------- | ----------------------------------------------------- | -------- | ----------------------------------------------------- | ----- | ---------------------------------------------------- |  | ---------------------------------------------------- | --------
|
|                                                                       |                                                      
|**Interest Income**                                                    |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|Loans, including fees                                                  | $                                                     | 4,150    |                                                       | $     | 3,550                                                |  | $                                                    | 11,806  
|Investment securities                                                  |                                                       | 190      |                                                       |       | 186                                                  |  |                                                      | 598     
|Federal funds sold and overnight deposits                              |                                                       | 75       |                                                       |       | 82                                                   |  |                                                      | 277     
|
|Total interest income                                                  |                                                       | 4,415    |                                                       |       | 3,818                                                |  |                                                      | 12,681  
|                                                                       |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|**Interest Expense**                                                   |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|Deposits                                                               |                                                       | 1,406    |                                                       |       | 860                                                  |  |                                                      | 3,824   
|Federal Home Loan Bank advances                                        |                                                       | 849      |                                                       |       | 806                                                  |  |                                                      | 2,396   
|
|Total interest expense                                                 |                                                       | 2,255    |                                                       |       | 1,666                                                |  |                                                      | 6,220   
|
|                                                                      
|**Net Interest Income**                                                |                                                       | 2,160    |                                                       |       | 2,152                                                |  |                                                      | 6,461   
|**Provision for Loan Losses**                                          |                                                       |         |                                                       |       |                                                     |  |                                                      |        
|
|                                                                       |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|**Net Interest Income After Provision
  for Loan Losses**              |                                                       | 2,160    |                                                       |       | 2,152                                                |  |                                                      | 6,461   
|                                                                       |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|**Noninterest Income**                                                 |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|Fees and service charges                                               |                                                       | 580      |                                                       |       | 532                                                  |  |                                                      | 1,617   
|Loan servicing fees                                                    |                                                       | 109      |                                                       |       | 119                                                  |  |                                                      | 338     
|Net gain on sale of loans                                              |                                                       | 59       |                                                       |       | 189                                                  |  |                                                      | 219     
|Net gain (loss) on sale of securities                                  |                                                       | (20      | )                                                     |       |                                                     |  |                                                      | (20     
|Other income (loss)                                                    |                                                       | 15       |                                                       |       | 44                                                   |  |                                                      | 144     
|
|Total noninterest income                                               |                                                       | 743      |                                                       |       | 884                                                  |  |                                                      | 2,298   
|                                                                       |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|**Noninterest Expenses**                                               |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|Salaries and employee benefits                                         |                                                       | 1,252    |                                                       |       | 1,267                                                |  |                                                      | 3,824   
|Occupancy and equipment                                                |                                                       | 256      |                                                       |       | 262                                                  |  |                                                      | 770     
|Data processing                                                        |                                                       | 176      |                                                       |       | 182                                                  |  |                                                      | 526     
|Amortization of mortgage servicing rights                              |                                                       | 88       |                                                       |       | 118                                                  |  |                                                      | 293     
|Professional services                                                  |                                                       | 90       |                                                       |       | 123                                                  |  |                                                      | 347     
|Amortization of core deposit intangible                                |                                                       | 68       |                                                       |       | 87                                                   |  |                                                      | 223     
|NOW account processing                                                 |                                                       | 42       |                                                       |       | 40                                                   |  |                                                      | 126     
|ATM/Debit card processing                                              |                                                       | 64       |                                                       |       | 60                                                   |  |                                                      | 183     
|Foreclosed property expense                                            |                                                       | 83       |                                                       |       | 58                                                   |  |                                                      | 238     
|Other general and administrative                                       |                                                       | 319      |                                                       |       | 344                                                  |  |                                                      | 913     
|
|Total noninterest expense                                              |                                                       | 2,438    |                                                       |       | 2,541                                                |  |                                                      | 7,443   
|
|**Income - Before income taxes**                                       |                                                       | 465      |                                                       |       | 495                                                  |  |                                                      | 1,316   
|**Income Taxes**                                                       |                                                       | 133      |                                                       |       | 129                                                  |  |                                                      | 338     
|
|**Net Income**                                                         | **$**                                                 | **332**  |                                                       | **$** | **366**                                              |  | **$**                                                | **978** 
|
|**Earnings Per Share**                                                 |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|                                                                       |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|**Basic**                                                              | **$**                                                 | **0.14** |                                                       | **$** | **0.15**                                             |  | **$**                                                | **0.39**
|                                                                       |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|**Diluted**                                                            | **$**                                                 | **0.14** |                                                       | **$** | **0.15**                                             |  | **$**                                                | **0.39**
|                                                                       |                                                       |          |                                                       |       |                                                      |  |                                                      |         
|See accompanying notes to condensed consolidated financial statements.

