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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB [X]
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2004
  [  ]
    
    Transition report under Section 13 or 15(d) of the Exchange Act
 
 Commission file number: 000-49814 MONARCH COMMUNITY BANCORP, INC. (Exact name of small business issuer as specified in its charter)
 Maryland
    
    04-3627031(State or other jurisdiction
    
    (I.R.S. employerof incorporation or organization)
    
    identification no.)
 375 North Willowbrook Road, Coldwater, MI 49036(Address of principal executive offices) 517-278-4566(Issuers telephone number) Check whether the issuer (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: [  ] State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practical date: At November 8, 2004, there
were 2,709,704 shares of the issuers Common Stock outstanding. Transitional Small Business Disclosure Format (check one): Yes: [  ] No: [X]




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##### Table of Contents



Monarch Community Bancorp, Inc.
Index PART I  FINANCIAL INFORMATIONItem 1  Condensed Financial Statements:Condensed Consolidated Balance Sheets  September 30, 2004 and
December 31, 2003
    
    
    1Condensed Consolidated Statements of Income  Three and Nine Months
Ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Changes in Stockholders Equity 
Nine Months Ended September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flow  Nine Months ended
September 30, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2  Managements Discussion and Analysis or Plan of Operation
    
    
    6-11Item 3 Controls and Procedures
    
    
    11PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    12Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    12Item 3  Defaults Upon Senior Securities
    
    
    12Item 4  Submission of Matters to a Vote of Security Holders
    
    
    12Item 5  Other Information
    
    
    12Item 6  Exhibits
    
    
    12SIGNATURES
    
    
    13Rule 13a-14(a) Certification of the President and Chief Executive OfficerRule 13a-14(a) Certification of the Chief Financial OfficerSection 1350 Certifications




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PART I-FINANCIAL INFORMATION 
 Item 1. CONDENSED FINANCIAL STATEMENTS MONARCH COMMUNITY BANCORP, INC. 
  (unaudited)September 30,
    
    December 31,2004
    
    2003(Dollars in thousands,except per share data)ASSETSCash and due from banks
    
    $
    8,456
    
    
    $
    6,357Federal Funds sold and overnight deposits
    
    
    3,339
    
    
    
    20,974Total cash and cash equivalents
    
    
    11,795
    
    
    
    27,331Securities-Available for sale
    
    
    12,333
    
    
    
    19,648Securities-Held to maturity
    
    
    271
    
    
    
    286Other investments
    
    
    4,671
    
    
    
    3,029Real Estate Investment  Limited partnership, at equity
    
    
    1,313
    
    
    
    1,415Loans held for sale
    
    
    725
    
    
    
    421Loans, net of allowance for loan losses
    
    
    222,039
    
    
    
    141,225Accrued interest and late charges
    
    
    1,256
    
    
    
    1,041Foreclosed assets, net
    
    
    3,161
    
    
    
    2,177Premises and equipment
    
    
    6,891
    
    
    
    4,168Deferred income taxes
    
    
    1,142
    
    
    
    882Goodwill & Core Deposit Intangible
    
    
    10,049
    
    
    
    Other assets
    
    
    4,942
    
    
    
    1,500Total assets
    
    $
    280,588
    
    
    $
    203,123LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    5,208
    
    
    $
    4,183Interest-bearing
    
    
    164,528
    
    
    
    103,057Total deposits
    
    
    169,736
    
    
    
    107,240Federal Home Loan Bank advances
    
    
    64,741
    
    
    
    57,384Accrued expenses and other liabilities
    
    
    4,405
    
    
    
    1,069Total liabilities
    
    
    238,882
    
    
    
    165,693Commitments and contingent liabilities
    
    
    
    
    
    
    Stockholders equityCommon stock-$0.01 par value authorized-20,000,000 shares
issued and outstanding-2,709,704 shares at September 30, 2004
and 2,399,550 shares at December 31, 2003
    
    
    27
    
    
    
    24Additional paid in capital
    
    
    27,924
    
    
    
    23,352Retained earnings
    
    
    16,115
    
    
    
    16,567Accumulated other comprehensive income
    
    
    7
    
    
    
    75Unearned Compensation
    
    
    (2,367
    )
    
    
    (2,588
    )Total stockholders equity
    
    
    41,706
    
    
    
    37,430Total liabilities and stockholders equity
    
    $
    280,588
    
    
    $
    203,123
 See accompanying notes to condensed consolidated financial statements Page 1




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10 Q-SB FOR SEPTEMBER 30, 2004 
  Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Interest IncomeLoans, including fees
    
    $
    3,597
    
    
    $
    2,725
    
    
    $
    9,511
    
    
    $
    8,568Investment securities
    
    
    176
    
    
    
    155
    
    
    
    483
    
    
    
    454Federal funds sold and overnight deposits
    
    
    14
    
    
    
    63
    
    
    
    90
    
    
    
    195Total interest income
    
    
    3,787
    
    
    
    2,943
    
    
    
    10,084
    
    
    
    9,217Interest ExpenseDeposits
    
    
    709
    
    
    
    694
    
    
    
