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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
 
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act
 
 Commission file number: 000-49814 MONARCH COMMUNITY BANCORP, INC. (Exact name of small business issuer 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(Issuers telephone number) Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: x No: o State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practical date: At May 10, 2004, there were
2,710,501 shares of the issuers Common Stock outstanding. Transitional Small Business Disclosure Format (check one): Yes: o No: x




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##### Table of Contents



Monarch Community Bancorp, Inc.
Index PART I - FINANCIAL INFORMATIONItem 1 -
    Condensed Financial Statements:Condensed Consolidated Balance Sheets - March 31, 2004 andDecember 31, 2003
    
    
    1Condensed Consolidated Statements of Income - Three MonthsEnded March 31, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Changes in Stockholders Equity -Three Months Ended March 31, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flow - Three Months endedMarch 31, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2 - Managements Discussion and Analysis or Plan of Operation
    
    
    6-10Item 3 - Controls and Procedures
    
    
    10PART II - OTHER INFORMATIONItem 1 - Legal Proceedings
    
    
    11Item 2 - Changes in Securities and Small Business Issuer Purchases of Equity Securities
    
    
    11Item 3 - Defaults Upon Senior Securities
    
    
    11Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    11Item 5 - Other Information
    
    
    11Item 6 - Exhibits and Reports on Form 8-K
    
    
    11SIGNATURES
    
    
    12Rule 13a-14(a) Certification of President and CEORule 13a-14(a) Certification of CFOSection 1350 Certification




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Condensed Consolidated Balance Sheets(unaudited)March 31,
    
    December 31,2004
    
    2003(Dollars in thousands,except per share data)ASSETSCash and due from banks
    
    $
    6,040
    
    
    $
    6,357Federal Funds sold and overnight deposits
    
    
    19,286
    
    
    
    20,974Total cash and cash equivalents
    
    
    25,326
    
    
    
    27,331Securities-Available for sale
    
    
    19,514
    
    
    
    19,648Securities-Held to maturity
    
    
    281
    
    
    
    286Other securities
    
    
    3,062
    
    
    
    3,029Real Estate Investment  Limited partnership, at equity
    
    
    1,381
    
    
    
    1,415Loans held for sale
    
    
    2,058
    
    
    
    421Loans, net of allowance for loan losses
    
    
    142,672
    
    
    
    141,225Accrued interest receivable
    
    
    1,033
    
    
    
    1,041Foreclosed assets, net
    
    
    2,207
    
    
    
    2,177Premises and equipment
    
    
    4,093
    
    
    
    4,168Deferred income taxes
    
    
    877
    
    
    
    882Other assets
    
    
    2,182
    
    
    
    1,500Total assets
    
    $
    204,686
    
    
    $
    203,123LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Noninterest-bearing
    
    
    4,994
    
    
    
    4,183Interest-bearing
    
    
    102,887
    
    
    
    103,057Total deposits
    
    
    107,881
    
    
    
    107,240Federal Home Loan Bank advances
    
    
    57,384
    
    
    
    57,384Accrued expenses and other liabilities
    
    
    1,999
    
    
    
    1,069Total liabilities
    
    
    167,264
    
    
    
    165,693Commitments and contingent liabilities
    
    
    
    
    
    
    Stockholders equityCommon stock-$0.01 par value
authorized-20,000,000 shares issued and
outstanding-2,399,550 shares at March 31, 2004 and December 31, 2003
    
    
    24
    
    
    
    24Additional paid in capital
    
    
    23,352
    
    
    
    23,352Retained earnings
    
    
    16,550
    
    
    
    16,567Accumulated other comprehensive income
    
    
    84
    
    
    
    75Unearned Compensation
    
    
    (2,588
    )
    
    
    (2,588
    )Total stockholders equity
    
    
    37,422
    
    
    
    37,430Total liabilities and stockholders equity
    
    $
    204,686
    
    
    $
    203,123
 See accompanying notes to condensed consolidated financial statements Page 1




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Condensed Consolidated Statements of IncomeThree Months
    
    Three MonthsEnded
    
    EndedMarch 31,
    
    March 31,2004
    
    2003(Dollars in thousands)Interest IncomeLoans, including fees
    
    $
    2,541
    
    
    $
    2,961Investment securities
    
    
    156
    
    
    