|2
|-



|Condensed Consolidated Statements of Changes in Stockholders Equity (Unaudited)
|--------------------------------------------------------------------------------
|                                                                                

|                                                                                                                                   | **Common Stock**                 |           |            |       |                                            |  |                             |            | **Accumulated**                            |       |                          |   |                                 |         |           |       |        |   |      
|---------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | --------- | ---------- | ----- | ------------------------------------------ |  | --------------------------- | ---------- | ------------------------------------------ | ----- | ------------------------ | - | ------------------------------- | ------- | --------- | ----- | ------ | - | -----
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|                                                                                                                                   | **Number
      of
      Shares** |           | **Amount** |       | **Additional
      Paid in
      Capital** |  | **Retained
      Earnings** |            | **Other
      Comprehensive
      Income** |       | **Treasury
      Stock** |   | **Unearned
      Compensation** |         | **Total** |      
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |      
|                                                                                                                                  
|Balance  January 1, 2005                                                                                                          |                                  | 2,709     |            | $     | 27                                         |  | $                           | 28,059     |                                            | $     | 13,529                   |   | $                               | 2       |           | $     |       |   | $    
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Issuance of 1,000 shares of common stock at
      $12.10/share in connection with Restricted
      Stock Plan                      |                                  | 1         |            |       |                                            |  |                             | 12         |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Vesting of restricted shares                                                                                                       |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|2,624 shares repurchased at an average price
      of $12.27/share                                                                 |                                  | (2        | )          |       |                                            |  |                             | (32        | )                                          |       |                          |   |                                 |         |           |       |        |   |      
|Comprehensive Income:                                                                                                              |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Net Income                                                                                                                         |                                  |           |            |       |                                            |  |                             |            |                                            |       | 1,129                    |   |                                 |         |           |       |        |   |      
|Change in unrealized gain on
                   securities available-for-sale,                                                     |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 | (75     | )         |       |        |   |      
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Total comprehensive income                                                                                                         |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Dividends paid ($0.15/share)                                                                                                       |                                  |          |            |       |                                           |  |                             |           |                                            |       | (406                     | ) |                                 |        |           |       |       |   |      
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |      
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |      
|Balance  September 30, 2005                                                                                                       |                                  | **2,708** |            | **$** | **27**                                     |  | **$**                       | **28,039** |                                            | **$** | **14,252**               |   | **$**                           | **(73** | **)**     | **$** | ****  |   | **$**
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |      
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Balance  January 1, 2006                                                                                                          |                                  | 2,710     |            | $     | 27                                         |  | $                           | 28,150     |                                            | $     | 14,401                   |   | $                               | (155    | )         | $     |       |   | $    
|Issuance of 3,884 shares of common stock at
      an average price of $12.03/share in connection 
      with Restricted Stock Plan |                                  | 4         |            |       |                                            |  |                             | 46         |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Vesting of restricted shares                                                                                                       |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|3,278 shares repurchased at an average price
      of $11.45/share                                                                 |                                  | (3        | )          |       |                                            |  |                             | (37        | )                                          |       |                          |   |                                 |         |           |       |        |   |      
|Purchases of treasury stock-177,300 shares                                                                                         |                                  | (177      | )          |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       | (2,110 | ) |      
|Stock option expenses                                                                                                              |                                  |           |            |       |                                            |  |                             | 65         |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Comprehensive Income:                                                                                                              |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Net Income                                                                                                                         |                                  |           |            |       |                                            |  |                             |            |                                            |       | 978                      |   |                                 |         |           |       |        |   |      
|Change in unrealized gain on                                                                                                       |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|securities available-for-sale,                                                                                                     |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 | 65      |           |       |        |   |      
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Total comprehensive income                                                                                                         |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |       |        |   |      
|Dividends paid ($0.18/share)                                                                                                       |                                  |          |            |       |                                           |  |                             |           |                                            |       | (478                     | ) |                                 |        |           |       |       |   |      
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |      
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |      
|Balance  September 30, 2006                                                                                                       |                                  | 2,534     |            | $     | 27                                         |  | $                           | 28,224     |                                            | $     | 14,901                   |   | $                               | (90     | )         | $     | (2,110 | ) | $    
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |            |                                            |       |                          |   |                                 |         |           |      
|                                                                                                                                  
|See accompanying notes to condensed consolidated financial statements.                                                            
|                                                                                                                                   |                                  |           |            |       |                                            |  |                             |           

