##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly
period ended March 31, 2005
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act
  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. employerof incorporation or organization)
    
    identification no.)
 375 North Willowbrook Road, Coldwater, MI 49036(Address of principal executive offices) 517-278-4566(Registrants telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes: þ No: o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes: o No: þ State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practical date: At April 19, 2005, there were 2,709,220 shares of the issuers Common Stock
outstanding.




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Monarch Community Bancorp, Inc.
Index  
 PART I  FINANCIAL INFORMATIONItem 1  Condensed Financial Statements:Condensed Consolidated Balance Sheets  March 31, 2005 and
December 31, 2004
    
    
    1Condensed Consolidated Statements of Income  Three Months
Ended March 31, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Changes in Stockholders Equity 
Three Months Ended March 31, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Cash Flow  Three Months ended
March 31, 2005 and 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    6 - 11Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    12Item 4 - Controls and Procedures
    
    
    13PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    14Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    14Item 3  Defaults Upon Senior Securities
    
    
    14Item 4  Submission of Matters to a Vote of Security Holders
    
    
    14Item 5  Other Information
    
    
    14Item 6  Exhibits
    
    
    14SIGNATURES
    
    
    15Rule 13a-14(a) Certification of the Company's President and Chief Financial OfficerRule 13a-14(a) Certification of the Company's President and Chief Financial OfficerSection 1350 Certification




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##### Table of Contents



PART IFINANCIAL INFORMATION 
 Item 1. CONDENSED FINANCIAL STATEMENTS Monarch Community Bancorp, Inc 
  (unaudited)March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands, except per share data)ASSETSCash and due from banks
    
    $
    7,577
    
    
    $
    9,529Federal Home Loan Bank overnight time and other interest bearing deposits
    
    
    9,627
    
    
    
    6,120Total cash and cash equivalents
    
    
    17,204
    
    
    
    15,649Securities-Available for sale
    
    
    13,282
    
    
    
    8,057Securities-Held to maturity
    
    
    262
    
    
    
    267Other investments
    
    
    4,780
    
    
    
    4,720Real Estate
Investment - Limited partnership, at equity
    
    
    1,242
    
    
    
    1,278Loans held for sale
    
    
    1,164
    
    
    
    361Loans, net of allowance for loan losses
    
    
    217,443
    
    
    
    219,317Accrued interest and late charges
    
    
    1,084
    
    
    
    1,138Foreclosed assets, net
    
    
    2,650
    
    
    
    1,960Premises and equipment
    
    
    6,155
    
    
    
    6,444Deferred income taxes
    
    
    668
    
    
    
    612Goodwill
    
    
    9,606
    
    
    
    9,606Core deposit
    
    
    1,642
    
    
    
    1,752Other assets
    
    
    4,853
    
    
    
    4,287Total assets
    
    $
    282,035
    
    
    $
    275,448LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    7,177
    
    
    $
    5,198Interest-bearing
    
    
    169,553
    
    
    
    162,535Total deposits
    
    
    176,730
    
    
    
    167,733Federal Home Loan Bank advances
    
    
    62,405
    
    
    
    65,955Accrued expenses and other liabilities
    
    
    3,315
    
    
    
    2,341Total liabilities
    
    
    242,450
    
    
    
    236,029Commitments and contingent liabilities
    
    
    
    
    
    
    Stockholders equityCommon stock-$0.01 par value authorized-20,000,000 shares
issued and outstanding-2,709,220 shares at March 31, 2005
and 2,709,220 shares at December 31, 2004
    
    
    27
    
    
    
    27Additional paid in capital
    
    
    28,059
    
    
    
    28,059Retained earnings
    
    
    13,806
    
    
    
    13,529Accumulated other comprehensive income
    
    
    (109
    )
    
    
    2Unearned Compensation
    
    
    (2,198
    )
    
    
    (2,198
    )Total stockholders equity
    
    
    39,585
    
    
    
    39,419Total liabilities and stockholders equity
    
    $
    282,035
    
    
    $
    275,448
 See accompanying notes to condensed consolidated financial statements 1




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Monarch Community Bancorp, Inc 
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2005
    
    
    2004(Dollars in thousands, except per share data)Interest IncomeLoans, including fees
    
    $
    3,563
    
    
    $
    2,541Investment securities
    
    
    156
    
    
    
    156Federal funds sold and overnight deposits
    
    
    47
    
    
    
    46Total interest income
    
    
    3,766
    
    
    
    2,743Interest ExpenseDeposits
    
    
    724
    
    
    
    606Federal Home Loan bank advances
    
    
    822
    
    
    
    798Total interest expense
    
    
    1,546
    
    
    
    1,404Net Interest Income
    
    
    2,220
    
    
    
    1,339Provisions for Loan Losses
    
    
    (385
    )
    