    146Federal funds sold and overnight deposits
    
    
    46
    
    
    
    62Total interest income
    
    
    2,743
    
    
    
    3,169Interest ExpenseDeposits
    
    
    606
    
    
    
    771Federal Home Loan bank advances
    
    
    798
    
    
    
    779Total interest expense
    
    
    1,404
    
    
    
    1,550Net Interest Income
    
    
    1,339
    
    
    
    1,619Provisions for Loan Losses
    
    
    
    
    
    
    225Net Interest Income after Provision
for Loan Losses
    
    
    1,339
    
    
    
    1,394Noninterest Income
Fees and service charges
    
    
    226
    
    
    
    233Loan servicing fees
    
    
    57
    
    
    
    49Net gain on sale of loans
    
    
    168
    
    
    
    385Other income
    
    
    34
    
    
    
    17Total noninterest income
    
    
    485
    
    
    
    684Noninterest ExpensesSalaries and employees benefits
    
    
    910
    
    
    
    846Occupancy and equipment
    
    
    197
    
    
    
    192Data processing
    
    
    99
    
    
    
    93Mortage banking
    
    
    35
    
    
    
    106Professional fees
    
    
    99
    
    
    
    89Office supplies and forms
    
    
    36
    
    
    
    27Advertising and promotion
    
    
    24
    
    
    
    14Other general and administrative
    
    
    277
    
    
    
    244Total noninterest expense
    
    
    1,677
    
    
    
    1,611Income  Before Income Taxes
    
    
    147
    
    
    
    467Income Taxes
    
    
    44
    
    
    
    148Net Income
    
    $
    103
    
    
    $
    319Earnings Per ShareBasic
    
    $
    0.04
    
    
    $
    0.14Diluted
    
    $
    0.04
    
    
    $
    0.14
 See accompanying notes to condensed consolidated financial statements Page 2




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Condensed Consolidated Statements of Changes in Stockholders EquityCommon 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
    )
    
    $
    36,949Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    319Change in unrealizedgain on securities availablefor sale, net of tax of $9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336Dividends paid ($0.05/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    
    
    
    
    
    
    
    
    (115
    )Balance, March 31, 2003
    
    
    2,314
    
    
    $
    23
    
    
    $
    22,149
    
    
    $
    16,583
    
    
    $
    81
    
    
    
    ($1,666
    )
    
    $
    37,170Balance, January 1, 2004
    
    
    2,399
    
    
    $
    24
    
    
    $
    23,352
    
    
    $
    16,567
    
    
    $
    75
    
    
    
    ($2,588
    )
    
    $
    37,430Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    103Change in unrealized
gain on securities available
for sale, net of tax of $5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112Dividends paid ($0.05/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    
    
    
    
    
    
    
    
    (120
    )Balance, March 31, 2004
    
    
    2,399
    
    
    $
    24
    
    
    $
    23,352
    
    
    $
    16,550
    
    
    $
    84
    
    
    
    ($2,588
    )
    
    $
    37,422
 See accompanying notes to condensed consolidated financial statements Page 3




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Condensed Consolidated Statements of Cash FlowsThree Months
    
    Three MonthsEnded
    
    EndedMarch 31,
    
    March 31,2004
    
    2003(Dollars in thousands)Cash Flows from Operating ActivitiesNet Income
    
    $
    103
    
    
    $
    319Adjustments to reconcile net income to net cash from operating activities:Depreciation
    
    
    101
    
    
    
    114Provision for Loan Losses
    
    
    
    
    
    
    225Amortization
    
    
    117
    
    
    
    198(Gain) Loss on sale of foreclosed assets
    
    
    (1
    )
    
    
    11Deferred income taxes
    
    
    
    
    
    
    (68
    )Mortgage loans originated for sale
    
    
    (7,102
    )
    
    
    (13,734
    )Proceeds from sale of mortgage loans
    
    
    5,633
    
    
    
    13,594Gain on sale of mortgage loans
    
    
    (168
    )
    
    
    (385
    )(Gain) Loss on disposal of premises and equipment
    
    
    
    
    
