UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549  FORM 10-Q  x

        Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2006 or o

        Transition report under Section 13 or 15(d) of the Exchange Act
 For the transition period from  ________ to ________  Commission file number:  000-49814  MONARCH COMMUNITY BANCORP, INC. (Exact name of registrant as specified in its charter)  Maryland

(State or other jurisdiction

of 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 (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:
xNo: o  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. (See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).
Large accelerated filer o  Accelerated filer o  Non-accelerated filer x  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).
Yes: o No: x  State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practical
date:  At April 24, 2006, there were 2,664,480 shares of the issuers Common Stock outstanding.     Monarch Community Bancorp, Inc.


Index





PART I  FINANCIAL INFORMATION





Item 1  Condensed Financial Statements:





Condensed Consolidated Balance Sheets  March 31, 2006 and


December 31, 2005

        1





Condensed Consolidated Statements of Income  Three Months


Ended March 31, 2006 and 2005

        2





Condensed Consolidated Statements of Changes in Stockholders Equity 


Three Months Ended March 31, 2006 and 2005

        3





Condensed Consolidated Statements of Cash Flows  Three Months ended


March 31, 2006 and 2005

        4





Notes to Condensed Consolidated Financial Statements

        5 - 7





Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations

        7 - 12





Item 3  Quantitative and Qualitative Disclosures about Market Risk

        12





Item 4 - Controls and Procedures

        13





PART II  OTHER INFORMATION





Item 1  Legal Proceedings

        14





Item 1A  Risk Factors

        14





Item 2  Unregistered Sales of Equity Securities and Use of Proceeds

        14





Item 3  Defaults Upon Senior Securities

        14





Item 4  Submission of Matters to a Vote of Security Holders

        15





Item 5  Other Information

        15





Item 6  Exhibits

        15








SIGNATURES

        16












PART IFINANCIAL INFORMATION







Item 1.

        CONDENSED FINANCIAL STATEMENTS





Condensed Consolidated
Balance Sheets


(unaudited)
March 31,
2006
     
     December 31,
2005(Dollars in thousands,
except per share data)AssetsCash and due from banks
     
     
     $9,539
        
     $9,298Federal Home Loan Bank overnight time andother interest bearing deposits
     7,959
        
     6,988Total cash and cash equivalents
     17,498
        
     16,286Securities - Available for sale
     13,603
        
     14,337Securities - Held to maturity
     242
        
     247Other securities
     4,841
        
     4,837Real estate investment - Limited partnership, at equity
     1,092
        
     1,129Loans held for sale
     543
        
     168Loans, net
     218,633
        
     213,073Foreclosed assets, net
     2,484
        
     2,811Premises and equipment
     5,632
        
     5,706Goodwill
     9,606
        
     9,606Core deposit intangible
     1,297
        
     1,384Other assets
     6,726
        
     7,484Total assets
     $282,197
        
     $277,068Liabilities and Stockholders EquityLiabilitiesDeposits:Noninterest-bearing
     $14,332
        
     $12,868Interest-bearing
     169,192
        
     159,878Total deposits
     183,524
        
     172,746Federal Home Loan Bank advances
     54,176
        
     59,562Accrued expenses and other liabilities
     4,343
        
     4,184Total liabilities
     242,043
        
     236,492Commitments and Contingencies
     
        
     Stockholders EquityCommon stock - $0.01 par value, 20,000,000 shares authorized, 2,714,480shares issued and 2,664,480 shares outstanding at March 31, 2006,2,710,596 shares issued and outstanding at December 31, 2005
     27
        
     27Additional paid-in capital
     28,218
        
     28,150Retained earnings
     14,571
        
     14,401Accumulated other comprehensive income
     (170
        )
     (155
        )Treasury stock, at cost
     (599
        )
     Unearned compensation
     (1,893
        )
     (1,847
        )Total stockholders equity
     40,154
        
     40,576Total liabilities and stockholders equity
     $282,197
        
     $277,068See accompanying notes to
condensed consolidated financial statements.