    2,018
    
    
    
    2,190Federal Home Loan bank advances
    
    
    893
    
    
    
    809
    
    
    
    2,573
    
    
    
    2,388Total interest expense
    
    
    1,602
    
    
    
    1,503
    
    
    
    4,591
    
    
    
    4,578Net Interest Income
    
    
    2,185
    
    
    
    1,440
    
    
    
    5,493
    
    
    
    4,639Provisions for Loan Losses
    
    
    375
    
    
    
    135
    
    
    
    825
    
    
    
    1,157Net Interest Income after Provision
for Loan Losses
    
    
    1,810
    
    
    
    1,305
    
    
    
    4,668
    
    
    
    3,482Noninterest IncomeFees and service charges
    
    
    588
    
    
    
    246
    
    
    
    1,261
    
    
    
    724Loan servicing fees
    
    
    118
    
    
    
    55
    
    
    
    276
    
    
    
    154Net gain on sale of loans
    
    
    245
    
    
    
    452
    
    
    
    690
    
    
    
    1,490Net gain (loss) on sale of securities
    
    
    4
    
    
    
    (1
    )
    
    
    14
    
    
    
    (1
    )Other income
    
    
    125
    
    
    
    5
    
    
    
    290
    
    
    
    86Total noninterest income
    
    
    1,080
    
    
    
    757
    
    
    
    2,531
    
    
    
    2,453Noninterest ExpensesSalaries and employees benefits
    
    
    1,780
    
    
    
    925
    
    
    
    3,913
    
    
    
    2,652Occupancy and equipment
    
    
    326
    
    
    
    181
    
    
    
    761
    
    
    
    559Data processing
    
    
    157
    
    
    
    89
    
    
    
    430
    
    
    
    271Mortgage banking
    
    
    88
    
    
    
    98
    
    
    
    199
    
    
    
    331Professional fees
    
    
    151
    
    
    
    69
    
    
    
    392
    
    
    
    309Office supplies and forms
    
    
    40
    
    
    
    18
    
    
    
    128
    
    
    
    93Advertising and promotion
    
    
    33
    
    
    
    24
    
    
    
    91
    
    
    
    58Other general and administrative
    
    
    511
    
    
    
    277
    
    
    
    1,147
    
    
    
    784Amortization of core deposit intangible
    
    
    109
    
    
    
    
    
    
    
    219
    
    
    
    Total noninterest expense
    
    
    3,195
    
    
    
    1,681
    
    
    
    7,280
    
    
    
    5,057Income  Before Income Taxes
    
    
    (305
    )
    
    
    381
    
    
    
    (81
    )
    
    
    878Income Taxes
    
    
    (45
    )
    
    
    105
    
    
    
    (20
    )
    
    
    247Net Income (Loss)
    
    $
    (260
    )
    
    $
    276
    
    
    $
    (61
    )
    
    $
    631Earnings (Loss) Per ShareBasic
    
    $
    (0.10
    )
    
    $
    0.12
    
    
    $
    (0.02
    )
    
    $
    0.27Diluted
    
    $
    (0.10
    )
    
    $
    0.12
    
    
    $
    (0.02
    )
    
    $
    0.27
 See accompanying notes to condensed consolidated financial statements Page 2




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Condensed Consolidated Statements of Changes in Stockholders Equity Common Stock
    
    
    
    
    
    
    
    
    
    AccumulatedNumber
    
    
    
    
    
    Additional
    
    
    
    
    
    Otherof
    
    
    
    
    
    Paid in
    
    Retained
    
    Comprehensive
    
    UnearnedShares
    
    Amount
    
    Capital
    
    Earnings
    
    Income
    
    Compensation
    
    TotalBalance, January 1, 2003
    
    
    2,314
    
    
    $
    23
    
    
    $
    22,149
    
    
    $
    16,379
    
    
    $
    64
    
    
    
    ($1,666
    )
    
    $
    36,949Issuance of 88,875 shares of common stock at $13/share awarded in connection with
Restricted Stock Plan
    
    
    89
    
    
    
    1
    
    
    
    1,154
    
    
    
    
    
    
    
    
    
    
    
    (1,155
    )
    
    
    Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    631
    
    
    
    
    
    
    
    
    
    
    
    631Change in unrealized gain on securities available for sale, net of tax of $4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    642Dividends paid ($0.15/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (357
    )
    
    
    
    
    
    
    
    
    
    
    (357
    )Balance, September 30, 2003
    
    
    2,403
    
    
    $
    24
    
    
    $
    23,303
    
    
    $
    16,653
    
    
    $
    75
    
    
    
    ($2,821
    )
    
    $
    37,234Balance, January 1, 2004
    
    
    2,399
    
    
    $
    24
    
    
    $
    23,352
    
    
    $
    16,567
    
    
    $
    75
    
    
    
    ($2,588
    )
    
    $
    37,430Issuance of 310,951 shares of common stock at $14.75/share in connection with purchase
of MSB Financial, Inc.
    