|3
|-



|Condensed Consolidated Statements of Cash Flows                           | (Unaudited) |           
|------------------------------------------------------------------------- | ----------- | ----------
|
|
|                                                                          |            
|**Cash Flows From Operating Activities**                                  |             |           
|Net Income                                                                | $           | 978       
|Adjustments to reconcile net income to net cash from operating activities |             |           
|Depreciation and amortization                                             |             | 953       
|Provision for loan losses                                                 |             |          
|Stock option expense                                                      |             | 65        
|(Gain) loss on sale of investments                                        |             | 20        
|Stock dividends on other securities                                       |             |          
|(Gain) loss on sale of foreclosed assets                                  |             | 11        
|Mortgage loans originated for sale                                        |             | (10,095   
|Proceeds from sale of mortgage loans                                      |             | 10,412    
|Gain on sale of mortgage loans                                            |             | (219      
|(Gain) loss on sale of premises and equipment                             |             |          
|Earned stock compensation                                                 |             | 215       
|Net change in:                                                            |             |           
|Deferred loan fees                                                        |             | (56       
|Accrued interest receivable                                               |             | (95       
|Other assets                                                              |             | 846       
|Accrued expenses and other liabilities                                    |             | 637       
|
|Net cash provided by operating activities                                 |             | 3,672     
|**Cash Flows From Investing Activities**                                  |             |           
|Activity in available-for-sale securities:                                |             |           
|Purchases                                                                 |             | (4,755    
|Proceeds from sale and maturities of securities                           |             | 5,478     
|Activity in held-to-maturity securities:                                  |             |           
|Purchases                                                                 |             | (4        
|Proceeds from maturities of securities                                    |             | 10        
|Proceeds from redemption of FHLB stock                                    |             | 395       
|Loan originations and principal collections, net                          |             | (22,807   
|Proceeds from sale of foreclosed assets                                   |             | 2,542     
|Proceeds on sale of premises and equipment                                |             |          
|Purchase of premises and equipment                                        |             | (104      
|
|Net cash provided by (used in) investing activities                       |             | (19,245   
|**Cash Flows From Financing Activities**                                  |             |           
|Net increase in deposits                                                  |             | 17,450    
|Issuance of common stock                                                  |             |          
|Repurchase of common stock                                                |             | (2,148    
|Dividends paid                                                            |             | (478      
|Proceeds from FHLB advances                                               |             | 22,500    
|Repayment of FHLB advances                                                |             | (21,945   
|
|Net cash provided by (used in) financing activities                       |             | 15,379    
|
|**Net Increase (Decrease) in Cash and Cash Equivalents**                  |             | (194      
|**Cash and Cash Equivalents**  January 1                                 |             | 16,286    
|
|**Cash and Cash Equivalents**  September 30                              | **$**       | **16,092**
|
|**Supplemental Cash Flow Information:**                                   |             |           
|Cash paid (received) for:                                                 |             |           
|Interest                                                                  |             | 6,133     
|Income taxes                                                              |             |          
|Noncash investing activities:                                             |             |           
|Loans transferred to foreclosed assets                                    |             | 1,997     
|Issuance of common stock in connection with the 2003                      |             |           
|Recognition and Retention Plan                                            |             | 46        
|                                                                          |             |           
|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. The Bank converted to a stock savings institution
      effective August 29, 2002. In connection with the conversion, the Corporation sold 2,314,375 shares
    of its common stock in a subscription offering.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|On 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 First Insurance Agency and has 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 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, 2005 filed with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|The results of operations for the nine month period ended September 30, 2006 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|5
|-



|ALLOWANCE FOR LOAN LOSSES, continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|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 2005 amounts have been reclassified to conform to the 2006 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|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
      Ended 
      Sept. 30, 2006 |       | Three Months
      Ended 
      Sept. 30, 2005 |   | Nine Months 
      Ended 
      Sept. 30, 2006 |   | Nine Months 
      Ended 
      Sept. 30, 2005 |      
|--------------------------------------------------------------------------------- | ---------------------------------------------- | ----- | ---------------------------------------------- | - | ---------------------------------------------- | - | ---------------------------------------------- | -----
|
|**Basic earnings per share**                                                      |                                                |       |                                                |   |                                                |   |                                                |      
|Numerator:                                                                        |                                                |       |                                                |   |                                                |   |                                                |      
|Net income                                                                        | $                                              | 332   |                                                | $ | 366                                            |   | $                                              | 978  
|
|                                                                                 
|Denominator:                                                                      |                                                |       |                                                |   |                                                |   |                                                |      
|Weighted average common shares outstanding                                        |                                                | 2,627 |                                                |   | 2,709                                          |   |                                                | 2,657
|Less: Average unallocated ESOP shares                                             |                                                | (111  | )                                              |   | (130                                           | ) |                                                | (111 
|Less: Average non-vested RRP shares                                               |                                                | (60   | )                                              |   | (56                                            | ) |                                                | (59  
|
|Weighted average common shares outstanding
          for basic earnings per share |                                                | 2,456 |                                                |   | 2,523                                          |   |                                                | 2,487
|
|                                                                                 
|Basic earnings per share                                                          | $                                              | 0.14  |                                                | $ | 0.15                                           |   | $                                              | 0.39 
|
|                                                                                 
|**Diluted earnings per share**                                                    |                                                |       |                                                |   |                                                |   |                                                |      
|Numerator:                                                                        |                                                |       |                                                |   |                                                |   |                                                |      
|Net income                                                                        | $                                              | 332   |                                                | $ | 366                                            |   | $                                              | 978  
|
|                                                                                 
|Denominator:                                                                      |                                                |       |                                                |   |                                                |   |                                                |      
|Weighted average common shares outstanding
          for basic earnings per share |                                                | 2,456 |                                                |   | 2,523                                          |   |                                                | 2,487
|Add: Dilutive effects of restricted stock and 
          stock options            |                                                |      |                                                |   |                                               |   |                                                |     
|
|Weighted average common shares and dilutive                                       |                                                |       |                                                |   |                                                |   |                                                |      
|potential common shares outstanding                                               |                                                | 2,456 |                                                |   | 2,523                                          |   |                                                | 2,487
|
|                                                                                 
|Diluted earnings per share                                                        | $                                              | 0.14  |                                                | $ | 0.15                                           |   | $                                              | 0.39 
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|SFAS No. 123(R) requires all public companies to measure the cost for stock options provided to employees
      in return for employee service. The cost is measured at the fair value of the options when granted
      and recognized over the employee service period, which is usually the vesting period of the options.
      As amended, this statement became effective for the Corporations fiscal year beginning January
      1, 2006. The effect on the Corporations net income will depend on the level of future option
      grants and the calculation of the fair value of the options granted, as well as the vesting periods
    provided.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The Corporation adopted the modified prospective method as required by SFAS 123 (R) which requires
      companies to expense the fair value of new stock option awards as well as the fair value of all unvested
      options outstanding at December 31, 2005 over the vesting period. Total compensation cost related
    to stock options was $65,000 and $0 for the nine months ended September 30, 2006 and 2005 respectively.                                                                                                                                                                                                                          