    
    Net change in:Real Estate Investment
    
    
    34
    
    
    
    35Deferred loan fees
    
    
    (12
    )
    
    
    (3
    )Accrued interest receivable
    
    
    8
    
    
    
    18Other assets
    
    
    (717
    )
    
    
    (46
    )Accrued expenses and other liabilities
    
    
    930
    
    
    
    926Net cash provided by (used in) operating activities
    
    
    (1,074
    )
    
    
    1,204Cash Flows from Investing ActivitiesProceeds from maturities of HTM securities
    
    
    5
    
    
    
    Purchases of HTM securities
    
    
    
    
    
    
    Proceeds from maturities of AFS securities
    
    
    1,565
    
    
    
    17Purchases of available for sale securities
    
    
    (1,499
    )
    
    
    (1,274
    )Purchases of other securities
    
    
    (38
    )
    
    
    (101
    )Proceeds from maturities of other securities
    
    
    5
    
    
    
    Loan originations and principal collections, net
    
    
    (1,960
    )
    
    
    (3,213
    )Proceeds from sale of foreclosed assets
    
    
    496
    
    
    
    699Proceeds from sale of premises and equipment
    
    
    
    
    
    
    Purchases of premises and equipment
    
    
    (26
    )
    
    
    (21
    )Loan to Employee Stock Ownership Plan
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (1,452
    )
    
    
    (3,893
    )Cash Flows from Financing ActivitiesNet increase (decrease) in deposits
    
    
    641
    
    
    
    10,041Proceeds from FHLB advances
    
    
    
    
    
    
    5,000Repayment of FHLB advances
    
    
    
    
    
    
    Issuance of Common Stock
    
    
    
    
    
    
    Issuance of dividend
    
    
    (120
    )
    
    
    (115
    )Net cash provided by (used in) financing activities
    
    
    521
    
    
    
    14,926Net increase (decrease) in cash and cash equivalents
    
    
    (2,005
    )
    
    
    12,237Cash and cash equivalents -January 1
    
    
    27,331
    
    
    
    20,207Cash and cash equivalents -March 31
    
    $
    25,326
    
    
    $
    32,444Supplemental Cash Flow Information:Cash paid for interest
    
    
    1,413
    
    
    
    1,541Cash paid for income taxes
    
    
    
    
    
    
    110Noncash investing activity  loans transferred to foreclosed assets
    
    
    525
    
    
    
    938
 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. Monarch Community Bank provides a broad range of banking services to its
primary market area of Branch and Hillsdale counties in Michigan. The Bank
operates five 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 minority
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 month periods ended March 31, 2004 are
not necessarily indicative of the results to be expected for the full year
period. 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 Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003The weighted average share reconciliation is as follows:Weighted average shares outstanding
    
    
    2,399,550
    
    
    
    2,314,375Less: Average nonvested RRP shares
    
    
    (   85,175
    )
    
    
    0Weighted average for basic EPS
    
    
    2,314,375
    
    
    
    2,314,375Dilutive affect of restricted stock and stock options
    
    
    82,692
    
    
    
    0Weighted average for dilutive EPS
    
    
    2,397,067
    
    
    
    2,314,375
 5




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STOCK-BASED COMPENSATION As permitted by SFAS No. 148, Accounting for Stock-Based Compensation, the
Company 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 Companys as reported and the pro forma information for the quarter ended
March 31, 2004 is as follows: March 31, 2004(Dollars in thousands, except per share data)As reported net income available to common shareholders
    
    $
    103Less: additional stock-based compensation determined
under the fair value method, net of tax
    
    
    12Pro forma net income
    
    $
    91As reported earnings per share
    
    $
    0.04Pro forma earnings per share
    
    $
    0.04As reported earnings per diluted share
    
    $
    0.04Pro forma earnings per diluted share
    
    $
    0.04
 There were no options outstanding during the quarter ended March 31, 2003. 
 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 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 assumption; 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 6




