##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
          For the quarterly period ended June 30, 2004oro
    
    Transition report under Section 13 or 15(d) of the Exchange Act
          For the transition period from  to
 Commission file number: 000-49814 MONARCH COMMUNITY BANCORP, INC. (Exact name of small business issuer as specified in its charter)
 Maryland(State or other jurisdictionof incorporation or organization)
    
    04-3627031(I.R.S. employer
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: þ No: o State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practical date: At August 10, 2004, there were
2,709,704 shares of the issuers Common Stock outstanding. Transitional Small Business Disclosure Format (check one): Yes:  o No: þ




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Monarch Community Bancorp, Inc.
Index PART I  FINANCIAL INFORMATIONItem 1  Condensed Financial Statements:Condensed Consolidated Balance Sheets  June 30, 2004 and December 31, 2003
    
    
    
    
    
    
    1Condensed Consolidated Statements of Income  Three and Six Months Ended June 30, 2004 and 2003
    
    
    
    
    
    
    2Condensed Consolidated Statements of Changes in Stockholder's Equity  Six Months Ended June 30, 2004 and 2003
    
    
    
    
    
    
    3Condensed Consolidated Statements of Cash Flow  Six Months ended June 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  Changes in Securities and Small Business Issuer Purchases of Equity Securities
    
    
    12Item 3  Defaults Upon Senior Securities
    
    
    12Item 4  Submission of Matters to a Vote of Security Holders
    
    
    12Item 5  Other Information
    
    
    12Item 6  Exhibits and Reports on Form 8-K
    
    
    12SIGNATURES
    
    
    13Rule 13a-14(a) Certification of President and Chief Executive OfficerRule 13a-14(a) Certification of Chief Financial OfficerSection 1350 Certification




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PART I - FINANCIAL INFORMATION Item 1. Condensed Financial Statements Condensed Consolidated
Balance Sheets (unaudited)June 30,
    
    December 31,2004
    
    2003(Dollars in thousands,except per share data)ASSETSCash and due from banks
    
    $
    9,497
    
    
    $
    6,357Federal Funds sold and overnight deposits
    
    
    7,010
    
    
    
    20,974Total cash and cash equivalents
    
    
    16,507
    
    
    
    27,331SecuritiesAvailable for sale
    
    
    19,686
    
    
    
    19,648SecuritiesHeld to maturity
    
    
    276
    
    
    
    286Other securities
    
    
    4,634
    
    
    
    3,029Real Estate Investment  Limited partnership, at equity
    
    
    1,348
    
    
    
    1,415Loans held for sale
    
    
    1,111
    
    
    
    421Loans, net of allowance for loan losses
    
    
    220,319
    
    
    
    141,225Accrued interest receivable
    
    
    1,268
    
    
    
    1,041Foreclosed assets, net
    
    
    3,489
    
    
    
    2,177Premises and equipment
    
    
    6,799
    
    
    
    4,168Deferred income taxes
    
    
    1,176
    
    
    
    882Core deposit intangible
    
    
    1,971
    
    
    
    Goodwill
    
    
    8,641
    
    
    
    Other assets
    
    
    4,700
    
    
    
    1,500Total assets
    
    $
    291,925
    
    
    $
    203,123LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Noninterest-bearing
    
    
    4,758
    
    
    
    4,183Interest-bearing
    
    
    173,415
    
    
    
    103,057Total deposits
    
    
    178,173
    
    
    
    107,240Federal Home Loan Bank advances
    
    
    65,245
    
    
    
    57,384Accrued expenses and other liabilities
    
    
    6,489
    
    
    
    1,069Total liabilities
    
    
    249,907
    
    
    
    165,693Commitments and contingent liabilities
    
    
    
    
    
    
    Stockholders equityCommon stock  $0.01 par value 2,709,704 shares
at June 30, 2004 and 2,399,550 at December 31, 2003
    
    
    27
    
    
    
    24Additional paid in capital
    
    
    27,924
    
    
    
    23,352Retained earnings
    
    
    16,511
    
    
    
    16,567Accumulated other comprehensive income
    
    
    (77
    )
    