|6
|-



|STOCK-BASED COMPENSATION, continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|No options were granted in the second or third quarters of 2006. Options granted in the first quarter
      of 2006, under the fair value method, had an exercise price equal to 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 in 2006 and 2005, 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):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                                                                                  | **Nine months ended**        |     
| | ------------------------------------------------------------------------------------------------ | ---------------------------- | ----
| |                                                                                                  | **September 30,
      2006** |     
| |                                                                                                  |                              |     
|
| | As reported net income                                                                           | $                            | 978 
| | Stock option expenses                                                                            |                              | 65  
| | Less: additional stock-based compensation determined
    under the fair value method, net of tax |                              | (65 
| |                                                                                                  |                              |     
| |                                                                                                  | $                            | 978 
| |                                                                                                  |                              |     
|
| | As reported earnings per share                                                                   | $                            | 0.39
| | Proforma earnings per share                                                                      | $                            | 0.39
| | As reported earnings per diluted share                                                           | $                            | 0.39
| | Proforma earnings per diluted share                                                              | $                            | 0.39

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.

|7
|-



|CRITICAL ACCOUNTING POLICIES, continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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 AssetsAssets increased $17.4 million to $294.5 million at September 30, 2006 compared to $277.1 million at
        December 31, 2005. Management attributes growth to its continued focus on increasing loan originations
        with management expecting interest rates to remain steady for the remainder of 2006 with limited
        downward movement in 2007. Management attributes deposit growth to an incentive program in the Banks
        branch offices, the ability to offer high interest rates on most deposit products, and the acquisition
      of additional brokered deposits in order to meet liquidity needs.
      SecuritiesSecurities decreased to $13.9 million at September 30, 2006 compared to $14.6 million at December 31,
        2005. The decrease was attributable to $2.9 million in securities that matured and $2.5 million in
        securities sold which was offset by $4.7 million in purchases as part of ongoing management of the
        Banks liquidity and investment portfolio. Purchases made in the third quarter of 2006 were
      made in order to increase interest yield and the duration of the portfolio.
      LoansThe Banks net loan portfolio increased by $20.8 million, or 9.8%, from $213.1 million at December
        31, 2005 to $233.9 million at September 30, 2006. The following table presents information concerning
    the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                            | **September 30, 2006**     |         | **December 31, 2005** | 
|--------------------------- | -------------------------- | ------- | --------------------- | 
|                            |                            |         |                       | 
|                            | **Amount**                 |         | **Percent**           | 
|                            |                            |         |                       | 
|                            | **(Dollars in thousands)** |        
|Real Estate Loans:          |                            |         |                       | 
|One-to-four family          | $                          | 142,809 |                       | 
|Multi-family                |                            | 7,043   |                       | 
|Commercial                  |                            | 39,235  |                       | 
|Construction or development |                            | 10,394  |                       | 
|                            |                            |         |                       | 
|Total real estate loans     |                            | 199,481 |                       | 
|Other Loans:                |                            |         |                       | 
|Consumer loans:             |                            |         |                       | 
|Automobile                  |                            | 1,668   |                       | 
|Home equity                 |                            | 18,230  |                       | 
|Manufactured housing        |                            | 502     |                       | 
|Other                       |                            | 7,570   |                       | 
|                            |                            |         |                       | 
|Total consumer loans        |                            | 27,970  |                       | 
|Commercial Business Loans   |                            | 9,770   |                       | 
|                            |                            |         |                       | 
|Total other loans           |                            | 37,740  |                       | 
|                            |                            |         |                       | 
|Total Loans                 |                            | 237,221 |                       | 
|                            |                            |         |                       | 
|Less:                       |                            |         |                       | 
|Allowance for loan losses   |                            | 2,586   |                       | 
|Net deferred loan fees      |                            | 696     |                       | 
|Loans in process            |                            |        |                       | 
|                            |                            |         |                       | 
|Total Loans, net            | $                          | 233,939 |                       | 
|                            |                            |         |                       | 
|                            |                            |         |                       | 