    
    Net Interest Income after Provision
for Loan Losses
    
    
    2,605
    
    
    
    1,339Noninterest IncomeFees and service charges
    
    
    466
    
    
    
    226Loan servicing fees
    
    
    113
    
    
    
    57Net gain on sale of loans
    
    
    137
    
    
    
    168Other income (loss)
    
    
    (211
    )
    
    
    34Total noninterest income
    
    
    505
    
    
    
    485Noninterest ExpensesSalaries and employees benefits
    
    
    1,277
    
    
    
    938Occupancy and equipment
    
    
    291
    
    
    
    197Data processing
    
    
    172
    
    
    
    99Mortgage banking
    
    
    104
    
    
    
    35Professional fees
    
    
    137
    
    
    
    99Amortization of core deposit intangible
    
    
    110
    
    
    
    NOW account processing
    
    
    49
    
    
    
    32ATM/Debit card processing
    
    
    51
    
    
    
    22Foreclosed property expense
    
    
    36
    
    
    
    46Other general and administrative
    
    
    319
    
    
    
    209Total noninterest expense
    
    
    2,546
    
    
    
    1,677Income - Before Income Taxes
    
    
    564
    
    
    
    147Income Taxes
    
    
    152
    
    
    
    44Net Income
    
    $
    412
    
    
    $
    103Earnings Per ShareBasic
    
    $
    0.16
    
    
    $
    0.04Diluted
    
    $
    0.15
    
    
    $
    0.04
 See accompanying notes to condensed consolidated financial statements 2




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Monarch Community Bancorp, Inc 
  Common Stock
    
    
    
    
    
    
    
    
    
    
    AccumulatedNumber
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Otherof
    
    
    
    
    
    
    Paid in
    
    
    Retained
    
    
    Comprehensive
    
    
    UnearnedShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Compensation
    
    
    Total(Dollars in thousands, except per share data)Balance, January 1, 2004
    
    
    2,399
    
    
    $
    24
    
    
    $
    23,352
    
    
    $
    16,567
    
    
    $
    75
    
    
    $
    (2,588
    )
    
    $
    37,430Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    103Change in unrealized gain
on securities available
for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112Dividends paid ($0.05/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    
    
    
    
    
    
    
    
    (120
    )Balance, March 31, 2004
    
    
    2,399
    
    
    $
    24
    
    
    $
    23,352
    
    
    $
    16,550
    
    
    $
    84
    
    
    $
    (2,588
    )
    
    $
    37,422Balance, January 1, 2005
    
    
    2,709
    
    
    $
    27
    
    
    $
    28,059
    
    
    $
    13,529
    
    
    $
    2
    
    
    $
    (2,198
    )
    
    $
    39,419Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    
    
    
    
    412Change in unrealized gain
(loss) on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    (111
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301Dividends paid ($0.05/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135
    )
    
    
    
    
    

    
    
    
    
    
    (135
    )Balance, March 31, 2005
    
    
    2,709
    
    
    $
    27
    
    
    $
    28,059
    
    
    $
    13,806
    
    
    $
    (109
    )
    
    $
    (2,198
    )
    
    $
    39,585
 See accompanying notes to condensed consolidated financial statements 3




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Monarch Community Bancorp, Inc 
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2005
    
    
    2004(Dollars in thousands)Cash Flows from Operating ActivitiesNet Income
    
    $
    412
    
    
    $
    103Adjustments to reconcile net income to net cash from operating activities:Depreciation
    
    
    154
    
    
    
    101Provision for Loan Losses
    
    
    (385
    )
    
    
    Amortization
    
    
    128
    
    
    
    117Stock dividends on other securities
    
    
    (50
    )
    
    
    (38
    )(Gain) Loss on sale of foreclosed assets
    
    
    
    
    
    
    (1
    )Mortgage loans originated for sale
    
    
    (6,814
    )
    
    
    (7,102
    )Proceeds from sale of mortgage loans
    
    
    6,148
    
    
    
    5,633Gain on sale of mortgage loans
    
    
    (137
    )
    
    
    (168
    )(Gain) Loss on disposal of premises and equipment
    
    
    (12
    )
    
    
    Net change in:Deferred loan fees
    
    
    28
    
    
    
    (12
    )Accrued interest receivable
    
    
    54
    
    
    
    8Other assets
    
    
    (593
    )
    
    
    (683
    )Accrued expenses and other liabilities
    
    
    974
    
    
    
    930Net cash provided by (used in) operating activities
    
    
    (93
    )
    
    
    (1,112
    )Cash Flows from Investing ActivitiesProceeds from maturities of HTM securities
    
    
    75
    
    
    
    5Purchases of HTM securities
    
    
    (10
    )
    
    
    Proceeds from sale and maturities of AFS securities
    
    
    