    
    75Unearned Compensation
    
    
    (2,367
    )
    
    
    (2,588
    )Total stockholders equity
    
    
    42,018
    
    
    
    37,430Total liabilities and stockholders equity
    
    $
    291,925
    
    
    $
    203,123
 See accompanying notes to condensed consolidated financial statements Page 1




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Condensed Consolidated Statements of Income Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Interest IncomeLoans, including fees
    
    $
    3,373
    
    
    $
    2,882
    
    
    $
    5,914
    
    
    $
    5,843Investment securities
    
    
    151
    
    
    
    153
    
    
    
    307
    
    
    
    299Federal funds sold and overnight deposits
    
    
    30
    
    
    
    70
    
    
    
    76
    
    
    
    132Total interest income
    
    
    3,554
    
    
    
    3,105
    
    
    
    6,297
    
    
    
    6,274Interest ExpenseDeposits
    
    
    703
    
    
    
    725
    
    
    
    1,309
    
    
    
    1,496Federal Home Loan bank advances
    
    
    882
    
    
    
    800
    
    
    
    1,680
    
    
    
    1,579Total interest expense
    
    
    1,585
    
    
    
    1,525
    
    
    
    2,989
    
    
    
    3,075Net Interest Income
    
    
    1,969
    
    
    
    1,580
    
    
    
    3,308
    
    
    
    3,199Provisions for Loan Losses
    
    
    450
    
    
    
    797
    
    
    
    450
    
    
    
    1,022Net Interest Income after Provision
for Loan Losses
    
    
    1,519
    
    
    
    783
    
    
    
    2,858
    
    
    
    2,177Noninterest IncomeFees and service charges
    
    
    447
    
    
    
    245
    
    
    
    673
    
    
    
    478Loan servicing fees
    
    
    101
    
    
    
    50
    
    
    
    158
    
    
    
    99Net gain on sale of loans
    
    
    277
    
    
    
    659
    
    
    
    445
    
    
    
    1,038Other income
    
    
    141
    
    
    
    58
    
    
    
    175
    
    
    
    81Total noninterest income
    
    
    966
    
    
    
    1,012
    
    
    
    1,451
    
    
    
    1,696Noninterest ExpensesSalaries and employees benefits
    
    
    1,223
    
    
    
    852
    
    
    
    2,133
    
    
    
    1,727Occupancy and equipment
    
    
    238
    
    
    
    186
    
    
    
    435
    
    
    
    378Data processing
    
    
    174
    
    
    
    89
    
    
    
    273
    
    
    
    182Mortage banking
    
    
    76
    
    
    
    127
    
    
    
    111
    
    
    
    233Professional fees
    
    
    142
    
    
    
    151
    
    
    
    241
    
    
    
    240Office supplies and forms
    
    
    52
    
    
    
    48
    
    
    
    88
    
    
    
    75Advertising and promotion
    
    
    34
    
    
    
    20
    
    
    
    58
    
    
    
    34Other general and administrative
    
    
    359
    
    
    
    292
    
    
    
    636
    
    
    
    507Amortization of core deposit intangible
    
    
    110
    
    
    
    
    
    
    
    110
    
    
    
    Total noninterest expense
    
    
    2,408
    
    
    
    1,765
    
    
    
    4,085
    
    
    
    3,376Income  Before Income Taxes
    
    
    77
    
    
    
    30
    
    
    
    224
    
    
    
    497Income Taxes
    
    
    (19
    )
    
    
    (6
    )
    
    
    25
    
    
    
    142Net Income
    
    $
    96
    
    
    $
    36
    
    
    $
    199
    
    
    $
    355Earnings Per ShareBasic
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.15Diluted
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.15
 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
    
    Total(Dollars in thousands,except per share data)Balance, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    
    
    
    
    355Change in unrealized gain
on securities available for sale, net
of tax of $60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    121Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    476Dividends paid ($0.10/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (236
    )
    
    
    
    
    
    
    
    
    
    
    (236
    )Balance, June 30, 2003
    
    
    2,314
    
    
    $
    23
    
    
    $
    23,303
    
    
    $
    16,498
    
    
    $
    185
    
    
    