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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. FINANCIAL CONDITION Securities
Securities totaled $22.9 million at March 31, 2004 and December 31, 2003.
During the three months ended March 31, 2004, Monarch purchased $1.5 million in
government agency bonds that are classified as available for sale to replace
agency securities that had matured during the quarter. 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 $1.5 million, or 1%, from $141.2
million at December 31, 2003 to $142.7 million at March 31, 2004. Real estate
loans increased $737,000, or .6%. This increase was primarily from multifamily
and commercial real estate loans. Commercial business loans increased $344,000,
or 13.0%. The Bank is continuing its efforts to increase its commercial real
estate and business lending. Consumer loans increased $303,000, or 1.9%. The
increase in consumer loans was primarily in boat and recreational vehicles
loans and resulted from the Banks indirect lending program. The portion of the
Banks loan portfolio represented by real estate loans was 86.8% at March 31,
2004 compared to 87.1% at December 31, 2003. Deposits
Total deposits increased $641,000, or .6%, from $107.2 million at December 31,
2003 to $107.9 million at March 31, 2004. Within the deposit totals,
noninterest-bearing deposits increased by $811,000 and interest-bearing
deposits decreased $170,000 from December 31, 2003 to March 31, 2004. The
noninterest-bearing deposit increase is largely due to increases in municipal
and commercial checking accounts at the Bank. The decrease in interest-bearing
deposits is primarily in money market accounts, which decreased $422,000. Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances did not change from December 31, 2003 to
March 31, 2004. 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 three months ended March 31,
2004 compared to the three months ended March 31, 2003. Management is
evaluating 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 $37.4 million at March 31, 2004 and December 31, 2003. This
represents 18.3% and 18.4% of total assets at March 31, 2004 and December 31,
2003, respectively. Continued profitable operations during the three months
ended March 31, 2004 was offset by the Corporation paying dividends of $.05 per
share of common stock. These dividend payments reduced equity by $120,000. RESULTS OF OPERATIONS Net Interest Income
Net interest income before the provision for loan losses for the quarter ended
March 31, 2004 totaled $1.3 million and represented a decrease of $280,000
compared to the same period one year ago. The Corporations net interest
margin decreased from 3.35% for the quarter ended March 31, 2003 to 2.87% for
the quarter ended March 31, 2004. The net interest margin has been impacted by
continued low market interest rates and the Banks level of FHLB borrowings
which are at fixed rates that do not decline along with market rates. These
borrowings cannot be prepaid without significant penalties. Net interest income
was also negatively impacted by the decrease of $6.7 million of average
interest earning assets (offset by the same reduction in liabilities).
Interest income from loans represented 92.6% of total interest income for the
first quarter of 2004 compared to 93.4% for the same period in 2003. 7




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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. All average balances are average daily balances. Three Months Ended March 31,2004
    
    
    
    
    
    
    
    
    
    2003Average
    
    Interest
    
    
    
    
    
    Average
    
    InterestOutstanding
    
    Earned/
    
    Yield/
    
    Outstanding
    
    Earned/
    
    Yield/Balance
    
    Paid
    
    Rate
    
    Balance
    
    Paid
    
    Rate(Dollars in Thousands)Fed Funds and overnight deposits
    
    $
    19,339
    
    
    $
    46
    
    
    
    0.96
    %
    
    $
    20,581
    
    
    $
    62
    
    
    
    1.22
    %Investment securities
    
    
    19,342
    
    
    
    119
    
    
    
    2.50
    %
    
    
    17,526
    
    
    
    110
    
    
    
    2.55
    %Other securities
    
    
    3,011
    
    
    
    37
    
    
    
    4.98
    %
    
    
    2,844
    
    
    
    36
    
    
    
    5.13
    %Loans receivable (1)
    
    
    144,784
    
    
    
    2,541
    
    
    
    7.12
    %
    
    
    152,227
    
    
    
    2,961
    
    
    
    7.89
    %Total earning assets
    
    $
    186,476
    
    
    
    2,743
    
    
    
    5.97
    %
    
    $
    193,178
    
    
    
    3,169
    
    
    
    6.66
    %Demand and NOW Accounts
    
    $
    13,322
    
    
    
    14
    
    
    
    0.43
    %
    
    $
    13,600
    
    
    
    25
    
    
    
    0.75
    %Money market accounts
    
    
    10,631
    
    
    
    33
    
    
    
    1.26
    %
    
    
    9,941
    
    
    
    40
    
    
    