    
    
    
    1,565Purchases of available for sale securities
    
    
    (5,469
    )
    
    
    (1,499
    )Proceeds from maturities of other securities
    
    
    
    
    
    
    5Loan originations and principal collections, net
    
    
    1,392
    
    
    
    (1,960
    )Proceeds from sale of foreclosed assets
    
    
    149
    
    
    
    496Proceeds from sale of premises and equipment
    
    
    204
    
    
    
    Purchases of premises and equipment
    
    
    (57
    )
    
    
    (26
    )Net cash provided by (used in) investing activities
    
    
    (3,716
    )
    
    
    (1,414
    )Cash Flows from Financing ActivitiesNet increase (decrease) in deposits
    
    
    8,997
    
    
    
    641Repayment of FHLB advances
    
    
    (3,498
    )
    
    
    Issuance of dividend
    
    
    (135
    )
    
    
    (120
    )Net cash provided by (used in) financing activities
    
    
    5,364
    
    
    
    521Net increase (decrease) in cash and cash equivalents
    
    
    1,555
    
    
    
    (2,005
    )Cash and cash equivalents -January 1
    
    
    15,649
    
    
    
    27,331Cash and cash equivalents -March 31

    
    $
    17,204
    
    
    $
    25,326Supplemental Cash Flow Information:Cash paid for interest
    
    
    1,609
    
    
    
    1,413Cash paid for income taxes
    
    
    
    
    
    
    Noncash
investing activity - loans transferred to foreclosed assets
    
    
    839
    
    
    
    525
 See accompanying notes to condensed consolidated financial statements 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 the acquisition of MSB Financial, Inc., parent company
of Marshall Savings Bank. Accordingly, MSB Financial was merged with and into Monarch Community
Bancorp, Inc. On June 7, 2004, Marshall Savings Bank was merged with and into Monarch Community
Bank. The Corporation issued a total of 310,951 shares of its common stock and paid cash of $19.7
million to former MSB Financial stockholders. The cash paid in the transaction came from the
Corporations existing liquidity. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase
accounting fair value adjustments are being amortized under various methods and over lives of the
corresponding assets and liabilities. Goodwill recorded for the acquisition amounted to $9.6
million. A Core Deposit Intangible of $2.1 million was recorded as part of the acquisition and is
being amortized on an accelerated basis over a period of 9.5 years. Monarch Community Bank provides a broad range of banking services to its primary market area of
Branch, Calhoun and Hillsdale counties in Michigan. The Bank operates six full service offices and
one drive-through only office. The Bank owns 100% of Community Services Group, Inc., which invests
in other entities, including 100% ownership of First Insurance Agency, a minority ownership in a
title agency, and a majority ownership in a limited liability company that reinsures private
mortgage insurance. First Insurance Agency is a licensed insurance agency established to allow for
the receipt of fees on insurance services provided to the Banks customers. BASIS OF PRESENTATION The condensed consolidated financial statements of the Corporation include the accounts of Monarch
Community Bank, Community Services Group, and First Insurance Agency. All significant intercompany
balances and transactions have been eliminated in consolidation. The condensed consolidated
financial statements for interim periods are unaudited; however, in the opinion of the
Corporations management, all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the Corporations financial position and results of operations have been
included. The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the
financial statements. Actual results could differ from those estimates and assumptions. The accompanying financial statements have been prepared in accordance with the instructions for
Form 10-Q and, therefore, do not include all information and footnotes required by generally
accepted accounting principles in annual consolidated financial statements. These condensed
consolidated financial statements should be read in conjunction with the Corporations Form 10-KSB
for the year ended December 31, 2004 filed with the Securities and Exchange Commission. The results of operations for the three month period ended March 31, 2005 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. The
weighted average share reconciliation is as follows: Three Months
    
    
    Three MonthsEnded
    
    
    EndedMar 31, 2005
    
    
    Mar 31, 2004Weighted average shares outstanding
    
    
    2,709,220
    
    
    
    2,399,550Less: Average nonvested RRP shares
    
    
    (67,651
    )
    
    
    (85,175
    )Weighted average for basic EPS
    
    
    2,641,569
    
    
    
    2,314,375Dilutive effect of restricted stock and stock options
    
    
    36,270
    
    
    
    82,692Weighted average for dilutive EPS
    
    
    2,677,839
    
    
    
    2,397,067
 STOCK-BASED COMPENSATION The Corporation accounts for stock option plans using the intrinsic value method. No compensation
cost related to stock options was recognized during 2005 or 2004, as all options granted had an
exercise price equal to or greater than the market price of the underlying common stock at the date
of the grant. Had compensation cost for stock options been measured using the fair value method,
the Corporations net income and basic and diluted earnings per share would have been the pro forma
amounts indicated below (000s omitted except per share data): Three months endedMarch 31,
    