    ($2,821
    )
    
    $
    37,189Balance, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199
    
    
    
    
    
    
    
    
    
    
    
    199Change in unrealized gain
(loss) on securities available for
sale, net of tax of $79
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (152
    )
    
    
    
    
    
    
    (152
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47Dividends paid ($0.10/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (255
    )
    
    
    
    
    
    
    
    
    
    
    (255
    )Balance, June 30, 2004
    
    
    2,709
    
    
    $
    27
    
    
    $
    27,924
    
    
    $
    16,511
    
    
    $
    (77
    )
    
    
    ($2,367
    )
    
    $
    42,018
 See accompanying notes to condensed consolidated financial statements Page 3




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Condensed Consolidated Statements of Cash Flows

Six Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2004
    
    2003(Dollars in thousands)Cash Flows from Operating ActivitiesNet Income
    
    $
    199
    
    
    $
    355Adjustments to reconcile net income to net cash from operating activities:Depreciation
    
    
    214
    
    
    
    225Provision for Loan Losses
    
    
    450
    
    
    
    1,022Amortization
    
    
    402
    
    
    
    418(Gain) Loss on sale of foreclosed assets
    
    
    (34
    )
    
    
    30Deferred income taxes
    
    
    76
    
    
    
    (378
    )Mortgage loans originated for sale
    
    
    (13,952
    )
    
    
    (38,763
    )Proceeds from sale of mortgage loans
    
    
    13,899
    
    
    
    36,926Gain on sale of mortgage loans
    
    
    (445
    )
    
    
    (1,048
    )(Gain) Loss on disposal of premises and equipment
    
    
    
    
    
    
    Net change in:Real Estate Investment
    
    
    67
    
    
    
    Deferred loan fees
    
    
    (353
    )
    
    
    (29
    )Accrued interest receivable
    
    
    99
    
    
    
    97Other assets
    
    
    168
    
    
    
    (117
    )Accrued expenses and other liabilities
    
    
    2,178
    
    
    
    2,340Net cash provided by (used in) operating activities
    
    
    2,968
    
    
    
    1,078Cash Flows from Investing ActivitiesProceeds from maturities of HTM securities
    
    
    (21
    )
    
    
    50Purchases of HTM securities
    
    
    
    
    
    
    Proceeds from maturities of AFS securities
    
    
    4,055
    
    
    
    1,570Purchases of available for sale securities
    
    
    (4,499
    )
    
    
    (3,641
    )Purchases of other securities
    
    
    (89
    )
    
    
    (140
    )Proceeds from maturities of other securities
    
    
    5
    
    
    
    Loan originations and principal collections, net
    
    
    (6,861
    )
    
    
    (920
    )Proceeds from sale of foreclosed assets
    
    
    1,358
    
    
    
    1,264Proceeds from sale of premises and equipment
    
    
    Purchases of premises and equipment
    
    
    (87
    )
    
    
    (21
    )Loan to Employee Stock Ownership Plan
    
    
    221
    
    
    
    Acquisition, net of cash
    
    
    (12,779
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (18,697
    )
    
    
    (1,838
    )Cash Flows from Financing ActivitiesNet increase (decrease) in deposits
    
    
    716
    
    
    
    11,001Proceeds from FHLB advances
    
    
    
    
    
    
    5,000Repayment of FHLB advances
    
    
    (131
    )
    
    
    Issuance of Common Stock
    
    
    4,586
    
    
    
    Repurchase of Common Stock
    
    
    (11
    )Issuance of dividend
    
    
    (255
    )
    
    
    (236
    )Net cash provided by (used in) financing activities
    
    
    4,905
    
    
    
    15,765Net increase (decrease) in cash and cash equivalents
    
    
    (10,824
    )
    
    
    15,005Cash and cash equivalents  January 1
    
    
    27,331
    
    
    
    20,207Cash and cash equivalents  June 30
    
    $
    16,507
    
    
    $
    35,212Supplemental Cash Flow Information:Cash paid for interest
    
    
    3,033
    
    
    