|8
|-



|Loans, continuedIn 2006, our loan officers placed significant emphasis on growth. One-to-four family loans grew as
        a result of a $2.7 million increase in fixed rate mortgages and a $1.6 million increase in balloon
        mortgages. Home equity lines of credit continue to increase and construction and development loans
        grew as construction loans increased $3.2 million and land development loans increased $1.8 million.
        Multi-family loans increased this year primarily as a result of three loans originated in the first
        quarter totaling $3.9 million collateralized by three separate apartment complexes. Commercial loans
        secured by real estate increased due to a $2.6 million increase in outstanding commercial lines of
        credit and $3.5 million in net loan growth. Originations of commercial loans secured by real estate
        (individually $300,000 and over) total $5.0 million for the year as of September 30, 2006. Management
        expects most future growth in the loan portfolio to come from originations of commercial real estate
        and business loans with expanded geographic outreach facilitated by the 2004 acquisition.
      The allowance for loan losses was $2,586,000 at September 30, 2006 and $2,895,000 at December 31, 2005,
        a reduction of $309,000 due to $372,000 in charge-offs and $63,000 in recoveries. Charge-offs for
        the nine months ended September 30, 2006 included $136,000 of one-to-four family mortgage loans,
        $118,000 of consumer loans, $15,000 of commercial business loans collateralized by real estate and
        $103,000 of commercial business loans not collateralized by real estate. Charge-offs for the quarter
        ended September 30, 2006 included $4,000 of one-to-four family mortgage loans, $25,000 of consumer
        loans, and $10,000 of commercial business loans not collateralized by real estate. Of the recoveries
        for the nine months ended September 30, 2006, $51,000 was from consumer loans. See the Provision
        for Loan Losses paragraphs that follow for further explanation regarding charge-offs.
      DepositsTotal deposits increased $17.6 million, or 10.2%, from $172.7 million at December 31, 2005 to $190.3
          million at September 30, 2006. The increase can be attributed to a $12.9 million increase in certificates
          of deposit, a $6.5 million increase in money market accounts, a $1.8 million increase in non-interest
          bearing accounts, and a $3.6 million decrease in all other types of deposits combined. Of the increase
          in certificates of deposit, $9.9 million was in the form of brokered deposits. Most of the remaining
          increase in certificates of deposit came from offering higher interest rates on short-term certificates
          in response to a relatively flat interest rate yield curve and rates offered by local competition.
          Brokered deposits have been managed to provide additional liquidity or reduce excess liquidity depending
          on current conditions. The increase in money market accounts was attributed to the Bank offering
          higher interest rates on its Investor Money Market Account. 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.
      Federal Home Loan Bank AdvancesFederal Home Loan Bank (FHLB) advances increased $0.5 million or 0.8% from $59.6 million at December
          31, 2005 to $60.1 million at September 30, 2006. Total proceeds from FHLB advances for the nine months
          ended September 30, 2006 were $22.5 million and total repayments were $22.0 million. 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 discussion below, and also see the Liquidity discussion later in
          this report regarding available borrowings.
      EquityTotal equity was $39.3 million at September 30, 2006 compared to $40.6 million at December 31, 2005.
          This represents 13.3% and 14.6% of total assets at September 30, 2006 and December 31, 2005, respectively.
          Decreases in equity for the nine months ended September 30, 2006 included stock repurchases totaling
          $2,110,000 (177,300 shares) along with $478,000 in dividend payments. Increases in equity resulted
          from $978,000 in year-to-date net income, the vesting of $215,000 in restricted stock compensation,
          and a $65,000 increase in other comprehensive income arising from a reduction in the unrealized loss
          on securities. Management considers its equity position to be strong.
      RESULTS OF OPERATIONS
      Net Interest IncomeNet interest income before the provision for loan losses for the quarter ended September 30, 2006 increased
          $8,000 compared to the same period one year ago. The increase came primarily from a $600,000 increase
          in interest income on loans offset by a $3,000 decrease in interest income on investment securities,
          federal funds sold and overnight deposits combined, a $43,000 increase in interest expense on FHLB
          advances, and a $546,000 increase in interest expense on deposits. The Banks net interest margin
          decreased to 3.38% for the quarter ended September 30, 2006 from 3.61% for the quarter ended September
          30, 2005 as our change in deposit yield increased more than our change in loan yield.Interest income
          from loans represented 94.0% of total interest income for the quarter ended September 30, 2006 compared
          to 93.0% for the same period in 2005.
      Net interest income before the provision for loan losses for the nine months ended September 30, 2006
        decreased $78,000 compared to the same period one year ago. The Banks net interest margin decreased
        to 3.44% for the nine months ended September 30, 2006 from 3.64% for the nine months ended September
    30, 2005.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9
|-



|Net Interest Income, continued
      Our net interest margin decreased primarily from offering certificates of deposit and money market
        accounts at higher interest rates that increased the Banks cost of funds. Interest income from
        loans represented 93.1% of total interest income for the nine months ended September 30, 2006 compared
        to 93.9% for the same period in 2005. 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.
      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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                   | **Nine Months Ended September 30,**          |        
|---------------------------------- | -------------------------------------------- | -------
|                                   | **2006**                                     |        
|                                   |                                              |        
|                                   | **Average 
      Outstanding
      Balance** |        
|                                   |                                              |        
|                                   | **(dollars in thousands)**                   |        
|Fed Funds and overnight deposits   | $                                            | 6,429  
|Investment securities              |                                              | 13,514 
|Other securities                   |                                              | 4,669  
|Loans receivable                   |                                              | 225,495
|                                   |                                              |        
|Total earning assets               | $                                            | 250,107
|                                   |                                              |        
|                                   |                                              |        
|Demand and NOW Accounts            | $                                            | 29,950 
|Money market accounts              |                                              | 18,150 
|Savings accounts                   |                                              | 25,813 
|Certificates of deposit            |                                              | 105,085
|Federal Home Loan Bank Advances    |                                              | 58,510 
|                                   |                                              |        
|Total interest bearing liabilities | $                                            | 237,508
|                                   |                                              |        
|Net interest income                |                                              |        
|Net interest spread                |                                              |        
|                                   |                                              |        
|Net interest margin                |                                              |        
|                                   |                                              |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Provision for Loan Losses
      The Bank recorded no provision for loan losses for the quarters ended September 30, 2006 and 2005,
        respectively. Net charge-offs for the quarter ended September 30, 2006 totaled $6,000 compared to
        $197,000 for the quarter ended September 30, 2005.
      The Bank recorded no provision for loan losses for the nine months ended September 30, 2006 compared
        to a $385,000 recovery for same period a year ago. The recovery in 2005 was possible due to the Bank
        receiving payoffs on two loan relationships totaling $1.5 million for which the Bank had previously
        provided loan loss allowances of $535,000. Asset quality was considered in determining the need for
        a provision for loan losses. If the level of non-performing assets increases, a provision for loan
        loss may be needed. No provision in the third quarter of 2006 was needed as the Bank has maintained
        a low level of charge-offs as compared to previous years and has reduced the level of total non-performing
        assets. Loans charged off during the nine months ended September 30, 2006 were already reserved for
        in the provision for loan losses as of December 31, 2005. Net charge-offs for the nine months ended
        September 30, 2006 totaled $309,000 compared to $3.0 million for the nine months ended September
        30, 2005. The decreased level of charge-offs in 2006 was the result of improved credit quality in
    our loan portfolio resulting from aggressive efforts in dealing with problem loans in 2005.