1






Condensed Consolidated
Statements of Income


(unaudited)Three Months
Ended
March 31,
2006
     
     Three Months
Ended
March 31,
2005(Dollars in thousands,
except per share data)Interest IncomeLoans, including fees
     $3,726
        
     $3,563Investment securities
     207
        
     156Federal funds sold and overnight deposits
     99
        
     47Total interest income
     4,032
        
     3,766Interest ExpenseDeposits
     1,143
        
     724Federal Home Loan Bank advances
     773
        
     822Total interest expense
     1,916
        
     1,546Net Interest Income
     2,116
        
     2,220Provision for Loan Losses
     
        
     (385
        )Net Interest Income After Provision for Loan Losses
     2,116
        
     2,605Noninterest IncomeFees and service charges
     458
        
     466Loan servicing fees
     117
        
     113Net gain on sale of loans
     68
        
     137Other income
     109
        
     64Total noninterest income
     752
        
     780Noninterest ExpensesSalaries and employee benefits
     1,279
        
     1,277Occupancy and equipment
     260
        
     291Data processing
     169
        
     172Amortization of mortgage servicing rights
     101
        
     104Professional services
     121
        
     137Amortization of core deposit intangible
     86
        
     110NOW account processing
     43
        
     49ATM/Debit card processing
     56
        
     51Foreclosed property expense
     57
        
     311Other general and administrative
     291
        
     319Total noninterest expense
     2,463
        
     2,821Income - Before income taxes
     405
        
     564Income Taxes
     75
        
     152Net Income
     $330
        
     $412Earnings Per ShareBasic
     $0.13
        
     $0.16Diluted
     $0.13
        
     $0.16See accompanying notes to
condensed consolidated financial statements.







2






Condensed Consolidated
Statements of Changes in Stockholders Equity


(Unaudited)Common Stock
     
     
     
     AccumulatedNumber
of
Shares
     
     Amount
     
     Additional
Paid in
Capital
     
     Retained
Earnings
     
     Other
Comprehensive
Income
     
     Treasury
Stock
     
     Unearned
Compensation
     
     TotalBalance -January 1, 2005
     
     
     2,709
        
     $27
        
     $28,059
        
     $13,529
        
     $2
        
     $
        
     $(2,198
        )
     $39,419Comprehensive Income:Net Income
     
        
     
        
     
        
     412
        
     
        
     
        
     
        
     412Change in unrealized gain onsecurities 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
        )
     $39,585Balance -January 1, 2006
     2,710
        
     $27
        
     $28,150
        
     $14,401
        
     $(155
        )
     $
        
     $(1,847
        )
     $40,576Issuance of 3,884 shares of common stock atan average price of $12.03/share in connectionwith Restricted Stock Plan
     4
        
     
        
     46
        
     
        
     
        
     
        
     (46
        )
     $Purchases of treasury stock-50,000 shares
     
        
     
        
     
        
     
        
     
        
     (599
        )
     
        
     (599
        )Stock option expenses
     
        
     
        
     22
        
     
        
     
        
     
        
     
        
     22Comprehensive Income:Net Income
     
        
     
        
     
        
     330
        
     
        
     
        
     
        
     330Change in unrealized gain onsecurities available-for-sale,
     
        
     
        
     
        
     
        
     (15
        )
     
        
     
        
     (15
        )Total comprehensive income
     
        
     
        
     
        
     
        
     
        
     
        
     
        
     315Dividends paid ($0.06/share)
     
        
     
        
     
        
     (160
        )
     
        
     
        
     
        
     (160
        )Balance - March 31, 2006
     2,714
        
     $27
        
     $28,218
        
     $14,571
        
     $(170
        )
     $(599
        )
     $(1,893
        )
     $40,154See accompanying notes to
condensed consolidated financial statements.





3






Condensed Consolidated
Statements of Cash Flows


(Unaudited)Three Months
Ended
March 31,
2006
     
     Three Months
Ended
March 31,
2005(Dollars in thousands)Cash Flows From Operating ActivitiesNet Income
     $330
        
     $412Adjustments to reconcile net income to net cash from operating activitiesDepreciation and amortization
     336
        
     282Provision for loan loss
     
        
     (385
        )Stock option expense
     22
        
     Stock dividends on other securities
     
        
     (50
        )(Gain) loss on sale of foreclosed assets
     (32
        )
     Mortgage loans originated for sale
     (3,295
        )
     (6,814
        )Proceeds from sale of mortgage loans
     2,959
        
     6,148Gain on sale of mortgage loans
     (38
        )
     (137
        )(Gain) loss on sale of premises and equipment
     