    3,095Cash paid for income taxes
    
    
    
    
    
    
    260Noncash investing activity  loans transferred to foreclosed assets
    
    
    1,271
    
    
    
    1,676


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 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 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 $8.6 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, 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 six month periods ended June 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
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003The weighted average share reconciliation is as follows:Weighted average shares outstanding
    
    
    2,658,659
    
    
    
    2,380,787
    
    
    
    2,529,104
    
    
    
    2,347,765Less: Average nonvested RRP shares
    
    
    (72,412
    )
    
    
    (66,412
    )
    
    
    (78,793
    )
    
    
    (33,390
    )Weighted average for basic EPS
    
    
    2,586,247
    
    
    
    2,314,375
    
    
    
    2,450,311
    
    
    
    2,314,375Dilutive effect of restricted stock and stock options
    
    
    51,037
    
    
    
    8,075
    
    
    
    26,294
    
    
    
    Weighted average for dilutive EPS
    
    
    2,637,284
    
    
    
    2,322,450
    
    
    
    2,476,605
    
    
    
    2,314,375


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 six months
ended June 30, 2004 and 2003 is as follows:

June 30, 2004
    
    June 30, 2003(Dollars in thousands, except per share data)As reported net income available to common shareholders
    
    $
    199
    
    
    $
    355Less: additional stock-based compensation determined
under the fair value method, net of tax
    
    
    (24
    )
    
    
    (8
    )Pro forma net income
    
    $
    175
    
    
    $
    347As reported earnings per share
    
    $
    0.08
    
    
    $
    0.15Pro forma earnings per share
    
    $
    0.07
    
    
    $
    0.15As reported earnings per diluted share
    
    $
    0.08
    
    
    $
    0.15Pro forma earnings per diluted share
    
    $
    0.07
    
    
    $
    0.15





ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis does not include any comments related to
Monarch Community Bancorp since Monarch Community Bancorp has no significant
operations. The discussion should be read in conjunction with the condensed
consolidated financial statements of the Corporation and the accompanying
notes.

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

FORWARD-LOOKING STATEMENTS

In addition to historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties. All
statements regarding the expected financial position, business and strategies
are forward-looking statements and the Corporation intends for them to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private

6



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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 $88.8 million, or 43.7% to $291.9 million at June 30, 2004
compared to $203.1 million at December 31, 2003, primarily due to the
acquisition of MSB Financial, Inc. Securities
Securities totaled $24.5 million at June 30, 2004 compared to $22.9 million at
December 31, 2003. The increase was attributable to the $1.5 million of
Federal Home Loan Bank Stock owned by MSB Financial. Management purchases
securities to maintain sufficient liquidity and to provide yield to offset
declines in the loan portfolio. Loans
The Banks net loan portfolio increased by $79.1 million, or 56.0%, from $141.2
million at December 31, 2003 to $220.3 million at June 30, 2004. Real estate
loans increased $74.9 million, or 58.8%. Real estate loans secured by one-to
four family residential properties increased $49.0 million to $157.0 million at
June 30, 2004 as compared to $107.9 million at December 31, 2003. Real estate
loans secured by multifamily and commercial property increased $25.9 million to
$45.2 million at June 30, 2004 from $ 19.4 million at December 31, 2003.
Commercial business loans increased $2.3 million to $5.0 million at June 30,
2004 as compared to $2.7 million at December 31, 2003. Consumer loans increased
$3.4 million to $9.7 million at June 30, 2004 from $6.3 million at December 31,
2003. These increases were due primarily to the acquisition of MSB Financial.
Notwithstanding the acquisition the Bank did increase its multifamily and
commercial real estate loans by $6.6 million thru new originations and the
conversion of a $3.2 million construction loan to permanent financing. The Bank
increased its consumer loans 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.
The portion of the Banks loan portfolio represented by real estate loans was
90.6% at June 30, 2004 compared to 87.1% at December 31, 2003. Deposits
Total deposits increased $70.9 million, or 66.1%, from $107.2 million at
December 31, 2003 to $178.1 million at June 30, 2004. This increase was
primarily due to the acquisition of MSB Financial. Management expects future
deposit growth to come from increased 7