    
    March 31,2005
    
    
    2004As reported net income
    
    $
    412
    
    
    $
    103less: additional stock-based compensation determined
under the fair value method, net of tax
    
    
    22
    
    
    
    12$
    390
    
    
    $
    91As reported earnings per share
    
    $
    0.16
    
    
    $
    0.04Proforma earnings per share
    
    $
    0.15
    
    
    $
    0.04As reported earnings per diluted share
    
    $
    0.15
    
    
    $
    0.04Proforma earnings per diluted share
    
    $
    0.15
    
    
    $
    0.04
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed consolidated
financial statements of the Corporation and the accompanying notes. 6




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The Corporation is not aware of any market or institutional trends, events, or circumstances that
will have or are likely to have a material effect on liquidity, capital resources, or results of
operations except as discussed herein. Also, the Corporation is not aware of any current
recommendations by regulatory authorities that will have such effect if implemented. FORWARD-LOOKING STATEMENTS In addition to historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties. All statements regarding the expected financial
position, business and strategies are forward-looking statements and the Corporation intends for
them to be covered by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. The words anticipates, believes,
estimates, seeks, expects, plans, intends, and similar expressions, as they relate to the
Corporation or management, are intended to identify forward-looking statements. The Corporation
believes that the expectations reflected in these forward-looking statements are reasonable based
on our current beliefs and assumptions; however, these expectations may prove to be incorrect.
Factors which could have a material adverse effect on our operations include, but are not limited
to, changes in interest rates, changes in the relative difference between short and long-term
interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, including levels of
non-performing assets, demand for loan products, deposit flows, competition, demand for financial
services in our market area, our operating costs and accounting principles and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking statements and you
should not rely too much on these statements. CRITICAL ACCOUNTING POLICIES The nature of the financial services industry is such that, other than described below, the use of
estimates and management judgment is not likely to present a material risk to the financial
statements. In cases where estimates or management judgment are required, internal controls and
processes are established to provide assurance that such estimates and management judgments are
materially correct to the best of managements knowledge. Allowance for Loan Losses. Accounting for loan classifications, accrual status, and determination
of the allowance for loan losses is based on regulatory guidance. This guidance includes, but is
not limited to, generally accepted accounting principles, the uniform retail credit classification
and account management policy issued by the Federal Financial Institutions Examination Council, the
joint policy statement on the allowance for loan losses methodologies issued by the Federal
Financial Institutions Examination Council and guidance issued by the Securities and Exchange
Commission. Accordingly, the allowance for loan losses includes a reserve calculation based on an
evaluation of loans determined to be impaired, risk ratings, historical losses, loans past due,
collateral values and cost of disposal and other subjective factors. Goodwill.The original value of Goodwill was determined by allocating the purchase price to the
estimated fair value of assets acquired and liabilities assumed. Periodically, Goodwill is tested
for impairment in accordance with SFAS No. 142. This test involves calculating the estimated fair
value of the reporting unit. Thus, the carrying value of Goodwill is subject to a high degree of
estimation and management judgment. FINANCIAL CONDITION Total Assets
Assets increased $6.6 million, or 2.4% to $282.0 million at March 31, 2005 compared to $275.4
million at December 31, 2004. Securities
Securities increased to $13.5 million at March 31, 2005 compared to $8.3 million at December 31,
2004. The increase was attributable to the purchase of securities as part of the ongoing
management of the Banks liquidity and investment portfolio. Loans
The Banks net loan portfolio decreased by $1.9 million, or 1%, from $219.3 million at December 31,
2004 to $217.4 million at March 31, 2005. The following table presents information concerning the
composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated: 7




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March 31, 2005
    
    
    December 31, 2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Real Estate Loans:One-to four-family
    
    $
    140,916
    
    
    
    63.0
    %
    
    $
    141,251
    
    
    
    62.4
    %Multi-family
    
    
    3,750
    
    
    
    1.7
    
    
    
    4,042
    
    
    
    1.8Commercial
    
    
    41,766
    
    
    
    18.7
    
    
    
    42,746
    
    
    
    18.9Construction or development
    
    
    7,415
    
    
    
    3.3
    
    
    
    8,853
    
    
    
    3.9Total real estate loans
    
    
    193,847
    
    
    
    86.6
    
    
    
    196,892
    
    
    
    86.9Other loans:Consumer loans:Automobile
    
    
    2,596
    
    
    
    1.2
    
    
    
    2,631
    
    
    
    1.2Home equity
    
    
    14,495
    
    
    
    6.5
    
    
    
    14,234
    
    
    
    6.3Manufactured housing
    
    
    788
    
    
    
    0.4
    
    
    
    784
    
    
    
    0.3Other
    
    
    6,918
    
    
    