|10
|--



|Provision for Loan Losses, continued
      The following table presents non-performing assets and certain asset quality ratios at September 30,
    2006 and December 31, 2005.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                               

|                                                  | **September 30, 2006**     |        | **December 31, 2005** |  
|------------------------------------------------- | -------------------------- | ------ | --------------------- | -
|                                                  |                           
|                                                  | **(Dollars in thousands)** |       
|                                                  |                           
|                                                 
|Non-performing loans                              | $                          | 1,043  |                       | $
|Real estate in judgment                           |                            | 1,332  |                       |  
|Foreclosed and repossessed assets                 |                            | 1,018  |                       |  
|                                                  |                           
|Total non-performing assets                       | $                          | 3,393  |                       | $
|                                                  |                           
|                                                 
|Non-performing loans to total loans               |                            | 0.44   | %                     |  
|Non-performing assets to total assets             |                            | 1.15   | %                     |  
|Allowance for loan losses to non-performing loans |                            | 247.94 | %                     |  
|Allowance for loan losses to net loans receivable |                            | 1.11   | %                     |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Bank had 13 non-performing loan relationships as of September 30, 2006 compared to 11 non-performing
      loan relationships as of December 31, 2005. The improvement of asset quality remains a priority while
      management continues to focus on loan growth.
      Noninterest Income
      Noninterest income decreased $141,000 or 16.0%, to $743,000 for the quarter ended September 30, 2006
        as compared to $884,000 for the quarter ended September 30, 2005. Fees and service charges increased
        to $580,000 from $532,000 for the same period a year ago as the Bank increased its level of bounce
        protection on customer direct deposit accounts (effective May 1, 2006) and its non-sufficient funds
        fee from $25 to $29 per transaction (effective September 1, 2006) which created an additional $23,000
        in NSF fees. The remaining increase in fees and service charges compared to the same period a year
        ago was primarily from a $9,000 increase in loan related fees (as the Bank developed new mortgage
        banking relationships with four brokerage companies at the end of June 2006 which led to $34,000
        in new fee income for the quarter), a $4,000 increase in fees for certificates of deposit early withdrawal
        penalties and a $4,000 increase in ATM income. All other increases in fees and service charges for
        the quarter ended September 30, 2006 totaling $8,000 were not individually significant.
      Gain on sale of loans decreased $130,000 to $59,000 from $189,000 for the same quarter a year ago as
        mortgage banking activities continue to decline due to lower than expected sales of loans (23 for
        the quarter ended September 30, 2006 compared to 64 for the quarter ended September 30, 2005) and
        interest rates that remain higher than last year. Other income decreased $29,000 for the quarter
        ended September 30, 2006 as compared to the same period in 2005 primarily due to rental income decreasing
        $12,000 (from $23,000 to $11,000) and losses on the sale of real estate owned increasing $9,000 (from
        $10,000 to $19,000). In 2005, the Bank was receiving rental income related to a foreclosed property
        that was subsequently sold. All other decreases in other income totaling $8,000 were not individually
        significant. The Bank also had a $20,000 loss on the sale of securities as management replaced two
        agency securities and one municipal security with municipal securities earning higher interest rates
        in anticipation of what management expects to be falling interest rates in 2007. Management expects
        to recover this loss with the increase in interest income from the new securities by the end of 2006.
      Noninterest income decreased $210,000 or 8.4%, to $2.3 million for the nine months ended September
        30, 2006 as compared to $2.5 million for the nine months ended September 30, 2005. Fees and service
        charges increased $88,000 to $1.6 million from $1.5 million for the same period a year ago as the
        predominant factors were total NSF fees increasing $56,000 and loan fees increasing $22,000. Gain
        on sale of loans decreased $230,000 to $219,000 from $449,000 for the same period a year ago as mortgage
        banking activities decreased compared to the same period in 2005 due to lower than expected sales
        of loans (89 as of September 30, 2006 compared to 156 as of September 30, 2005), a lower level of
        customer refinancing, and interest rates that remain higher than they were in 2005. Other income
        decreased $38,000 for the nine months ended September 30, 2006 as compared to the same period in
        2005. Net gains on sales of fixed assets (including the Jonesville branch office) decreased to $0
        from $45,000 for the same period a year ago. Net losses on sales of real estate owned were $11,000
        for the nine months ended September 30, 2006 compared to $29,000 for the nine months ended September
        30, 2005. The remaining increases in other income were primarily due to a $12,000 decrease in year-to-date
    rental income.