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##### Table of Contents



marketing efforts to attract savings and checking accounts as well as product
enhancement including the introduction on internet banking. Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances increased $7.8 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 six months ended June 30, 2004
compared to the six months ended June 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 4.4 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. Equity
Total equity was $42.0 million at June 30, 2004 compared to $37.4 million at
December 31, 2003. This represents 14.4% and 18.4% of total assets at June 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 $255,000.
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
June 30, 2004 totaled $2.0 million and represented an increase of $389,000
compared to the same period one year ago. The Corporations net interest margin
increased from 3.27% for the quarter ended June 30, 2003 to 3.38% for the
quarter ended June 30, 2004. The net interest margin for the three months
ended was positively impacted by the acquisition of lower costing deposit
accounts from MSB Financial. Interest income from loans represented 94.9% of
total interest income for the first quarter of 2004 compared to 93% for the
same period in 2003. Net interest income before the provision for loan losses for the six months
ended June 30, 2004 totaled $3.3 million and represented an increase of
$109,000, or 3.4%, compared to the same period a year ago. The Corporations
net interest margin declined to 3.16% for the six months ended June 30, 2004
from 3.30% for the six months ended June 30, 2003. The primary reason for the
decline in net interest margin is the Banks level of FHLB borrowing which have
not declined in cost to offset declines in loan yields over the same period.
Loan yields have declined as market rates remained low resulting in
refinancings at lower rates and decreasing rates on adjustable rate loans. Net
interest income increased despite the lower net interest margin due to the
higher level of earning assets 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. Six Months Ended June 30,2004
    
    2003Average
    
    Interest
    
    
    
    
    
    Average
    
    InterestOutstanding
    
    Earned/
    
    Yield/
    
    Outstanding
    
    Earned/
    
    Yield/Balance
    
    Paid
    
    Rate
    
    Balance
    
    Paid
    
    Rate(Dollars in Thousands)Federal Funds sold andOvernight deposit
    
    $
    14,973
    
    
    $
    76
    
    
    
    1.02
    %
    
    $
    22,165
    
    
    $
    106
    
    
    
    1.75
    %Investment securities
    
    
    19,665
    
    
    
    240
    
    
    
    2.45
    
    
    
    18,018
    
    
    
    225
    
    
    
    2.52Other securities
    
    
    3,546
    
    
    
    67
    
    
    
    3.79
    
    
    
    2,873
    
    
    
    75
    
    
    
    5.26Loans
    
    
    171,440
    
    
    
    5,914
    
    
    
    6.92
    
    
    
    152,252
    
    
    
    5,843
    
    
    
    7.74Total earning assets
    
    $
    209,624
    
    
    
    6,297
    
    
    
    6.02
    
    
    $
    195,308
    
    
    
    6,274
    
    
    
    6.48Demand and NOW accounts
    
    $
    18,717
    
    
    
    51
    
    
    
    .55
    
    
    $
    9,980
    
    
    
    41
    
    
    
    .83Money market accounts
    
    
    11,833
    
    
    
    71
    
    
    
    1.20
    
    
    
    9,896
    
    
    
    65
    
    
    
    1.32Savings deposit
    
    
    18,078
    
    
    
    51
    
    
    
    0.57
    
    
    
    15,862
    
    
    
    81
    
    
    
    1.03Certificates of deposit
    
    
    70,672
    
    
    
    1,136
    
    
    
    3.22
    
    
    
    78,102
    
    
    
    1,309
    
    
    
    3.38FHLB advances
    
    
    60,141
    
    
    
    1,680
    
    
    
    5.60
    
    
    
    56,727
    
    
    
    1,579
    
    
    
    5.61Total interest-bearing liabilities
    
    $
    179,441
    
    
    
    2,989
    
    
    
    3.34
    
    
    $
    170,567
    
    
    
    3,075
    
    
    
    3.64Net interest income
    
    
    
    
    
    $
    3,308
    
    
    
    
    
    
    
    
    
    
    $
    3,199Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.68
    %
    
    
    
    
    
    
    
    
    