    3.1
    
    
    
    6,645
    
    
    
    2.9Total consumer loans
    
    
    24,797
    
    
    
    11.1
    
    
    
    24,294
    
    
    
    10.7Commercial Business Loans
    
    
    5,099
    
    
    
    2.3
    
    
    
    5,330
    
    
    
    2.4Total other loans
    
    
    29,896
    
    
    
    13.4
    
    
    
    29,624
    
    
    
    13.1Total Loans
    
    
    223,743
    
    
    
    100.0
    %
    
    
    226,516
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    5,520
    
    
    
    
    
    
    
    6,385Net deferred loan fees
    
    
    780
    
    
    
    
    
    
    
    808Loans in process
    
    
    
    
    
    
    
    
    
    
    6Total Loans, net
    
    $
    217,443
    
    
    
    
    
    
    $
    219,317
 The decreases noted in the table above were due to repayments on existing loans exceeding new
loan production including payoffs of certain problem loans that management encouraged. Management
expects future growth in the loan portfolio to come from increased originations of commercial real
estate and business loans as well as expanded geographic outreach facilitated by the acquisition.
The introduction of online mortgage origination is expected to expand the Banks mortgage lending
activities within its current market area by offering convenience to borrowers and realtors and may
lead to some originations in areas contiguous to the Banks current market. Deposits
Total deposits increased $9.0 million, or 5.4%, from $167.7 million at December 31, 2004 to $176.7
million at March 31, 2005. The increase consisted of a $3.3 million increase in checking and
savings accounts and a $5.7 million increase in certificates of deposit. Of the increase in
certificates of deposit, $2.0 million was in the form of brokered deposits. Brokered deposits have
been utilized to provide additional liquidity or reduce excess liquidity depending on current
conditions. 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 decreased $3.6 million from December 31, 2004 to March 31,
2005.The decrease was the result of the Bank repaying maturing advances. Management is attempting
to reduce it reliance on borrowed funds through the growth of deposits but should this strategy not
succeed management anticipates future borrowings to fund loan growth. See Net Interest Income
discussion below. Equity
Total equity was $39.6 million at March 31, 2005 compared to $39.4 million at December 31, 2004.
This represents 14.0% and 14.3% of total assets at March 31, 2005 and December 31, 2004,
respectively. The increased equity was the result of earnings for the quarter exceeding the
dividend payment. Management considers its equity position to be strong and has no plans or
intentions to increase equity other than by continued profitable operations. 8




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##### Table of Contents



RESULTS OF OPERATIONS Net Interest Income
Net interest income before the provision for loan losses for the quarter ended March 31, 2005
totaled $2.2 million and represented an increase of $881,000 compared to the same period one year
ago. The Corporations net interest margin increased from 2.87% for the quarter ended March 31,
2004 to 3.61% for the quarter ended March 31, 2005. The net interest margin for the three months
ended March 31, 2005 was positively impacted by the acquisition of lower costing deposit accounts
from MSB Financial as well as a general increase in short term market rates from the levels of a
year ago. Interest income from loans represented 94.6% of total interest income for the first
quarter of 2005 compared to 92.6% for the same period in 2004. The following table presents, for the periods indicated, the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the interest expense on
average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made. Three Months Ended March 31,2005
    
    
    2004Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate(dollars in thousands)Fed Funds and overnight deposits
    
    $
    6,603
    
    
    $
    48
    
    
    
    2.95
    %
    
    $
    19,339
    
    
    $
    46
    
    
    
    0.96
    %Investment securities
    
    
    11,553
    
    
    
    105
    
    
    
    3.69
    
    
    
    19,342
    
    
    
    119
    
    
    
    2.50Other securities
    
    
    4,708
    
    
    
    50
    
    
    
    4.31
    
    
    
    3,011
    
    
    
    37
    
    
    
    4.98Loans receivable
    
    
    222,837
    
    
    
    3,563
    
    
    
    6.48
    
    
    
    144,784
    
    
    
    2,541
    
    
    
    7.12Total earning assets
    
    $
    245,701
    
    
    $
    3,766
    
    
    
    6.22
    
    
    $
    186,476
    
    
    $
    2,743
    
    
    
    5.97Demand and NOW Accounts
    
    $
    33,409
    
    
    $
    20
    
    
    
    0.24
    
    
    $
    13,322
    
    
    $
    14
    
    
    
    0.43Money market accounts
    
    
    18,482
    
    
    
    47
    
    
    
    1.03
    
    
    
    10,631
    
    
    
    33
    
    
    
    1.26Savings accounts
    
    
    29,167
    
    
    
    31
    
    
    
    0.43
    
    
    
    15,906
    
    
    
    17
    
    
    
    0.43Certificates of deposit
    
    
    88,585
    
    
    
    626
    
    
    