|11
|--



|Noninterest Expense
      Noninterest expense decreased $103,000 or 4.1%, for the quarter ended September 30, 2006 compared to
        the quarter ended September 30, 2005. Salaries and employee benefits decreased $15,000 as a result
        of a $49,000 reduction in health insurance expenses offset by a $34,000 increase in salaries and
        wages expense. Professional fees decreased $33,000 due to reductions in legal expenses and regulatory
        examination costs now that the Bank has converted to a state chartered commercial bank.
      Foreclosed property expenses increased $25,000 for the quarter ended September 30, 2006 compared to
        the same period in 2005. Management recorded $31,000 in writedowns of foreclosed properties in the
        third quarter of 2006 compared to no writedowns in the third quarter of 2005. The Bank had a $6,000
        decrease in foreclosed property operating expenses for the same respective periods. Amortization
        of core deposit intangible decreased $19,000 for the quarter ended September 30, 2006 as amortization
        of this asset continues to slow from year to year. Management expects to continue to see an expense
        of approximately $23,000 per month for the remainder of 2006 compared to $29,000 for the last quarter
        of 2005. Amortization of mortgage servicing rights decreased $30,000 consistent with a lower
        amount of loan originations during the third quarter. Other decreases in noninterest expense for
        the quarter ended September 30, 2006 as compared to the same period for 2005 primarily include a
        $10,000 increase in Michigan Single Business Tax expense offset by a $5,000 decrease in office supplies
        and printing expenses resulting from the reduction of supply inventory levels, a $16,000 decrease
        in telephone expense, and a $17,000 decrease in loan fees related to indirect lending as management
        has decided to significantly reduce this activity due to the credit risk involved and has continued
        to focus on expense control.
      Noninterest expense decreased $459,000 for the nine months ended September 30, 2006 compared to the
        nine months ended September 30, 2005, a decrease of 5.8%. Salaries and employee benefits increased
        $26,000 due to a $131,000 increase in compensation (including $65,000 in stock option expenses),
        and a $34,000 increase in pension fund expense offset by a $137,000 decrease in health insurance
        expense resulting from revision to the Banks medical coverage plans for calendar year 2006.
        Occupancy and equipment expense decreased $65,000 primarily due to lower depreciation expense. Professional
        fees decreased $74,000 due to a $20,000 reduction in legal expense, a $22,000 reduction in audit
        and accounting expense, and a $22,000 reduction in regulatory examination costs. Other decreases
        in professional fees were not individually significant.
      Expense control and revenue enhancement continue to be challenges for management as efforts continue
        on improving efficiency. In September 2006, management (with approval from the Board of Directors)
        decided to downsize certain departments in order to position the Company for improved financial results
        as year-to-date net income for 2006 lags behind results for 2005. This resulted in a reduction of
        9 full-time equivalent employees (FTEs) in October 2006 with an additional reduction of 2 FTEs by
        December 1, 2006. Management also decided to reduce employee benefits in October 2006 that include
        reducing the employer match in the Companys 401(k) plan by 50% (an estimated $38,000 annual
        savings) and extending the time the Company allocates ESOP shares to employees from 5 years to 10
        years (estimated to be a $93,000 annual savings for 2007). As strategic planning for 2007 continues,
        ways to enhance revenue and improve expense control continued to be pursued. Management is confident
        that the actions taken to control expenses will not affect the Companys ability to fulfill
        its obligations to its customers and shareholders.
      Foreclosed property expenses decreased $170,000 for the nine months ended September 30, 2006 compared
        to the same period in 2005. Management recorded a $72,000 in writedowns of foreclosed properties
        compared to $283,000 in the nine month period ending September 2005, and the Bank had a $41,000 increase
        in foreclosed property operating expenses for the nine months ended September 30, 2006 as compared
        to the same period in 2005. Amortization of core deposit intangible decreased $60,000 and amortization
        of mortgage servicing rights decreased $40,000 for the nine months ended September 30, 2006. Other
        general and administrative expenses for the nine months ended September 30, 2006 as compared to the
        same period for 2005 include a $26,000 decrease in office supplies and printing expenses, a $50,000
        decrease in expenses related to indirect lending, a $49,000 decrease in telephone expense, and a
        $32,000 decrease in employee education and business travel expense offset by a $73,000 increase
        in advertising and promotion expense used for professional services for an extensive marketing campaign.
      Federal Income Tax Expense
      The Companys provision for federal income taxes increased $4,000 for the quarter ended September
        30, 2006 compared to the same period in 2005. The effective tax rate for the quarter ended September
        30, 2006 was 28.6% of income before tax as compared to 26.1% for the same period in 2005.
      The Companys provision for federal income taxes decreased $63,000 for the nine months ended September
        30, 2006 compared to the same period in 2005 due to decreased income before taxes in 2006. The effective
        tax rate for the nine months ended September 30, 2006 was 25.7% of income before tax as compared
        to 26.2% for the same period in 2005. 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
|--