        
     (12
        )Net change in:Deferred loan fees
     37
        
     28Accrued interest receivable
     (121
        )
     54Other assets
     733
        
     (593
        )Accrued expenses and other liabilities
     159
        
     974Net cash provided by (used in) operating activities
     1,090
        
     (93
        )Cash Flows From Investing ActivitiesActivity in available-for-sale securities:Purchases
     (1,993
        )
     (5,469
        )Proceeds from maturities of securities
     2,715
        
     Activity in held-to-maturity securities:Purchases
     (4
        )
     (10
        )Proceeds from maturities of securities
     
        
     75Loan originations and principal collections, net
     (6,096
        )
     1,392Proceeds from sale of foreclosed assets
     953
        
     149Proceeds on sale of premises and equipment
     
        
     204Purchase of premises and equipment
     (56
        )
     (57
        )Net cash used in investing activities
     (4,481
        )
     (3,716
        )Cash Flows From Financing ActivitiesNet increase in deposits
     10,748
        
     8,997Repurchase of Common Stock
     (599
        )
     Dividends paid
     (160
        )
     (135
        )Repayment of FHLB advances
     (5,386
        )
     (3,498
        )Net cash provided by financing activities
     4,603
        
     5,364Net Increase in Cash and Cash Equivalents
     1,212
        
     1,555Cash and Cash Equivalents - Beginning
     16,286
        
     15,649Cash and Cash Equivalents - End
     $17,498
        
     $17,204Supplemental Cash Flow Information:Cash paid (received) for:Interest
     1,860
        
     1,609Income taxes
     
        
     Noncash investing activities:Loans transferred to foreclosed assets
     572
        
     839Issuance of common stock in connection with the 2003Recongnition and Retention Plan
     46
        
     See accompanying notes to condensed
consolidated financial statements.






4






MONARCH COMMUNITY BANCORP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





ORGANIZATION





Monarch Community Bancorp, Inc. (the Corporation) was incorporated in 2002 under Maryland law to hold all of
the common stock of Monarch Community Bank (the Bank), formerly known as Branch County Federal Savings and Loan Association.  The Bank converted to a stock savings institution effective
August 29, 2002. In connection with the conversion, the Corporation sold 2,314,375 shares of its common stock in a subscription offering.





On April 15, 2004, the Corporation completed the acquisition of MSB Financial, Inc., parent company of Marshall Savings
Bank. Accordingly, MSB Financial was merged with and into Monarch Community Bancorp, Inc. On June 7, 2004, Marshall Savings Bank was merged with and into Monarch Community Bank. The Corporation
issued a total of 310,951 shares of its common stock and paid cash of $19.7 million to former MSB Financial stockholders. The cash paid in the transaction came from the Corporations existing
liquidity. The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based upon
the estimated fair values at the date of acquisition. The purchase accounting fair value adjustments are being amortized under various methods and over lives of the corresponding assets and
liabilities.

Goodwill recorded for the acquisition amounted to $9.6 million. A Core Deposit Intangible of $2.1 million was recorded as part of the acquisition and is being amortized on an accelerated basis over a
period of 9.5 years.





Monarch Community Bank provides a broad range of banking services to its primary market area of Branch, Calhoun and
Hillsdale counties in Michigan.  The Bank operates six full service offices and one drive-through only office.  The Bank owns 100% of Community Services Group, Inc., which invests in other entities,
including 100% ownership of First Insurance Agency, a minority ownership in a limited liability company that operates a title agency, and 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.





Community Services Group, Inc. with assets totaling $998,000 as of March 31, 2006 is in the process of liquidation.  The
liquidation date is April 30, 2006 with the assets being transferred to Monarch Community Bank resulting in no gain or loss on the dissolution.





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-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission.





The results of operations for the three month period ended March 31, 2006 are not necessarily indicative of the results
to be expected for the full year period.





ALLOWANCE FOR LOAN LOSSES





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

of the effect of this condition may be reflected as a specific allowance applicable to this credit or portfolio segment.





5






ALLOWANCE FOR LOAN LOSSES, continued





The allowance for loan losses is based on estimates of losses inherent in the loan portfolio.  Actual losses can vary
significantly from the estimated amounts.  Our methodology as described permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in managements
judgment, significant factors which affect the collectibility of the portfolio as of the evaluation date are not reflected in the loss factors.  By assessing the estimated losses inherent in the loan
portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.