    2.87
    
    
    
    65,865
    
    
    
    542
    
    
    
    3.34Federal Home Loan Bank Advances
    
    
    65,169
    
    
    
    822
    
    
    
    5.12
    
    
    
    57,384
    
    
    
    798
    
    
    
    5.64Total interest bearing liabilities
    
    $
    234,812
    
    
    
    1,546
    
    
    
    2.67
    
    
    $
    163,108
    
    
    
    1,404
    
    
    
    3.49Net interest income
    
    
    
    
    
    $
    2,220
    
    
    
    
    
    
    
    
    
    
    $
    1,339Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.55
    %
    
    
    
    
    
    
    
    
    
    
    2.47
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.61
    %
    
    
    
    
    
    
    
    
    
    
    2.87
    %
 Provision for Loan Losses
The Bank reversed prior provision for loan losses of $385,000 for the quarter ended March 31, 2005
compared to $0 provision for the quarter ended March 31, 2004. The reversal of provisions was
possible due to the Bank receiving payoffs during the quarter on two loan relationships totaling
$1.5 million for which the bank had previously provided loan loss allowances of $535,000. Net
charge-offs for the quarter ended March 31, 2005 totaled $480,000 compared to $74,000 for the
quarter ended March 31, 2004. The increased level of charge offs in 2005 was the result of the Bank
continuing to aggressively deal with problem loans as evidenced by the increase in real estate in
judgment at March 31, 2005. The allowance for loan losses was $5,520,000 at March 31, 2005 and $6,385,000 at December 31, 2004. The following table presents non-performing assets and certain asset quality ratios at March 31,
2005 and December 31, 2004. March 31, 2005
    
    
    December 31, 2004(Dollars in thousands)Non-performing loans
    
    $
    6,881
    
    
    $
    4,231Real estate in judgment
    
    
    1,500
    
    
    
    726Foreclosed and repossessed assets
    
    
    1,176
    
    
    
    1,243Total non-performing assets
    
    $
    9,557
    
    
    $
    6,200
 9




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##### Table of Contents



March 31, 2005
    
    
    December 31, 2004(Dollars in thousands)Non-performing loans to total loans
    
    
    3.08
    %
    
    
    1.87
    %Non-performing assets to total assets
    
    
    3.39
    %
    
    
    2.23
    %Allowance for loan losses to non-performing loans
    
    
    80.2
    %
    
    
    150.9
    %Allowance for loan losses to loans receivable
    
    
    2.47
    %
    
    
    2.82
    %
 Non-performing loans increased $2.7 million to $6.9 million at March 31, 2005 compared to $4.2
million at December 31, 2004. The increase is the result of a loan relationship totaling $4.2
million which was classified as non-performing at March 31, 2005 but was considered performing at
December 31, 2004. Notwithstanding the relationships status as performing at December 31, 2004,
the Bank established a loss allowance of $2.1 million at December 31, 2004. 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 $20,000 to $505,000 for the quarter ended March 31, 2005 as
compared to $485,000 for the quarter ended March 31, 2004. Fees and service charges increased
$240,000, or 106.2%, due to the number of savings and checking accounts acquired. $174,000 of this
increase was due to increased overdraft fees. Loan servicing fees increased $56,000, or 98.3%, as a
result of the larger loan servicing portfolio created by the acquisition. Gain on sale of loans
decreased to $137,000 from $168,000 for the same period a year ago as mortgage banking activities
were reduced in 2005 compared to the same period in 2004. Management does not believe this downward
trend will continue in 2005, as it anticipates mortgage banking activities to be consistent with
2004 . Other income (loss) decreased $245,000 for the quarter ended March 31, 2005 as compared to
the quarter ended March 31, 2004. This decrease is due to a write down of $275,000 the Bank
experienced on a REO property it acquired along with MSB Financial. The property had been valued,
based on appraisal, at $775,000. Based on the lack of marketability of the property, management
recently agreed to accept a $500,000 offer on the property. The property has not been sold as of
March 31, 2005. Investment service income of $13,000 and earnings on bank owned life insurance of
$21,000 helped offset the write down of REO. These two income contributors were not present in
2004. Noninterest Expense
Noninterest expense increased by $869,000 for the quarter ended March 31, 2005 compared to the
quarter ended March 31, 2004. The primary reason for the increase was the additional 30 staff
members and 2 branches of the Marshall operations which were not part of Monarchs operations in
2004. Professional fees increased $ 38,000 due to increased supervisory examination expense,
employee recruiting expense and data processing consulting. Amortization of the core deposit
intangible amounted to $110,000 compared to $0 for the quarter ended March 31, 2004. Federal Income Tax Expense
The provision for federal income tax increased $108,000 for the three months ended March 31, 2005
compared to the same period a year ago due to the increased profits in 2005. LIQUIDITY The Banks liquidity, represented by cash, overnight funds and investments, is a product of our
operating, investing, and financing activities. The Banks primary sources of funds are deposits,
amortization, prepayments and maturities of outstanding loans, and funds provided from operations.
While scheduled payments from the amortization of loans are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The 10