    
    311
    
    
    
    3
    
    
    
    4,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,586Vesting of restricted shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221
    
    
    
    221797 shares repurchased at $14.15/share
    
    
    (1
    )
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Change in unrealized gain (loss) on securities available for sale, net of tax of $35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    
    
    
    
    (68
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129
    )Dividends paid ($0.15/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (391
    )
    
    
    
    
    
    
    
    
    
    
    (391
    )Balance, September 30, 2004
    
    
    2,709
    
    
    $
    27
    
    
    $
    27,924
    
    
    $
    16,115
    
    
    $
    7
    
    
    
    ($2,367
    )
    
    $
    41,706
 See accompanying notes to condensed consolidated financial statements Page 3




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Condensed Consolidated Statements of Cash Flows Nine Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2004
    
    2003(Dollars in thousands)Cash Flows from Operating ActivitiesNet Income
    
    $
    (61
    )
    
    $
    631Adjustments to reconcile net income to net cash from operating activities:Depreciation
    
    
    385
    
    
    
    324Provision for Loan Losses
    
    
    875
    
    
    
    1,157Amortization
    
    
    601
    
    
    
    609(Gain) Loss on sale of foreclosed assets
    
    
    (97
    )
    
    
    32Deferred income taxes
    
    
    67
    
    
    
    (385
    )Mortgage loans originated for sale
    
    
    (22,545
    )
    
    
    (53,864
    )Proceeds from sale of mortgage loans
    
    
    23,129
    
    
    
    56,029Gain on sale of mortgage loans
    
    
    (696
    )
    
    
    (1,501
    )(Gain) Loss on disposal of premises and equipment
    
    
    
    
    
    
    Net change in:Real Estate Investment
    
    
    102
    
    
    
    Deferred loan fees
    
    
    (348
    )
    
    
    (47
    )Accrued interest receivable
    
    
    111
    
    
    
    125Other assets
    
    
    (74
    )
    
    
    (505
    )Accrued expenses and other liabilities
    
    
    94
    
    
    
    904Net cash provided by (used in) operating activities
    
    
    1,543
    
    
    
    3,509Cash Flows from Investing ActivitiesProceeds from maturities of HTM securities
    
    
    
    
    
    
    270Purchases of HTM securities
    
    
    (21
    )
    
    
    (291
    )Proceeds from sale and maturities of AFS securities
    
    
    12,430
    
    
    
    2,730Purchases of available for sale securities
    
    
    (5,499
    )
    
    
    (3,641
    )Purchases of other securities
    
    
    (140
    )
    
    
    (176
    )Proceeds from maturities of other securities
    
    
    19
    
    
    
    Loan originations and principal collections, net
    
    
    (9,800
    )
    
    
    (4,141
    )Proceeds from sale of foreclosed assets
    
    
    2,233
    
    
    
    1,961Proceeds from sale of premises and equipment
    
    
    
    
    
    
    Purchases of premises and equipment
    
    
    (350
    )
    
    
    (21
    )Vesting of restricted stock
    
    
    221
    
    
    
    Acquisition, net of cash
    
    
    (12,010
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (12,917
    )
    
    
    (3,309
    )Cash Flows from Financing ActivitiesNet increase (decrease) in deposits
    
    
    (7,721
    )
    
    
    4,373Proceeds from FHLB advances
    
    
    1,000
    
    
    
    5,000Repayment of FHLB advances
    
    
    (1,625
    )
    
    
    Issuance of Common Stock
    
    
    4,586
    
    
    
    Repurchase of Common Stock
    
    
    (11
    )Issuance of dividend
    
    
    (391
    )
    
    
    (357
    )Net cash provided by (used in) financing activities
    
    
    (4,162
    )
    
    
    9,016Net increase (decrease) in cash and cash equivalents
    
    
    (15,536
    )
    
    
    9,216Cash and cash equivalents -January 1
    
    
    27,331
    
    
    
    20,207Cash and cash equivalents -September 30
    
    $
    11,795
    
    
    $
    29,423Supplemental Cash Flow Information:Cash paid for interest
    
    
    4,726
    
    
    
    4,656Cash paid for income taxes
    
    
    23
    
    
    
    260Noncash investing activity  loans transferred to foreclosed assets
    
    
    2,060
    
    
    
    2,296
 See accompanying notes to condensed consolidated financial statements Page 4