RECLASSIFICATIONS





Certain 2005 amounts have been reclassified to conform to the 2006 presentation.





EARNINGS PER SHARE





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






Three Months
Ended
March 31, 2006
     
     Three Months
Ended
March 31, 2005Basic earnings per shareNumerator:Net income
     $330
        
     $412Denominator:Weighted average common shares outstanding
     2,711
        
     2,709Less: Average unallocated ESOP shares
     (111
        )
     (130
        )Less: Average non-vested RRP shares
     (56
        )
     (67
        )Weighted average common shares outstandingfor basic earnings per share
     2,544
        
     2,512Basic earnings per share
     $0.13
        
     $0.16Diluted earnings per shareNumerator:Net income
     $330
        
     $412Denominator:Weighted average common shares outstandingfor basic earnings per share
     2,544
        
     2,512Add: Dilutive effects of restricted stock and stock options
     
        
     36Weighted average common shares and dilutivepotential common shares outstanding
     2,544
        
     2,548Diluted earnings per share
     $0.13
        
     $0.16





6






STOCK-BASED COMPENSATION





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

stock options  was $22,000 and $0 for the quarters ended March 31, 2006 and 2005 respectively.





Options granted in the first quarter of 2006, under the fair value method, had an exercise price equal to the market
price of the underlying common stock at the date of the grant. Had compensation cost for stock options been measured using the fair value method in 2006 and 2005, the Corporations net income
and basic and diluted earnings per share would have been the pro forma amounts indicated below (000s omitted except per share data):

Three months endedMarch 31,
2006
     
     March 31,
2005As reported net income
     
     
     $330
        
     $412Stock option expenses
     22
        
     Less: additional stock-based compensation determinedunder the fair value method, net of tax
     (22
        )
     (22
        )$330
        
     $390As reported earnings per share
     $0.13
        
     $0.16Proforma earnings per share
     $0.13
        
     $0.15As reported earnings per diluted share
     $0.13
        
     $0.16Proforma earnings per diluted share
     $0.13
        
     $0.15




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





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





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





FORWARD-LOOKING STATEMENTS





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

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






7






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





Overview


Assets increased $5.1 million to $282.2 million at March 31, 2006 compared to $277.1 million at December 31, 2005.
Management attributes growth to its continued focus on increasing the Banks commercial loan portfolio with management expecting a continued rise in interest rates in the first half of 2006.
Management attributes core deposit growth to an incentive program in the Banks branch offices and the ability to offer higher interest rates on most of its deposit products.





Securities


Securities decreased to $13.8 million at March 31, 2006 compared to $14.6 million at December 31, 2005.  The decrease
was attributable to the maturity of $2.8 million in securities offset by purchases of $2.0 million as part of ongoing management of the Banks liquidity and investment portfolio.





Loans


The Banks net loan portfolio increased by $5.5 million, or 2.6%, from $213.1 million at December 31, 2005 to
$218.6 million at March 31, 2006.  The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:






March 31, 2006
     
     December 31, 2005Amount
     
     Percent
     
     Amount
     
     Percent(Dollars in thousands)Real Estate Loans:One-to-four family
     $140,108
        
     63.1
        %
     $138,473
        
     63.9
        %Multi-family
     7,440
        
     3.3
        
     3,534
        
     1.7Commercial
     32,845
        
     14.8
        
     33,162
        
     15.3Construction or development
     6,057
        
     2.7
        
     5,415
        
     2.5Total real estate loans
     186,450
        
     83.9
        
     180,584
        
     83.4Other loans:Consumer loans:Automobile
     2,268
        
     1.0
        
     2,447
        
     1.1Home equity
     16,674
        
     7.5
        
     16,170
        
     7.5Manufactured housing
     567
        
     0.3
        
     576
        
     0.3Other
     7,772
        
     3.5
        
     7,745
        
     3.5Total consumer loans
     27,281
        
     12.3
        
     26,938
        
     12.4Commercial Business Loans
     8,372
        
     3.8
        
     9,086
        
     4.2Total other loans
     35,653
        
     16.1
        
     36,024
        
     16.6Total Loans
     222,103
        
     100.0
        %
     216,608
        
     100.0
        %Less:Allowance for loan losses
     2,793
        
     
        
     2,895Net deferred loan fees
     677
        
     
        
     640Loans in process
     
        
     
        
     Total Loans, net
     $218,633
        
     
        
     $213,073



8






Loans, continued





One-to-four family loans increased as new loan production increased. Multi-family loans increased as a result of three
new loans originated in the first quarter of 2006 totaling $3.9 million collateralized by three separate apartment complexes. Management expects most future growth in the loan portfolio to come from
increased originations of commercial real estate and business loans with  expanded geographic outreach facilitated by the acquisition. The availability 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.