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##### Table of Contents



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 March 31, 2005 totaled $53.5 million.
Management believes that a significant portion of these certificates of deposit will remain with
Monarch 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 Monarch to offer interest rates higher than those of the competition. At
March 31, 2005 and based on current collateral levels, Monarch could borrow an additional $17.8
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 increased by $1.6 million during the three month period
ended March 31, 2005 compared to a $2.0 million decrease for the same period in 2004. The primary
provider of cash for the quarter ended March 31, 2005 was an increase in deposits of $9.0 million.
Purchase of additional investment securities used $5.5 million of cash and repayment of FHLB
advances used another $3.4 million. The decrease in cash in 2004 was primarily the result of new
loan originations exceeding repayments and sales of loans. Management expects its primary source of
funds to be new deposit balances and its primary use of funds to be growth in loan balances. CONTRACTUAL OBLIGATIONS The Company has certain obligations and commitments to make future payments under contracts. At
March 31, 2005, the aggregate contractual obligations and commitments are: Contractual obligations Payments due by periodLess than
    
    
    1-3
    
    
    3-5
    
    
    AfterTotal
    
    
    One year
    
    
    Years
    
    
    Years
    
    
    5 Years(in thousands)Certificates of deposit
    
    $
    86,920
    
    
    $
    53,540
    
    
    $
    25,688
    
    
    $
    7,564
    
    
    $
    128FHLB advances
    
    
    62,405
    
    
    
    8,230
    
    
    
    20,345
    
    
    
    12,312
    
    
    
    21,518Total
    
    $
    149,325
    
    
    $
    61,770
    
    
    $
    46,033
    
    
    $
    19,876
    
    
    $
    21,646
 Other commitments Amount of commitment expiration per periodLess than
    
    
    1-3
    
    
    3-5
    
    
    AfterTotal
    
    
    One year
    
    
    Years
    
    
    Years
    
    
    5 Years(in thousands)Commitments to grant loans
    
    $
    3,021
    
    
    $
    3,021
    
    
    $
    
    
    
    $
    
    
    
    $
    Unfunded commitments under HELOCs
    
    
    14,995
    
    
    
    1,632
    
    
    
    2,594
    
    
    
    2,999
    
    
    
    7,770Unfunded commitments under Commercial LOCs
    
    
    1,378
    
    
    
    1,348
    
    
    
    30
    
    
    
    
    
    
    
    Letters of credit
    
    
    122
    
    
    
    62
    
    
    
    60
    
    
    
    
    
    
    
    Total
    
    $
    19,516
    
    
    $
    6,063
    
    
    $
    2,684
    
    
    $
    2,999
    
    
    $
    7,770
 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. 11




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##### Table of Contents



CAPITAL RESOURCES The Bank is subject to various regulatory capital requirements. As of March 31, 2005, the Bank met
the regulatory standards to be classified as well capitalized. The Banks regulatory capital
ratios as of March 31, 2005 were as follows: tangible capital, 8.7%; leverage capital, 8.7%; and
total risk-based capital, 13.9%. The regulatory capital requirements to be considered well
capitalized are 3.0%, 5.0%, and 10.0%, respectively. Management considers the Banks capital to be
adequate to support anticipated growth and does not anticipate needing to seek additional capital
in the foreseeable future. 
 ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys primary market risk exposure is interest rate risk (IRR). Interest rate risk refers
to the risk that changes in market interest rates might adversely affect the Companys net interest
income or the economic value of its portfolio of assets, liabilities, and off-balance sheet
contracts. Interest rate risk is primarily the result of an imbalance between the price sensitivity
of the Companys assets and its liabilities (including off-balance sheet contracts). Such
imbalances can be caused by differences in the maturity, repricing and coupon characteristics of
assets and liabilities, and options, such as loan prepayment options, interest rate caps and
floors, and deposit withdrawal options. These imbalances, in combination with movement in interest
rates, will alter the pattern of the Companys cash inflows and outflows, effecting the earnings
and economic value of the Company. The Companys primary tool for assessing IRR is the Office of Thrift Supervision Net Portfolio
Value (NPV) Model. The model uses scenario analysis to evaluate the IRR risk exposure of the Bank
by estimating the sensitivity of the Banks portfolios of assets, liabilities, and off-balance
sheet contracts to changes in market interest rates. To measure the sensitivity of the Banks NPV
to changes in interest rates, the NPV model estimates what would happen to the economic value of
each type of asset, liability, and off-balance sheet contract under six different interest rate
scenarios. The model estimates the NPV that would result following instantaneous, parallel shifts
in the Treasury yield curve of -300, -200, -100, +100, +200, +300 basis points. The OTS utilizes
guidelines based on the model to determine the level of IRR for the Bank. The levels, from least
risk to most risk, are; minimal, moderate, significant, high and imminent threat. Based on the
model, as of December 31, 2004 the Banks IRR level was regarded as minimal. Data from the model
as of March 31, 2005 is not yet available but management does not believe its IRR position has
significantly changed since December 31, 2004. The following table provides information about the Companys financial instruments that are
sensitive to changes in interest rates as of December 31, 2004. The Company had no derivative
instruments, or trading portfolio, as of that date. The expected maturity date values for loans
receivable, mortgage-backed securities and investment securities were calculated without adjusting
the contractual maturity dates for expectations of repayments. Expected maturity date values for
non-maturity, interest bearing deposits were based on the opportunity for repricing. Principal Amount Maturing In:Fair2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total
    