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MONARCH COMMUNITY BANCORP, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Monarch Community Bancorp, Inc. (the Corporation) was incorporated in 2002
under Maryland law to hold all of the common stock of Monarch Community Bank
(the Bank), formerly known as Branch County Federal Savings and Loan
Association. Prior to August 29, 2002, the Bank was a federally chartered and
insured mutual savings institution, which converted to a stock savings
institution effective August 29, 2002. In connection with the conversion, on
August 29, 2002, the Corporation sold 2,314,375 shares of its common stock in a
subscription offering. Fifty percent of the net proceeds from this offering
were used to purchase all of the common stock of the Bank. On April 15, 2004 the Corporation completed its acquisition of MSB Financial,
Inc., parent company of Marshall Savings Bank. Accordingly, MSB Financial was
merged with and into Monarch Community Bancorp, Inc. On September 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 $7.9 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, Hillsdale and Calhoun counties in Michigan. The
Bank operates eight full service offices and one drive-through only office.
The Bank owns 100% of Community Services Group, Inc., which invests in other
entities, including 100% ownership of First Insurance Agency, a minority
ownership in a corporation that reinsures credit life and disability insurance,
and a majority ownership in a limited liability company that reinsures private
mortgage insurance. First Insurance Agency is a licensed insurance agency
established to allow for the receipt of fees on insurance services provided to
the Banks customers. BASIS OF PRESENTATION The condensed consolidated financial statements of the Corporation include the
accounts of Monarch Community Bank, Community Services Group, and First
Insurance Agency. All significant intercompany balances and transactions have
been eliminated in consolidation. The condensed consolidated financial
statements for interim periods are unaudited; however, in the opinion of the
Corporations management, all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the Corporations financial
position and results of operations have been included. The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Actual results
could differ from those estimates and assumptions. The accompanying financial statements have been prepared in accordance with the
instructions for Form 10-QSB and, therefore, do not include all information and
footnotes required by generally accepted accounting principles in annual
consolidated financial statements. These condensed consolidated financial
statements should be read in conjunction with the Corporations Form 10-KSB for
the year ended December 31, 2003 filed with the Securities and Exchange
Commission. The results of operations for the three and nine month periods ended September
30, 2004 are not necessarily indicative of the results to be expected for the
full year period. 5




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EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares
outstanding during each period. Diluted earnings per share show the dilutive
effect of stock-based compensation. Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    EndedSept 30, 2004
    
    Sept 30, 2003
    
    Sept 30, 2004
    
    Sept 30, 2003The weighted average share reconciliation is as follows:Weighted
average shares outstanding
    
    
    2,709,704
    
    
    
    2,403,250
    
    
    
    2,589,744
    
    
    
    2,366,463Less: Average nonvested RRP shares
    
    
    (68,135
    )
    
    
    (88,875
    )
    
    
    (75,225
    )
    
    
    (52,088
    )Weighted average for basic EPS
    
    
    2,641,569
    
    
    
    2,314,375
    
    
    
    2,514,519
    
    
    
    2,314,375Dilutive effect of restricted stock and stock options
    
    
    
    
    
    
    28,723
    
    
    
    
    
    
    
    2,542Weighted average for dilutive EPS
    
    
    2,641,569
    
    
    
    2,343,098
    
    
    
    2,514,519
    
    
    
    2,316,917
 STOCK-BASED COMPENSATION As permitted by SFAS No. 148,Accounting for Stock-Based Compensation, the
Corporation applies the provisions of APB No. 25. Accounting for Stock-Based
Compensation, for all employee stock option grants and has elected to disclose
pro forma net income and earnings per share amounts as if the fair value based
method has been applied in measuring compensation costs. The Corporations as reported and the pro forma information for the nine months
ended September 30, 2004 and 2003 is as follows: (Dollars in thousands, except per share data)
    
    September 30, 2004
    
    September 30, 2003As reported net income (loss) available to common shareholders
    
    $
    (61
    )
    
    $
    631Less: additional stock-based compensation determined
under the fair value method, net of tax
    
    
    (36
    )
    
    
    (12
    )Pro forma net income (loss)
    
    $
    (97
    )
    
    $
    619As reported earnings (loss) per share
    
    $
    (0.02
    )
    
    $
    0.27Pro forma earnings (loss) per share
    
    $
    (0.04
    )
    
    $
    0.27As reported earnings (loss) per diluted share
    
    $
    (0.02
    )
    
    $
    0.27Pro forma earnings (loss) per diluted share
    
    $
    (0.04
    )
    
    $
    0.27
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 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 6




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##### Table of Contents



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 are not likely to
present a material risk to the financial statements. In cases where estimates
or management judgment are required, internal controls and processes are
established to provide assurance that such estimates and management judgments
are materially correct to the best of managements knowledge. Allowance for Loan Losses. Accounting for loan classifications, accrual
status, and determination of the allowance for loan losses is based on
regulatory guidance. This guidance includes, but is not limited to, generally
accepted accounting principles, the uniform retail credit classification and
account management policy issued by the Federal Financial Institutions
Examination Council, and the joint policy statement on the allowance for loan
losses methodologies issued by the Federal Financial Institutions Examination
Council. 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, and other subjective factors. Purchase Price Allocation.The acquisition of MSB Financial, Inc. has been
accounted for using the purchase method. Accordingly the cost of the
acquisition has been allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of the acquisition. The excess
cost over the amounts assigned to assets acquired and liabilities assumed has
been recognized as Goodwill. Management obtained appraisals and valuations of
certain assets and liabilities from third party appraisers and financial
consultants to assist in its estimate of fair values of the assets acquired and
liabilities assumed. FINANCIAL CONDITION Total Assets Assets increased $77.4 million, or 38.1% to $280.6 million at September 30,
2004 compared to $203.1 million at December 31, 2003. The increase was the
result of the acquisition of MSB Financial, Inc assets of $97.4 million less
the $19.7 million in cash paid. Securities Securities totaled $17.2 million at September 30, 2004 compared to $22.9
million at December 31, 2003. The decrease was attributable to the maturity,
call and sale of securities as part of the ongoing management of the Banks
liquidity and investment portfolio. Loans The Banks net loan portfolio increased by $80.8 million, or 57.2%, from $141.2
million at December 31, 2003 to $222.0 million at September 30, 2004. The
following table presents information concerning the composition of our loan
portfolio in dollar amounts and in percentages as of the dates indicated: 7