The allowance for loan losses was $2,793,000 at March 31, 2006 and $2,895,000 at December 31, 2005, a reduction of
$102,000 due to $118,000 in charge-offs and $16,000 in recoveries. Charge-offs for the quarter ended March 31, 2006 included $60,000 of one-to-four family mortgage loans, $53,000 of consumer loans,
and $5,000 of commercial business loans not collateralized by real estate.  Recoveries for the quarter ended March 31, 2006 were almost entirely from consumer loans.





Deposits





Total deposits increased $10.8 million, or 6.3%, from $172.7 million at December 31, 2005 to $183.5 million at March 31,
2006.  The increase can be attributed to a $7.2 million increase in certificates of deposit, a $1.8 million increase in money market accounts, a  $1.4 million increase in non-interest bearing
accounts, and a $0.4 million increase in all other types of deposits combined. Of the increase in certificates of deposit, $1.1 million was in the form of brokered deposits.  Most of the remaining
increase came from offering higher interest rates on short-term certificates of deposit in response to a relatively flat interest rate yield curve and rates offered by local competition. Brokered
deposits have been utilized to provide additional liquidity or reduce excess liquidity depending on current conditions. The increase in money market accounts was attributed to the Bank offering
higher interest

rates on its Investor Money Market account. Management expects future deposit growth to come from increased sales and marketing efforts to attract lower cost savings and checking accounts as well as
product enhancement.





Federal Home Loan Bank Advances





Federal Home Loan Bank (FHLB) advances decreased $5.4 million or 9.1% from $59.6 million at December 31, 2005 to $54.2
million at March 31, 2006. The decrease was the result of the Bank repaying maturing advances. Management is attempting to reduce its reliance on borrowed funds through the growth of deposits. Should
this strategy not succeed, management anticipates the need for  future borrowings to fund loan growth. See Net Interest Income discussion below.


Equity





Total equity was $40.2 million at March 31, 2006 compared to $40.6 million at December 31, 2005.  This represents 14.2%
and 14.6% of total assets at March 31, 2006 and December 31, 2005, respectively.  The decrease in equity for the three months ended March 31, 2006 was primarily the result of the stock repurchase
program announced January 30, 2006 where 50,000 shares totaling $599,000 were purchased.  Other factors contributing to the decrease in equity were $160,000 in dividend payments offset by $330,000 in
earnings for the same period. 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 March 31, 2006 decreased $104,000
compared to the same period one year ago. The Banks net interest margin decreased to 3.46% for the quarter ended March 31, 2006 from 3.61% for the quarter ended March 31, 2005. Our net interest
margin decreased primarily from offering certificates of deposit and money market accounts at higher interest rates that increased the Banks cost of funds in response to local competition and a
rising interest rate environment. Interest income from loans represented 92.4% of total interest income for the quarter ended March 31, 2006 compared to 94.6% for the same period in 2005. The
Banks ability to maintain the net interest margin is heavily dependent on future loan demand and its ability to attract core deposits to offset the affect of higher cost CDs and borrowings.