    1.63
    %Savings accounts
    
    
    15,906
    
    
    
    17
    
    
    
    0.43
    %
    
    
    15,458
    
    
    
    44
    
    
    
    1.15
    %Certificates of deposit
    
    
    65,865
    
    
    
    542
    
    
    
    3.34
    %
    
    
    74,461
    
    
    
    662
    
    
    
    3.61
    %Federal Home Loan Bank Advances
    
    
    57,384
    
    
    
    798
    
    
    
    5.64
    %
    
    
    55,944
    
    
    
    779
    
    
    
    5.65
    %Total interest bearing liabilities
    
    $
    163,108
    
    
    
    1,404
    
    
    
    3.49
    %
    
    $
    169,404
    
    
    
    1,550
    
    
    
    3.71
    %Net interest income
    
    
    
    
    
    $
    1,339
    
    
    
    
    
    
    
    
    
    
    $
    1,619Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.47
    %
    
    
    
    
    
    
    
    
    
    
    2.95
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.87
    %
    
    
    
    
    
    
    
    
    
    
    3.35
    %
 Provision for Loan Losses
The provision for loan losses was $0 for the quarter ended March 31, 2004
compared to $225,000 for the quarter ended March 31, 2003. We were able to
maintain an adequate allowance for loan losses without recording a provision
for loan losses during the quarter ended March 31, 2004 primarily due to the
reduced level of non-performing loans at March 31, 2004 as compared to December
31, 2003. The allowance for loan losses was $2,544,000 at March 31, 2004 and
$2,618,000 at December 31, 2002. The allowance as a percent of gross loans was
1.75% and 1.81% at March 31, 2004 and December 31, 2003, respectively. Net
charge-offs for the quarter ended March 31, 2004 totaled $74,000 compared to
$186,000 for the quarter ended March 31, 2003. Management attributes the lower
charge offs in 2004 to the continued aggressive collection efforts and
foreclosure activity which began in 2003. The following table presents non-performing assets and certain asset quality
ratios at March 31, 2004 and December 31, 2003. March 31, 2004
    
    December 31, 2003(Dollars in thousands)Non-performing loans
    
    $
    2,780
    
    
    $
    3,746Real estate in judgment
    
    
    1,079
    
    
    
    1,082Foreclosed and repossessed assets
    
    
    1,151
    
    
    