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##### Table of Contents



September 30, 2004
    
    December 31, 2003Amount
    
    Percent
    
    Amount
    
    PercentReal Estate Loans:One-to four-family
    
    $
    141,315
    
    
    
    62.7
    %
    
    $
    93,056
    
    
    
    64.5
    %Multi-family
    
    
    3,574
    
    
    
    1.6
    
    
    
    485
    
    
    
    0.3Commercial
    
    
    41,492
    
    
    
    18.4
    
    
    
    22,728
    
    
    
    15.8Construction or development
    
    
    7,842
    
    
    
    3.5
    
    
    
    9,451
    
    
    
    6.5Total real estate loans
    
    
    194,223
    
    
    
    86.2
    
    
    
    125,720
    
    
    
    87.1Other loans:Consumer loans:Automobile
    
    
    2,655
    
    
    
    1.2
    
    
    
    1,546
    
    
    
    1.1Home equity
    
    
    15,000
    
    
    
    6.7
    
    
    
    9,613
    
    
    
    6.7Manufactured housing
    
    
    797
    
    
    
    0.3
    
    
    
    930
    
    
    
    0.6Other
    
    
    6,726
    
    
    
    3.0
    
    
    
    3,795
    
    
    
    2.6Total consumer loans
    
    
    25,178
    
    
    
    11.2
    
    
    
    15,884
    
    
    
    11.0Commercial Business Loans
    
    
    5,869
    
    
    
    2.6
    
    
    
    2,695
    
    
    
    1.9Total other loans
    
    
    31,047
    
    
    
    13.8
    
    
    
    18,579
    
    
    
    12.9Total Loans
    
    
    225,270
    
    
    
    100.0
    %
    
    
    144,299
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    2,441
    
    
    
    
    
    
    
    2,618Net deferred loan fees
    
    
    790
    
    
    
    
    
    
    
    454Loans in process
    
    
    
    
    
    
    
    
    
    
    2Total Loans, net
    
    $
    222,039
    
    
    
    
    
    
    $
    141,225
 These increases noted in the table above were due primarily to the acquisition
of MSB Financial. Notwithstanding the acquisition, the Bank did increase its
commercial real estate loans by $6.2 million thru new originations and the
conversion of a $3.2 million construction loan to permanent financing. The Bank
increased its consumer loans $2.5 million primarily in boat and recreational
vehicles loans resulting from the Banks indirect lending program. Management
expects future growth in the loan portfolio to come from increased originations
of commercial real estate and business loans as well as expanded geographic
outreach facilitated by the acquisition and introduction of online mortgage
origination. Deposits Total deposits increased $62.5 million, or 58.3%, from $107.2 million at
December 31, 2003 to $169.7 million at September 30, 2004. The acquisition of
MSB Financial provided $70.2 million in additional deposits consisting of $42.4
million of savings and checking accounts and $27.8 million in certificates of
deposit. This was offset by a decline in deposits since December 31, 2003 of
$8.6 million, primarily in brokered certificates of deposit of $5.4 million.
Balances in brokered deposits are managed to provide additional liquidity or
reduce excess liquidity depending on current conditions. Management expects
future deposit growth to come from increased sales and marketing efforts to
attract lower cost savings and checking accounts as well as product enhancement
including the introduction of internet banking. Federal Home Loan Bank Advances Federal Home Loan Bank (FHLB) advances increased $7.4 million as a result of
the acquisition. In an effort to manage our interest rate risk, the Bank has
utilized longer term (in excess of five year maturities) fixed rate FHLB
advances to extend the overall maturity of our liabilities. While the interest
rates paid on these advances are currently greater than those paid on certain
shorter term deposits, the longer-term advances allow the Bank to better match
the term of these advances against anticipated maturities of loans in an
attempt to reduce future interest rate risk. This strategy had a negative
impact on the Banks net interest margin for the nine months ended September
30, 2004 compared to the nine months ended September 30, 2003. The advances
assumed in the acquisition, while carrying a similar interest rate to the
Banks existing advances, has resulted in a reduction of the weighted average
remaining maturity
from 4.9 years to 4.1 years. Management continues to evaluate the potential
benefit of prepaying certain advances but has no specific plans to do so at
this time. See Net Interest Income discussion below. 8