9






Net Interest Income, continued





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 31,2006
     
     2005Average
Outstanding
Balance
     
     Interest
Earned/
Paid
     
     Yield/
Rate
     
     Average
Outstanding
Balance
     
     Interest
Earned/
Paid
     
     Yield/
Rate(dollars in thousands)Fed Funds and overnight deposits
     
     
     $7,601
        
     $99
        
     5.28
        %
     $6,603
        
     $47
        
     2.95
        %Investment securities
     13,906
        
     140
        
     4.08
        
     11,553
        
     105
        
     3.69Other securities
     4,773
        
     67
        
     5.69
        
     4,708
        
     51
        
     4.31Loans receivable
     218,619
        
     3,726
        
     6.91
        
     222,837
        
     3,563
        
     6.48Total earning assets
     $244,899
        
     $4,032
        
     6.68
        
     $245,701
        
     $3,766
        
     6.22Demand and NOW Accounts
     $32,594
        
     $18
        
     0.22
        
     $33,409
        
     20
        
     0.24Money market accounts
     16,565
        
     101
        
     2.47
        
     18,482
        
     47
        
     1.03Savings accounts
     26,503
        
     27
        
     0.41
        
     29,167
        
     31
        
     0.43Certificates of deposit
     100,868
        
     997
        
     4.01
        
     88,585
        
     626
        
     2.87Federal Home Loan Bank Advances
     57,428
        
     773
        
     5.46
        
     65,169
        
     822
        
     5.12Total interest bearing liabilities
     $233,958
        
     1,916
        
     3.32
        
     $234,812
        
     1,546
        
     2.67Net interest income
     
        
     $2,116
        
     
        
     
        
     $2,220Net interest spread
     
        
     
        
     3.36
        %
     
        
     
        
     3.55
        %Net interest margin
     
        
     
        
     3.46
        %
     
        
     
        
     3.61
        %


Provision for Loan Losses





The Bank recorded $0 provision for loan losses for the quarter ended March 31, 2006 compared to a $385,000 recovery for
the quarter ended March 31, 2005. The recovery in 2005 was possible due to the Bank receiving payoffs on two loan relationships totaling $1.5 million for which the Bank had previously provided loan
loss allowances of $535,000. No provision in the first quarter of 2006 was needed due to improved underwriting and a lower amount of classified loans. Net charge-offs for the quarter ended March 31,
2006 totaled $102,000 compared to $480,000 for the quarter ended March 31, 2005. The decreased level of charge-offs in 2006 was the result of improved credit quality in our loan portfolio resulting
from aggressive efforts in dealing with problem loans in 2005.  See Loans discussion above.





The following table presents non-performing assets and certain asset quality ratios at March 31, 2006 and December 31,
2005.






March 31, 2006
     December 31, 2005(Dollars in thousands)Non-performing loans
     
     $833
        
     $811Real estate in judgment
     1,443
        
     1,349Foreclosed and repossessed assets
     1,041
        
     1,462Total non-performing assets
     $3,317
        
     $3,622Non-performing loans to total loans
     .38
        %
     0.37
        %Non-performing assets to total assets
     1.18
        %
     1.31
        %Allowance for loan losses to non-performing loans
     335.29
        %
     356.97
        %Allowance for loan losses to net loans receivable
     1.28
        %
     1.36
        %


The Bank had 15 non-performing loan relationships as of March 31, 2006 compared to 11 non-performing loan relationships
as of December 31, 2005. The improvement of asset quality remains a priority as management continues to focus on loan growth.





10






Noninterest Income





Noninterest income decreased by $28,000 to $752,000 for the quarter ended March 31, 2006 as compared to $780,000 for the
quarter ended March 31, 2005. Gain on sale of loans decreased to $68,000 from $137,000 for the same period a year ago as mortgage banking activities were reduced as a result of total sales volume for
the quarter (28 loans as of March 31, 2006 compared to 45 loans as of March 31, 2005) being affected by a sluggish local economy, rising interest rates and less refinancing activity. Management
expects loan sales volume to be higher in the second, third and fourth quarters of 2006 than it was in the first quarter, however, it will be difficult to match the volume levels attained in 2005.
Other income increased $45,000 for the quarter ended March 31, 2006 as compared to the same period in 2005. Included in other income, net gains on sales of real estate owned were $33,000 for the
quarter ended

March 31, 2006, compared to no gains or losses on sales of real estate for the quarter ended March 31, 2005, and investment services income increased $6,000 for the quarter ended March 31, 2006 as
compared to the same period in 2005.





Noninterest Expense





Noninterest expense decreased by $358,000 for the quarter ended March 31, 2006 compared to the quarter ended March 31,
2005, a decrease of 12.7%. Occupancy and equipment decreased $31,000 due to decreased maintenance costs and depreciation expense. Professional fees decreased $16,000 as legal and employee recruiting
costs decreased. Foreclosed property expenses decreased $254,000 for the three months ended March 31, 2006 compared to the same period in 2005.  Management recorded a $275,000 writedown of a
foreclosed property in March 2005, and the Bank had a $21,000 increase in foreclosed property operating expenses for the quarter ended March 31, 2006 as compared to the same period in 2005.
Amortization of core deposit intangible decreased $24,000 for the quarter ended March 31, 2006 as compared to the same period in 2005 as management expects to see a $6,000 per month decrease in these
costs for the

remainder of 2006.   Other decreases in noninterest expense for the quarter ended March 31, 2006 as compared to the same period for 2005 include a $9,000 decrease in accrued Michigan Single Business
taxes due to lower taxable income and a $5,000 decrease in office supplies and printing expenses resulting from the reduction of supply inventory levels.