|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 September 30, 2006 totaled $78.3 million. Management believes that
        a significant portion of these certificates of deposit will remain with the Bank provided the Bank
        pays a rate of interest that is competitive both in the local and national markets.
      If necessary, additional funding sources include additional 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 September 30, 2006
        and based on current collateral levels, the Bank could borrow an additional $22.7 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 $194,000 during the nine month period
        ended September 30, 2006 compared to a $2.0 million increase for the same period in 2005. The primary
        sources of cash for the nine months ended September 30, 2006 were $22.5 million in proceeds from
        FHLB advances, $10.4 million in proceeds from the sale of mortgage loans, and a $17.4 million increase
        in deposits compared to $1.0 million in proceeds from FHLB advances, $20.3 million in proceeds from
        the sale of mortgage loans and a $3.2 million increase in deposits for the nine months ended September
        30, 2005. Sales and maturities of available for sale securities net of purchases provided $0.7 million
        for the nine months ended September 30, 2006 whereas the same activity used $6.6 million for the
        same period in 2005. The primary uses of cash for the nine months ended September 30, 2006 were $22.8
        million of new loan originations exceeding principal collections, $21.9 million in repayments of
        FHLB advances and $10.1 million in new loans originated for sale compared to $7.1 million in repayments
        of FHLB advances and $20.7 million in new loans originated for sale in 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13
|--



|CONTRACTUAL OBLIGATIONS
      The Corporation has certain obligations and commitments to make future payments under contracts. At
    September 30, 2006, the aggregate contractual obligations and commitments are:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                    

|Contractual Obligations | Payments Due by Period |        
|----------------------- | ---------------------- | -------
|
|
|
|Certificates of deposit | $                      | 109,739
|FHLB advances           |                        | 60,117 
|
|                        |                       
|Total                   | $                      | 169,856
|

|                                           |   |       
|------------------------------------------ | - | ------
|
|
|
|
|Commitments to grant loans                 | $ | 4,513 
|Unfunded commitments under HELOCs          |   | 18,749
|Unfunded commitments under Commercial LOCs |   | 1,327 
|Letters of credit                          |   | 14    
|
|                                           |  
|Total                                      | $ | 24,603
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 September 30, 2006, the Bank
        met the regulatory standards to be classified as well capitalized. The Banks
        regulatory capital ratios as of September 30, 2006 were as follows: Tier 1 leverage ratio 10.06%,
        Tier 1 risk-based capital ratio 13.57%; and total risk-based capital, 14.82%. The regulatory capital
        requirements to be considered well capitalized are 5.0%, 6.0%, 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 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. The
        levels, from least risk to most risk, are; minimal, moderate, significant, high and imminent threat.
        Data from the model, as of September 30, 2006, June 30, 2006 and December 31, 2005 indicates that
    the Banks IRR level remains minimal.

|14
|--



|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 September 30, 2006,
        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 September 30, 2006,
        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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15
|--



|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, 2005, 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
      (c) The following table provides information about purchases of the Corporations common stock
    by the Corporation during the quarter ended September 30, 2006.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|**ISSUER PURCHASES OF EQUITY SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|**Period**                | **(a) Total Number of
      Shares Purchased** |         | **(b) Average Price
      Paid per Share** |                | **(c) Total Number of
      Shares Purchased as
      Part of Publicly 
      Announced Plans or 
      Programs** |  | **(d) Maximum Number
      (or Approximate
      Dollar Value) of
      Shares that May Yet
      Be Purchased Under
      the Plans or Programs** | 
|------------------------- | ---------------------------------------------- | ------- | ------------------------------------------ | -------------- | ------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                         
|07/01/06 
      07/31/06 |                                                | -0-     |                                            | Not applicable |                                                                                                                    |  | -0-                                                                                                                                                | 
|                         
|08/01/06 
      08/31/06 |                                                | 25,000  |                                            | $ 11.60        |                                                                                                                    |  | 25,000                                                                                                                                             | 
|                         
|09/01/06 
      09/30/06 |                                                | 102,300 |                                            | $ 11.94        |                                                                                                                    |  | 102,300                                                                                                                                            | 
|                          |                                                |         |                                            |                |                                                                                                                    |  |                                                                                                                                                    | 
|                         
|Total                     |                                                | 127,300 |                                            | $ 11.87        |                                                                                                                    |  | 127,300                                                                                                                                            | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We repurchased an aggregate of 177,300 shares of our common stock pursuant to the repurchase program
      that we announced on January 24, 2006 (the Program).                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(2) | Our board of directors approved the repurchase by us of up to an aggregate of 270,000 shares of our
        common stock pursuant to the Program. The expiration date of this Program is January 30, 2007. Unless
        terminated earlier by resolution of our board of directors, the Program will expire on the earlier
        of such expiration date or when we have repurchased all shares authorized for repurchase under the
      Program.

|                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 3.   DEFAULTS UPON SENIOR SECURITIES
      Not applicable
      Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      None.
      Item 5.   OTHER INFORMATION
      Not applicable
      Item 6.   EXHIBITS
    See the index to exhibits.

|16
|--



|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: November 9, 2006                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|Date: November 9, 2006                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                      

|17
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|INDEX TO EXHIBITS
|-----------------

|            |                                                                
|----------- | ---------------------------------------------------------------
|Exhibit No. | Description of Exhibit                                         
|            |                                                                
|3.1         | Bylaws, as amended effective September 20, 2006 filed herewith.
|            |                                                                

|10.1 | Employment Agreement dated September 20, 2006 by and between Monarch Community Bancorp, Inc. and
Donald L. Denney (Incorporated by reference from Current Report on Form 8-K filed on September 25, 2006).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                           
|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.                                                                                                                                                                               

|18
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