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##### Table of Contents



Equity Total equity was $41.8 million at September 30, 2004 compared to $37.4 million
at December 31, 2003. This represents 14.9% and 18.4% of total assets at
September 30, 2004 and December 31, 2003, respectively. Equity increased $4.6
million due to the issuance of 310,951 shares of common stock in connection
with the acquisition of MSB Financial. Dividend payments reduced equity by
$391,000. Management considers its equity position to be strong and has no
plans or intentions to increase equity other than by continued profitable
operations. RESULTS OF OPERATIONS Net Interest Income Net interest income before the provision for loan losses for the quarter ended
September 30, 2004 totaled $2.2 million and represented an increase of $745,000
compared to the same period one year ago. The Corporations net interest margin
increased from 2.91% for the quarter ended September 30, 2003 to 3.52% for the
quarter ended September 30, 2004. The net interest margin for the three months
ended September 30, 2004 was positively impacted by the acquisition of lower
costing deposit accounts from MSB Financial as well as the relatively lower
balances kept by the Bank in federal funds sold and overnight deposits.
Interest income from loans represented 95.0% of total interest income for the
third quarter of 2004 compared to 92.6% for the same period in 2003. Net interest income before the provision for loan losses for the nine months
ended September 30, 2004 totaled $5.5 million and represented an increase of
$854,000, or 18.4%, compared to the same period a year ago. The Corporations
net interest margin increased from 3.16% for the nine months ended September
30, 2003 from 3.29% for the nine months ended September 30, 2004. The primary
reason for the increase in net interest margin was the lower cost liabilities
resulting from the acquisition of MSB Financial. 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 30,2004
    
    2003Average
    
    Interest
    
    
    
    
    
    Average
    
    InterestOutstanding
    
    Earned/
    
    Yield/
    
    Outstanding
    
    Earned/
    
    Yield/Balance
    
    Paid
    
    Rate
    
    Balance
    
    Paid
    
    Rate(Dollars in Thousands)Federal Funds sold and
Overnight deposit
    
    $
    10,947
    
    
    $
    90
    
    
    
    1.10
    %
    
    $
    23,706
    
    
    $
    195
    
    
    
    1.10
    %Investment securities
    
    
    19,368
    
    
    
    416
    
    
    
    2.86
    
    
    
    18,001
    
    
    
    343
    
    
    
    2.51Other securities
    
    
    3,900
    
    
    
    123
    
    
    
    4.20
    
    
    
    3,134
    
    
    
    111
    
    
    
    5.13Loans
    
    
    188,185
    
    
    
    9,511
    
    
    
    6.73
    
    
    
    150,887
    
    
    
    8,568
    
    
    
    7.59Total earning assets
    
    $
    222,401
    
    
    
    10,084
    
    
    
    6.04
    
    
    $
    195,728
    
    
    
    9,217
    
    
    
    6.30Demand and NOW accounts
    
    $
    22,606
    
    
    
    73
    
    
    
    .43
    
    
    $
    14,110
    
    
    
    58
    
    
    
    .55Money market accounts
    
    
    14,635
    
    
    
    124
    
    
    
    1.13
    
    
    
    10,036
    
    
    
    95
    
    
    
    1.27Savings deposit
    
    
    22,350
    
    
    
    85
    
    
    
    0.51
    
    
    
    16,083
    
    
    
    112
    
    
    
    .93Certificates of deposit
    
    
    77,055
    
    
    
    1,736
    
    
    
    3.00
    
    
    
    73,375
    
    
    
    1,925
    
    
    
    3.51FHLB advances
    
    
    61,680
    
    
    
    2,573
    
    
    
    5.56
    
    
    
    56,987
    
    
    
    2,388
    
    
    
    5.60Total interest-bearing liabilities
    
    $
    198,327
    
    
    
    4,591
    
    
    
    3.08
    
    
    $
    170,591
    
    
    
    4,578
    
    
    
    3.59Net interest income
    
    
    
    
    
    $
    5,493
    
    
    
    
    
    
    
    
    
    
    $
    4,639Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    
    
    
    
    
    
    
    
    2.71
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.29
    %
    
    
    
    
    
    
    
    
    
    
    3.16
    %
 The recent increase in short term market interest rates is expected to improve
the Banks net interest margin as adjustable rate loans reprice to higher rates
more quickly than the Banks liabilities. Provision for Loan Losses The provision for loan losses was $375,000 for the quarter ended September 30,
2004 compared to $135,000 for the quarter ended September 30, 2003. The
increased provision in 2004 was due to management identifying certain
commercial loans as watch credits
and the resulting impact on the determination of the adequacy of the allowance
for loan losses. Net charge-offs for the quarter ended September 30, 2004
totaled $82,000 compared to $135,000 for the quarter ended September 30, 2003. 9




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The provision for loan losses for the nine months ended September 30, 2004 was
$825,000 compared to $1.2 million for the same period in 2003. Net charge-offs for the nine months ended September 30, 2004 totaled $1.5
million compared to $421,000 for the six months ended September 30, 2003.
During 2004 the Bank charged off $1.2 million of a $1.6 million loan
relationship secured by a commercial building in southwest Michigan. The
relationship includes two loans which were made to fund the construction of a
commercial building in southwest Michigan that was completed in 2003. Both
loans were placed into non-accrual status as of June 30, 2003. In June 2004,
the Bank foreclosed on the property in an attempt to satisfy the debt. The
foreclosure is subject to redemption rights by the borrower and the Bank does
not expect to take possession of the property until late in 2004 or early 2005.
The property is recorded in Real Estate in Judgment at September 30, 2004. The allowance for loan losses was $2,441,000 at September 30, 2004 and
$2,618,000 at December 31, 2003. The following table presents non-performing assets and certain asset quality
ratios at September 30, 2004 and December 31, 2003. September 30, 2004
    