Federal Income Tax Expense





The Companys provision for federal income taxes decreased $77,000 for the quarter ended March 31, 2006 compared to
the same period in 2005 due to decreased income before taxes in 2006.   The effective tax rate for the quarter ended March 31, 2006 was 18.5% of income before tax as compared to 26.9% for the same
period in 2005.  The difference between the effective tax rates and the federal corporate income tax rate of 34% is attributable to the low income housing credits available to the Bank from the
investment in the limited partnership, fluctuations of permanent book and tax differences such as non-taxable income and non-deductible expenses, and adjustments made to the tax accruals as the
Company finalized its year end tax return.  The Company expects the effective tax rate to increase to approximately 24% -25% for the remainder of 2006.LIQUIDITY





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





Liquidity management is both a daily and long-term function of business management.  Excess liquidity is generally
invested in short-term investments such as overnight deposits.  On a longer-term basis, the Bank maintains a strategy of investing in various investments and lending products.  The Bank uses its
sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. Certificates of deposit scheduled to mature
in one year or less at March 31, 2006 totaled $71.5 million.  Management believes that a significant portion of these certificates of deposit will remain with the Bank provided the Bank pays a rate
of interest that is competitive both in the local and national markets.





If necessary, additional funding sources include additional deposits and Federal Home Loan Bank advances.  Deposits can
be obtained in the local market area and from out of market sources; however, this may require the Bank to offer interest rates higher than those of the competition.  At March 31, 2006 and based on
current collateral levels, the Bank could borrow an additional $27.5 million from the Federal Home Loan Bank at prevailing interest rates.  This borrowing capacity can be increased in the future if
the Bank pledges additional collateral to the Federal Home Loan Bank.  The Company anticipates that it will continue to have sufficient funds, through deposits and borrowings, to meet its current
commitments.






11






LIQUIDITY, continued





The Banks total cash and cash equivalents increased by $1.2 million during the three month period ended March 31,
2006 compared to a $1.6 million increase for the same period in 2005. The primary provider of cash for the three months ended March 31, 2006 was an increase in deposits totaling $10.7 million
compared to an increase in deposits of $9.0 million for the three months ended March 31, 2005. Maturities of available for sale securities net of purchases provided $0.7 million for the three months
ended March 31, 2006 whereas the same activity used $5.4 million for the same period in 2005. The primary use of cash for the three months ended March 31, 2006 was due to new loan originations
exceeding collections on loans by $6.1 million compared to collections exceeding new loan originations by $1.4 million during the three months ended March 31, 2005.  FHLB advance repayments net of
new borrowings used

$5.4 million during the three months ended March 31, 2006 compared to $3.5 million for the three months ended March 31, 2005. Management expects its primary source of funds to be new deposit balances
and its primary use of funds to be growth in loan balances.





CONTRACTUAL OBLIGATIONS





The Corporation has certain obligations and commitments to make future payments under contracts.  At March 31, 2006, the
aggregate contractual obligations and commitments are:





Contractual Obligations
     Payments Due by PeriodTotal
     
     Less than
1 year
     
     1-3
years
     
     3-5
years
     
     After
5 years(Dollars in Thousands)Certificates of deposit
     
     
     $104,127
        
     $71,544
        
     $25,530
        
     $7,045
        
     $8FHLB advances
     54,176
        
     6,199
        
     26,299
        
     8,328
        
     13,350Total
     $158,303
        
     $77,743
        
     $51,829
        
     $15,373
        
     $13,358Other Commitments
     Amount of commitment expiration per periodTotal
     
     Less than
1 year
     
     1-3
years
     
     3-5
years
     
     After
5 years(Dollars in Thousands)Commitments to grant loans
     
     
     $7,280
        
     $7,280
        
     $
        
     $
        
     $Unfunded commitments under HELOCs
     17,604
        
     1,280
        
     3,831
        
     3,234
        
     9,259Unfunded commitments under Commercial LOCs
     385
        
     385
        
     
        
     
        
     Letters of credit
     64
        
     64
        
     
        
     
        
     Total
     $25,333
        
     $9,009
        
     $3,831
        
     $3,234
        
     $9,259


Commitments to grant loans are governed by the Banks credit underwriting standards, as established by the
Banks Loan Policy. The Banks policy is to grant Home Equity Lines of Credits (HELOCs) for periods of up to 15 years.