    1,142Total non-performing assets
    
    $
    5,010
    
    
    $
    5,970Non-performing loans to total loans
    
    
    1.91
    %
    
    
    2.60
    %Non-performing assets to total assets
    
    
    2.45
    %
    
    
    2.94
    %Allowance for loan losses to non-performing loans
    
    
    91.5
    %
    
    
    69.9
    %Allowance for loan losses to loans receivable
    
    
    1.75
    %
    
    
    1.81
    %
 8




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Non-performing loans includes a $1.6 million loan relationship which was put on
non-accrual status as of June 30, 2003. Two loans were made to fund the
construction of a commercial building in southwest Michigan that has been
completed. At March 31, 2004, $949,000 is owing on a 21 year, fixed rate loan
which is 11 payments delinquent. $645,000 is owing on a one-year note which
matured May 2003. The Bank made protective advances of $31,000 during the
quarter ended March 31, 2004. The Bank is discussing a workout agreement with
the borrower. The entire loan relationship has been classified by management as
doubtful as of March 31, 2004. The appropriateness of the allowance for loan losses is reviewed by management
based upon our evaluation of then-existing economic and business conditions
affecting our key lending areas and other conditions, such as credit quality
trends (including trends in delinquencies, nonperforming loans and foreclosed
assets expected to result from existing conditions), collateral values, loan
volumes and concentrations, specific industry conditions within portfolio
segments and recent loss experience in particular segments of the portfolio
that existed as of the balance sheet date and the impact that these conditions
were believed to have had on the collectibility of the loan. Senior management
reviews these conditions quarterly. To the extent that any of these conditions
is evidenced by a specifically identifiable problem credit or portfolio segment
as of the evaluation date, managements estimate of the effect of this
condition may be reflected as a specific allowance applicable to this credit or
portfolio segment. The allowance for loan losses is based on estimates of losses inherent in the
loan portfolio. Actual losses can vary significantly from the estimated
amounts. Our methodology as described permits adjustments to any loss factor
used in the computation of the formula allowance in the event that, in
managements judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon
any more recent information that has become available. Noninterest Income
Noninterest income decreased by $199,000 to $485,000 for the quarter ended
March 31, 2004 as compared to $684,000 for the quarter ended March 31, 2003.
Gain on sale of loans decreased to $168,000 compared to $385,000 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. Noninterest Expense
Noninterest expense increased by $66,000 for the quarter ended March 31, 2004
compared to the quarter ended March 31, 2003. Salaries and benefits increased
$64,000. Increased expenses related to the Employee Stock Ownership Plan, the
Recognition and Retention Plan and the Pension Plan were partially offset by
decreases in wage expense and employee health insurance costs which were the
result of a reduced number of employees in 2004 compared to 2003 as well as an
increase in the employee contribution to
health insurance premiums. Mortgage banking expense decreased $71,000
consistent with the reduced mortgage banking activity in 2004 compared to 2003.
Other operating expenses increased $33,000 primarily due to increased expenses
related to the Banks real estate owned and repossessed assets which increased
$31,000. Federal Income Tax Expense
The provision for federal income tax was 30% of pretax income for the three
months ended March 31, 2004 as compared to 32% for the three months ended March
31, 2003. The difference between the effective tax rates and the federal
corporate income tax rate of 34% is attributable to the fluctuation of
permanent book and tax differences such as non-deductible expenses and
tax-exempt income as well as 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. At March 31, 2004, the total approved loan origination
commitments outstanding including the unadvanced portion of construction loans
amounted to $2.8 million. Unused commercial and consumer lines of credit were
$6.3 million as of March 31, 2004; there were no outstanding letters of credit
as of that date. Certificates of 9




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##### Table of Contents



deposit scheduled to mature in one year or
less at March 31, 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 March 31, 2004 and
based on current collateral levels, Monarch could borrow an additional $4.4
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 $2.0 million during the
three-month period ended March 31, 2004 compared to a $12.2 million increase
for the same period in 2003. During the three months ended March 31, 2003,
management structured deposit rates to attract certificates of deposit as it
was believed that market interest rates had bottomed out. Cash provided by
increased deposits totaled $10.0 million in 2003 compared to $641,000 for the
same period in 2004. A $5 million FHLB advance also provided cash for the three
months ended March 31, 2003 while no borrowings were undertaken for the same
period in 2004. ACQUISITION On April 15, 2004 the Companys acquisition of MSB Financial, Inc., parent
company of Marshall Savings Bank, was completed. Accordingly, MSB Financial was
merged with and into Monarch Community Bancorp, Inc. In June of 2004 it is
expected that Marshall Savings Bank will merge with and into Monarch Community
Bank. The Company will issue a total of 310,951 shares of its common stock and
pay a total of approximately $19.7 million to former MSB Financial
stockholders. Additional information regarding this purchase can be found in
the Current Report on Form 8-K filed by the Company on April 30, 2004. CAPITAL RESOURCES The Bank is subject to various regulatory capital requirements. As of March
31, 2004, the Bank met the regulatory standards to be classified as well
capitalized. The Banks regulatory capital ratios as of March 31, 2004 were
as follows: tangible capital, 14.1%; leverage capital, 14.1 %; and total
risk-based capital, 25.1%. The regulatory capital requirements to be
considered well capitalized are 3.0%, 5.0%, and 10.0%, respectively. The Bank
will remain 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 March 31, 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 March 31, 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. 10




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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 Not applicable 
 Item 5. OTHER INFORMATION Not applicable 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits See the index to exhibits.  (b)
    
    Reports on Form 8-K  (1)
    
    Registrant filed a Current Report on Form 8-K on February 11,
2004 to report its earnings for the year ended December 31, 2003. 11




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##### Table of Contents



SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. MONARCH COMMUNITY BANCORP, INC.Date: May 12, 2004
    By:
    /s/ John R. SchrollJohn R. SchrollPresident and Chief Executive Officer Date: May 12, 2004
    And: /s/ William C. KurtzWilliam C. KurtzSenior Vice President and Treasurer 12




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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.
 13