    December 31, 2003(Dollars in thousands)Non-performing loans
    
    $
    2,534
    
    
    $
    3,746Real estate in judgment
    
    
    1,206
    
    
    
    1,082Foreclosed and repossessed assets
    
    
    1,999
    
    
    
    1,142Total non-performing assets
    
    $
    5,739
    
    
    $
    5,970Non-performing loans to total loans
    
    
    1.14
    %
    
    
    2.60
    %Non-performing assets to total assets
    
    
    2.05
    %
    
    
    2.92
    %Allowance for loan losses to non-performing loans
    
    
    96.3
    %
    
    
    69.9
    %Allowance for loan losses to loans receivable
    
    
    1.09
    %
    
    
    1.81
    %
 The appropriateness of the allowance for loan losses is reviewed by management
based upon our evaluation of then-existing economic and business conditions
affecting our key lending areas and other conditions, such as credit quality
trends (including trends in delinquencies, nonperforming loans and foreclosed
assets expected to result from existing conditions), collateral values, loan
volumes and concentrations, specific industry conditions within portfolio
segments and recent loss experience in particular segments of the portfolio
that existed as of the balance sheet date and the impact that these conditions
were believed to have had on the collectibility of the loan. Senior management
reviews these conditions quarterly. To the extent that any of these conditions
is evidenced by a specifically identifiable problem credit or portfolio segment
as of the evaluation date, managements estimate of the effect of this
condition may be reflected as a specific allowance applicable to this credit or
portfolio segment. The allowance for loan losses is based on estimates of losses inherent in the
loan portfolio. Actual losses can vary significantly from the estimated
amounts. Our methodology as described permits adjustments to any loss factor
used in the computation of the formula allowance in the event that, in
managements judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon
any more recent information that has become available. Noninterest Income Noninterest income increased by $320,000 to $1.1 million for the quarter ended
September 30, 2004 as compared to $750,000 for the quarter ended September 30,
2003. Gain on sale of loans decreased to $245,000 compared to $452,000 for the
same period a year ago as mortgage banking activities were reduced
significantly in 2004 compared to the same period in 2003. Management believes
this trend will continue for the balance of 2004. Fees and service charges
increased $342,000 and loan servicing fees increased $63,000 for the quarter
ended September 30, 2004 compared to the same period in 2003 and were primarily
the result of adding the operations of MSB Financial. Fees and service charges
on deposit accounts have increased significantly due to the number of savings
and checking accounts acquired. Also, the Bank recently began an overdraft
protection program which is expected to further increase fees in the future.
Other income increased $120,000 to $125,000 for the quarter ended September 30,
2004 as compared to $5,000 for the quarter ended September 30, 2003. This
increase was due to gains on sale of real estate owned increasing $62,000 from
the same period a
year ago. Investment service income of $16,000 and earnings on bank owned life
insurance of $20,000 also contributed to the increase in other income. 10