    
    ValueRATE-SENSITIVE ASSETSOvernight deposits
    
    $
    6,120
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,120
    
    
    $
    6,120Average interest rate
    
    
    1.85
    %Securities
    
    
    1,535
    
    
    
    770
    
    
    
    2,761
    
    
    
    
    
    
    
    2,968
    
    
    
    267
    
    
    
    8,301
    
    
    
    8,325Average interest rate
    
    
    2.06
    %
    
    
    3.05
    %
    
    
    3.42
    %
    
    
    
    
    
    
    4.21
    %
    
    
    4.30
    %Gross Loans
    
    
    23,112
    
    
    
    5,483
    
    
    
    9,915
    
    
    
    6,380
    
    
    
    10,889
    
    
    
    170,737
    
    
    
    226,516
    
    
    
    229,128Average interest rate
    
    
    6.00
    %
    
    
    7.63
    %
    
    
    7.33
    %
    
    
    7.02
    %
    
    
    6.60
    %
    
    
    6.46
    %RATE-SENSITIVE LIABILITIESSavings & interest bearing
demand deposits
    
    
    76,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,134
    
    
    
    76,134Average interest rate
    
    
    0.51
    %Certificates of deposit
    
    
    56,171
    
    
    
    13,297
    
    
    
    10,918
    
    
    
    4,164
    
    
    
    1,714
    
    
    
    137
    
    
    
    86,401
    
    
    
    87,380Average interest rate
    
    
    2.51
    %
    
    
    3.64
    %
    
    
    4.45
    %
    
    
    3.52
    %
    
    
    3.47
    %
    
    
    3.24
    %FHLB advances
    
    
    9,393
    
    
    
    8,585
    
    
    
    6,146
    
    
    
    20,153
    
    
    
    160
    
    
    
    21,518
    
    
    
    65,955
    
    
    
    68,155Average interest rate
    
    
    5.01
    %
    
    
    5.22
    %
    
    
    6.43
    %
    
    
    5.67
    %
    
    
    5.64
    %
    
    
    4.97
    %
 12




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES An evaluation of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as of March 31, 2005, was
carried out under the supervision and with the participation of the Companys Chief Executive
Officer, Chief Financial Officer and several other members of the Companys senior management. The
Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures as currently in effect are effective in ensuring that the
information required to be disclosed by the Company in the reports it files or submits under the
Exchange Act is (i) accumulated and communicated to the Companys management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within time periods specified in the SECs rules and forms. There have been
no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) that occurred during the quarter ended March 31, 2005, that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting. The Company intends to continually review and evaluate the design and effectiveness of its
disclosure controls and procedures and to improve its controls and procedures over time and to
correct any deficiencies that it may discover in the future. The goal is to ensure that senior
management has timely access to all material financial and non-financial information concerning the
Companys business. While the Company believes the present design of its disclosure controls and
procedures is effective to achieve its goal, future events affecting its business may cause the
Company to modify its disclosure controls and procedures. 13




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##### Table of Contents



OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS The Company and the Bank are from time-to-time involved in legal proceedings arising out of, and
incidental to, their business. Management, based on its review with counsel of all actions and
proceedings affecting the Company and the Bank, has concluded that the aggregate loss, if any,
resulting from the disposition of these proceedings should not be material to the Companys
financial condition or results of operations. 
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None 
 Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 
 Item 5. OTHER INFORMATION Not applicable 
 Item 6. EXHIBITS See the index to exhibits. 14




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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: May 10, 2005
    
    By:
    
    /s/ Donald L. DenneyDonald L. DenneyPresident and Chief Executive OfficerDate: May 10, 2005
    
    And:
    
    /s/ William C. KurtzWilliam C. KurtzSenior Vice President and Treasurer
 15




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##### Table of Contents



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.
 16