CAPITAL RESOURCES





The Bank is subject to various regulatory capital requirements.  As of March 31, 2006, the Bank met the regulatory
standards to be classified as well capitalized.  The Banks regulatory capital ratios as of March 31, 2006 were as follows:  tangible capital, 9.84%; leverage capital, 9.84%; and
total risk-based capital, 15.22%.  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 QUALITIVE DISCLOSURES ABOUT MARKET RISK





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

economic value of the Corporation.





12






ITEM 3.

        QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK, 
continued





The Corporation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 March 31, 2005 and December 31, 2005 the Banks IRR level was regarded as minimal. Data from
the model as of March 31, 2006 is not yet available but management does not believe its IRR position has significantly changed since December 31, 2005.







ITEM 4.

        CONTROLS AND PROCEDURES





An evaluation of the Corporations disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934 (the Exchange Act)) as of March 31, 2006, was carried out under the supervision and with the participation of the Corporations Chief Executive
Officer, Chief Financial Officer and several other members of the Corporations senior management. The Companys Chief Executive Officer and Chief Financial Officer concluded that the
Corporations disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or
submits under the Exchange Act is (i) accumulated and communicated to the Corporations management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed,

summarized and reported within time periods specified in the SECs rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of
the Exchange Act) that occurred during the quarter ended March 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





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





13






OTHER INFORMATION







Item 1.

        LEGAL PROCEEDINGS





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







Item 1A.  RISK FACTORS





In addition to the other information set forth in this report, you should carefully consider the factors discussed in
Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results.
The risks described in our Annual Report on Form 10-K are not the only risks facing our Corporation. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition and/or operating results.







Item 2.

        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





The following table provides information about purchases of the Corporations common stock by the Corporation
during the quarter ended March 31, 2006.





ISSUER PURCHASES OF EQUITY SECURITIES





Period

        (a) Total Number of Shares Purchased

        (b) Average Price Paid per Share

        (c) Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs

        (d) Maximum Number (or Approximate Dollar Value) of
Shares that May Yet Be Purchased Under the Plans or Programs01/01/06 

01/31/06

        -0-

        Not Applicable

        -0-

        270,00002/01/06 

02/28/06

        50,000

        $11.98

        50,000

        220,00003/01/06 

03/31/06

        -0-

        Not Applicable

        -0-

        220,000Total

        50,000

        $11.98

        50,000

        220,000





(1)

        We repurchased an aggregate of 50,000 shares of our common stock pursuant to
the repurchase program that we announced on January 24, 2006 (the Program).


(2)

        Our board of directors approved the repurchase by us of up to an aggregate of
270,000 shares of our common stock pursuant to the Program.  The expiration date of this Program is January 30, 2007.  Unless terminated earlier by resolution of our board of directors, the Program
will expire on the earlier of such expiration date or when we have repurchased all shares authorized for repurchase under the Program.







Item 3.

        DEFAULTS UPON SENIOR SECURITIES





Not applicable





14






OTHER INFORMATION, continued







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.





15






SIGNATURES





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








MONARCH COMMUNITY BANCORP, INC.











Date: May 9, 2006

        By:

        /s/ Donald L. Denney





Donald L. Denney


President and Chief Executive Officer











Date: May 9, 2006

        And:

        /s/ Ralph A. Micalizzi, Jr.





Ralph A. Micalizzi, Jr.


Vice President, Chief Financial Officer


and Treasurer








16






INDEX TO EXHIBITS





Exhibit No.

        Description of Exhibit





31.1

        Rule 13a-14(a) Certification of the Corporations President and Chief
Executive Officer.





31.2

        Rule 13a-14(a) Certification of the Corporations Chief Financial Officer.





32

        Section 1350 Certification.








17