    
    2.84
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.16
    %
    
    
    
    
    
    
    
    
    
    
    3.30
    %
 8




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Provision for Loan Losses
The provision for loan losses was $450,000 for the quarter ended June 30, 2004
compared to $797,000 for the quarter ended June 30, 2003. Net charge-offs for
the quarter ended June 30, 2004 totaled $1.4 million compared to $104,000 for
the quarter ended June 30, 2003. During the quarter ended June 30, 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 June 30, 2004. The provision for loan losses for the six months ended June 30, 2004 was
$450,000 compared to $1.0 million for the same period in 2003. The primary
reason for the higher provision in 2003 was the placing of the two loans
mentioned above into non-accrual status as of June 30, 2003. The allowance for
loan losses was $2,147,000 at June 30, 2004 and $2,618,000 at December 31,
2003. The allowance as a percent of gross loans was .96% and 1.81% at June 30,
2004 and December 31, 2003, respectively. Net charge-offs for the six months
ended June 30, 2004 totaled $1.4 million compared to $290,000 for the six
months ended June 30, 2003. The following table presents non-performing assets and certain asset quality
ratios at June 30, 2004 and December 31, 2003. June 30, 2004
    
    December 31, 2003(Dollars in thousands)Non-performing loans
    
    $
    2,279
    
    
    $
    3,746Real estate in judgment
    
    
    1,138
    
    
    
    1,082Foreclosed and repossessed assets
    
    
    2,377
    
    
    
    1,142Total non-performing assets
    
    $
    5,794
    
    
    $
    5,970Non-performing loans to total loans
    
    
    1.03%
    
    
    
    2.60%Non-performing assets to total assets
    
    
    1.98%
    
    
    
    2.92%Allowance for loan losses to non-performing loans
    
    
    94.2%
    
    
    
    69.9%Allowance for loan losses to loans receivable
    
    
    .96%
    
    
    
    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. 9




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Noninterest Income
Noninterest income decreased by $46,000 to $966,000 for the quarter ended June
30, 2004 as compared to $1.01 million for the quarter ended June 30, 2003. Gain
on sale of loans decreased to $277,000 compared to $659,000 for the same period
a year ago as mortgage banking activities were reduced significantly due to a
less favorable refinancing environment in 2004 compared to the same period in
2003. Management believes this trend will continue throughout 2004. Fees and
service charges increased $202,000 and loan servicing fees increased $51,000
for the quarter ended June 30, 2004 compared to the same period in 2003 and
were primarily the result of adding the operations of MSB Financial. Other
income increase $83,000 to $141,000 for the quarter ended June 30, 2004 as
compared to $58,000 for the quarter ended June 30, 2003. This increase was due
to gains on sale of real estate owned increasing $52,000 from the same period a
year ago. Investment service income of $18,000 and earnings on bank owned life
insurance of $17,000 also contributed to the increase in other income. For the six months ended June 30, 2004 noninterest income decreased $245,000 to
$1.5 million from $1.7 million for the six months ended June 30, 2003. Gain on
sale of loans decreased to $445,000 from $1.0 million for the same period a
year ago. Fees and service charges increased $195,000, loan servicing fees
increased $59,000 and other income increased $94,000 for the six months ended
June 30, 2004 as compared to the same period in 2003, for the reasons discussed
above. Noninterest Expense
Noninterest expense increased by $643,000 for the quarter ended June 30, 2004
compared to the quarter ended June 30, 2003. The primary reason for the
increase was the additional 30 staff members and 3 branches of the Marshall
operations. Data processing increased $85,000 from $89,000 for the quarter
ended June 30, 2003 to $174,000 for the quarter ended June 30, 2004. This
increase was primarily the result of operating two separate data processing
systems thru most of the quarter ended June 30, 2004. Mortgage banking expense
decreased $51,000 consistent with the reduced mortgage banking activity in 2004
compared to 2003. Other general and administrative expenses included an
increase in real estate owned expense of $40,000 for the three months ended
June 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 commenced during the three months ended June 30, 2004
and amounted to $110,000 compared to $0 for the quarter ended June 30, 2003. For the six months ended June 30, 2004 noninterest expense increased $709,000
to $4.1 million as compared to $3.4 million for the six months ended June 30,
2003. This increase was largely attributable to the same reasons discussed
above. Federal Income Tax Expense
The provision for federal income tax was 11% of pretax income for the six
months ended June 30, 2004 as compared to 29% for the six months ended June 30,
2003. The difference between the effective tax rates and the federal corporate
income tax rate of 34% is largely attributable to the tax benefits recorded on
the limited partnership investment. 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
June 30, 2004 totaled $35.8 million. Based on historical experience,
management believes that a significant portion of these certificates of deposit
will remain with Monarch. 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 June 30, 2004 and
based on current collateral levels, Monarch could borrow an additional $23.3
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 $10.8 million during
the six month period ended June 30, 2004 compared to a $15.0 million increase
for the same period in 2003. The acquisition of MSB Financial used $12.8
million in cash which was partially 10