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For the nine months ended September 30, 2004 noninterest income increased
$78,000 to $2.5 million from $2.4 million for the nine months ended September
30, 2003. Gain on sale of loans decreased to $800,000 from $1.5 million for the
same period a year ago. Fees and service charges increased $537,000, loan
servicing fees increased $122,000 and other income increased $219,000 for the
nine months ended September 30, 2004 as compared to the same period in 2003,
for the reasons discussed above. Noninterest Expense Noninterest expense increased by $1.5 million for the quarter ended September
30, 2004 compared to the quarter ended September 30, 2003. The primary reason
for the increase was the additional 30 staff members and 3 branches of the
Marshall operations and the additional expenses incurred in continuing the
integration of staff and data processing systems. The Bank also recorded
severance pay of $525,000 in connection with the termination of its former
President and CEO. This expense is included in salaries and employee benefits.
Professional fees increased $ 82,000 due to increased legal, audit, stock
transfer and employee recruiting expense. Other general and administrative
expenses included an increase in real estate owned expense of $48,000 for the
three months ended September 30, 2004 compared to the same period a year ago as
the Bank continues to have a relatively high number of foreclosed properties.
Amortization of the core deposit intangible amounted to $109,000 compared to $0
for the quarter ended September 30, 2003. For the nine months ended September 30, 2004 noninterest expense increased $2.1
to $7.2 million as compared to $5.1 million for the nine months ended September
30, 2003. This increase was largely attributable to the same reasons discussed
above. Federal Income Tax Expense The provision for federal income tax was negative $20,000 for the nine months
ended September 30, 2004 due to the net loss experienced during that period. LIQUIDITY The Banks liquidity, represented by cash and cash equivalents, 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, Monarch maintains a
strategy of investing in various investments and lending products. Monarch
uses its sources of funds primarily to meet its ongoing commitments, to pay
maturing certificates of deposit and savings withdrawals and to fund loan
commitments. Certificates of deposit scheduled to mature in one year or less at
September 30, 2004 totaled $51.5 million. Based on historical experience,
management believes that a significant portion of these certificates of deposit
will remain with Monarch as long as the Bank pays a competitive rate of
interest. 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 Monarch to offer
interest rates higher than those of the competition. At September 30, 2004 and
based on current collateral levels, Monarch could borrow an additional $21.3
million from the Federal Home Loan Bank at prevailing interest rates. This
borrowing capacity can be increased in the future if Monarch pledges additional
collateral to the Federal Home Loan Bank. Monarch 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 $15.5 million during
the nine month period ended September 30, 2004 compared to a $9.0 million
increase for the same period in 2003. The acquisition of MSB Financial used
$12.8 million in cash which was partially offset by issuance of common stock of
$4.6 million. Loan originations, net of payments, used $9.8 million for the
nine months ended September 30, 2004 compared to $4.1 million for the same
period a year ago. Cash used by deposit runoff totaled $7.7 million in 2004
while providing $4.4 million for the same period in 2003. During the nine
months ended September 30, 2003, management structured deposit rates to attract
certificates of deposit as it was believed that market interest rates had
bottomed out. During the nine months ended September 30, 2004 management
reversed this strategy to allow certificate balances to decline. The decline in
funds was offset by the sale and maturity of $12.4 million of available for
sale securities during the nine months ended September 30, 2004. A $5 million
FHLB advance provided cash for the nine months ended September 30, 2003 while
only $1 million was borrowed for the same period in 2004. 11




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##### Table of Contents



OFF-BALANCE SHEET ARRANGEMENTS At September 30, 2004, the total approved loan origination commitments
outstanding including the unadvanced portion of construction loans amounted to
$4.5 million. Unused commercial and consumer lines of credit were $13.7
million as of September 30, 2004 and letters of credit were $148,000 as of that
date. CAPITAL RESOURCES The Bank is subject to various regulatory capital requirements. As of
September 30, 2004, the Bank met the regulatory standards to be classified as
well capitalized. The Banks regulatory capital ratios as of September 30,
2004 were as follows: tangible capital, 10.04%; leverage capital, 10.04%; and
total risk-based capital, 15.53%. The regulatory capital requirements to be
considered well capitalized are 3.0%, 5.0%, and 10.0%, respectively. The Bank
remains well capitalized after the consummation of the merger with MSB
Financial, Inc., which was completed on April 15, 2004, and therefore
Management does not anticipate needing to seek additional capital in the
foreseeable future. 
 ITEM 3. CONTROLS AND PROCEDURES An evaluation of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act)) as of September 30, 2004, was carried out under the supervision and with
the participation of the Companys Chief Executive Officer, Chief Financial
Officer and several other members of the Companys senior management. The
Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures as currently in effect are,
EXCEPT AS NOTED BELOW, effective in ensuring that the information required to
be disclosed by the Company in the reports it files or submits under the
Exchange Act is (i) accumulated and communicated to the Companys management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within time
periods specified in the SECs rules and forms. There have been no changes in
our internal control over financial reporting (as defined in Rule 13a-15(f) of
the Exchange Act) that occurred during the quarter ended September 30, 2004,
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. During the quarter ended September 30, 2004, management determined that
controls relating to the ongoing monitoring of the Banks Commercial Loan
portfolio were not sufficient to ensure that a deterioration of credit quality
would be disclosed in a timely manner within the Banks financial statements.
Management has since taken steps to ensure the Commercial Loan portfolio is
monitored properly and that deterioration of credit quality, should it occur,
would be properly disclosed in the financial statement. The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material financial and non-financial information concerning the
Companys business. While the Company believes the present design of its
disclosure controls and procedures is effective to achieve its goal, future
events affecting its business may cause the Company to modify its disclosure
controls and procedures. 12




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##### Table of Contents



OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS On September 27, 2004, John R. Schroll, former President and CEO of the
Corporation filed suit in the Circuit Court of Branch County, Michigan seeking
an injunction against the Board of Directors of the Corporation to prevent the
Board from terminating Schrolls employment for cause. The suit also seeks to
compel arbitration regarding the consideration of Schrolls employment
agreement with Monarch Community Bank. 
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None 
 Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 
 Item 5. OTHER INFORMATION Not applicable 
 Item 6. EXHIBITS See the index to exhibits. 13




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##### Table of Contents



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 15, 2004
    By:
    /s/ Donald L. DenneyDonald L. DenneyPresident and Chief Executive Officer Date: November 15, 2004
    And:
    /s/ William C. KurtzWilliam C. KurtzSenior Vice President and Treasurer 14




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INDEX TO EXHIBITS Exhibit No.
    
    Description of Exhibit31.1
    
    Rule 13a-14(a) Certification of the Companys President and Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of the Companys Chief Financial Officer.32
    
    Section 1350 Certification.
 15