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offset by issuance of common stock of $4.6 million. Loan originations, net of
payments, used $6.9 million for the six months ended June 30, 2004 compared to
$920,000 for the same period a year ago. Cash provided by increased deposits
totaled $11.0 million in 2003 compared to $716,000 for the same period in 2004.
During the six months ended June 30, 2003, management structured deposit rates
to attract certificates of deposit as it was believed that market interest
rates had bottomed out. A $5 million FHLB advance also provided cash for the
six months ended June 30, 2003 while no borrowings were undertaken for the same
period in 2004. OFF-BALANCE SHEET ARRANGEMENTS At June 30, 2004, the total approved loan origination commitments outstanding
including the unadvanced portion of construction loans amounted to $4.0
million. Unused commercial and consumer lines of credit were $13.2 million as
of June 30, 2004 and letters of credit were $138,000 as of that date. CAPITAL RESOURCES The Bank is subject to various regulatory capital requirements. As of June 30,
2004, the Bank met the regulatory standards to be classified as well
capitalized. The Banks regulatory capital ratios as of June 30, 2004 were as
follows: tangible capital, 9.42%; leverage capital, 9.42%; and total
risk-based capital, 15.25%. 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 June 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
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is (i)
accumulated and communicated to the Companys management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within time periods specified in
the SECs rules and forms. There have been no changes in our internal control
over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act)
that occurred during the quarter ended June 30, 2004, 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. 11




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##### Table of Contents



OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS None 
 Item 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES None 
 Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  1.
    
    Election of Directors with terms ending in 2007 For
    
    WithholdJohn R. Schroll
    
    
    2,011,641
    
    
    
    14,329Craig W. Dally
    
    
    2,011,840
    
    
    
    14,130
  The following are the names of the directors (and remaining terms) whose terms continued after the meeting: TermExpiresHarold A. Adamson
    
    
    2005Lauren L. Bracy
    
    
    2005James R. Vozar
    
    
    2005Frank M. Tripp
    
    
    2006Stephen M. Ross
    
    
    2006Gordon L. Welch
    
    
    2006
  2.
    
    Ratification of the appointment of Plante & Moran, PLLC as
independent auditors for the fiscal year ending December 31, 2004: For: 1,987,206
    
    Against: 23,539
    
    Abstain: 15,225
 
 Item 5. OTHER INFORMATION Not applicable 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    ExhibitsSee the index to exhibits.(b)
    
    Reports on Form 8-K  (1)
    
    Registrant filed a Current Report on Form 8-K on June 8, 2004
to report the merger of Marshall Savings Bank with and into Monarch
Community Bank as well as to report on the charge off of $1.2 million
in connection with a commercial real estate loan.(2)
    
    Registrant filed a Current Report on Form 8-K on April 15, 2004
to report the merger of MSB Financial, Inc. with and into Monarch
Community Bancorp, Inc. 12




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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: August 12, 2004
    By:
    /s/ John R. SchrollJohn R. Schroll

President and Chief Executive Officer Date: August 12, 2004
    And:
    /s/ William C. KurtzWilliam C. Kurtz

Senior Vice President and Treasurer 13




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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.
 14