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, 2007 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
        04-3627031(State or other jurisdiction
        (I.R.S. employerof incorporation or organization
        identification no.)
  375 North Willowbrook Road, Coldwater, MI  49036 (Address of principal executive offices)  517-278-4566 (Registrants telephone number)  Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: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 fileroAccelerated fileroNon-accelerated filerx  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:oNo: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 11, 2007, there were 2,533,781 shares of the issuers Common Stock outstanding.   Monarch Community Bancorp, Inc.

Index




PART I  FINANCIAL INFORMATIONItem 1  Condensed Financial Statements:Condensed Consolidated Balance Sheets  March 31, 2007 andDecember 31, 2006
        1Condensed Consolidated Statements of Income  Three MonthsEnded March 31, 2007 and 2006
        2Condensed Consolidated Statements of Changes in Stockholders Equity Three Months Ended March 31, 2007 and 2006
        3Condensed Consolidated Statements of Cash Flows  Three Months EndedMarch 31, 2007 and 2006
        4Notes to Condensed Consolidated Financial Statements
        5 - 7Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
        7 - 13Item 3  Quantitative and Qualitative Disclosures about Market Risk
        13Item 4 - Controls and Procedures
        14PART II  OTHER INFORMATIONItem 1  Legal Proceedings
        15Item 1A  Risk Factors
        15Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
        15Item 3  Defaults Upon Senior Securities
        15Item 4  Submission of Matters to a Vote of Security Holders
        15Item 5  Other Information
        15Item 6  Exhibits
        15SIGNATURES
        16CERTIFICATIONS
        17-20









PART IFINANCIAL INFORMATION




Item 1.
        CONDENSED FINANCIAL STATEMENTS


CondensedConsolidated
Balance Sheets





(Unaudited)March
            31,
        
        December
            31,2007
        
        2006(Dollars
            in thousands,except
            per share data)AssetsCash
            and due from banks
        
        $
        7,189
        
        $
        7,433Federal
            Home Loan Bank overnight time andother
            interest bearing deposits
        
        
        12,293
        
        
        7,864Total
            cash and cash equivalents
        
        
        19,482
        
        
        15,297Securities
            - Available for sale
        
        
        14,605
        
        
        13,706Securities
            - Held to maturity
        
        
        223
        
        
        228Other
            securities
        
        
        4,237
        
        
        4,237Real
            estate investment - Limited partnership, at equity
        
        
        942
        
        
        979Loans
            held for sale
        
        
        1,683
        
        
        937Loans,
            net
        
        
        226,551
        
        
        230,247Foreclosed
            assets, net
        
        
        1,433
        
        
        1,680Premises
            and equipment
        
        
        5,169
        
        
        5,261Goodwill
        
        
        9,606
        
        
        9,606Core
            deposit intangible
        
        
        1,024
        
        
        1,092Other
            assets
        
        
        6,319
        
        
        6,717Total
            assets
        
        $
        291,274
        
        $
        289,987Liabilities
            and Stockholders EquityLiabilitiesDeposits:Non-interest
            bearing
        
        $
        18,091
        
        $
        15,733Interest
            bearing
        
        
        175,366
        
        
        176,839Total
            deposits
        
        
        193,457
        
        
        192,572Federal
            Home Loan Bank advances
        
        
        54,476
        
        
        54,476Accrued
            expenses and other liabilities
        
        
        2,975
        
        
        2,953Total
            liabilities
        
        
        250,908
        
        
        250,001Commitments
            and Contingencies
        
        
        
        
        
        Stockholders
            EquityCommon
            stock - $0.01 par value, 20,000,000 shares authorized, 2,533,781shares
            issued and outstanding at March 31, 2007 and December 31, 2006
        
        
        25
        
        
        25Additional
            paid-in capital
        
        
        26,213
        
        
        26,191Retained
            earnings
        
        
        15,636
        
        
        15,319Accumulated
            other comprehensive income
        
        
        (22
        )
        
        (63
        )Unearned
            compensation
        
        
        (1,486
        )
        
        (1,486
        )Total
            stockholders equity
        
        
        40,366
        
        
        39,986Total
            liabilities and stockholders equity
        
        $
        291,274
        
        $
        289,987



See accompanying notes to condensed
consolidated financial statements.



1



Condensed Consolidated
Statements of Income (Unaudited)

Three Months
        
        Three MonthsEnded
        
        EndedMarch 31,
        
        March 31,2007
        
        2006(Dollars in thousands,except per share data)Interest IncomeLoans, including fees
        
        $
        4,079
        
        $
        3,726Investment securities
        
        
        207
        
        
        207Federal funds sold and overnight deposits
        
        
        141
        
        
        99Total interest income
        
        
        4,427
        
        
        4,032Interest ExpenseDeposits
        
        
        1,629
        
        
        1,143Federal Home Loan Bank advances
        
        
        724
        
        
        773Total interest expense
        
        
        2,353
        
        
        1,916Net Interest Income
        
        
        2,074
        
        
        2,116Provision for Loan Losses
        
        
        225
        
        
        Net Interest Income After Provision for Loan Losses
        
        
        1,849
        
        
        2,116Non-interest IncomeFees and service charges
        
        
        600
        
        
        458Loan servicing fees
        
        
        111
        
        
        117Net gain on sale of loans
        
        
        193
        
        
        68Other income
        
        
        96
        
        
        109Total non-interest income
        
        
        1,000
        
        
        752Non-interest ExpenseSalaries and employee benefits
        
        
        1,106
        
        
        1,279Occupancy and equipment
        
        
        266
        
        
        260Data processing
        
        
        187
        
        
        169Amortization of mortgage servicing rights
        
        
        86
        
        
        101Professional services
        
        
        105
        
        
        121Amortization of core deposit intangible
        
        
        68
        
        
        86NOW account processing
        
        
        44
        
        
        43ATM/Debit card processing
        
        
        44
        
        
        56Foreclosed property expense
        
        
        23
        
        
        57Other general and administrative
        
        
        262
        
        
        291Total non-interest expense
        
        
        2,191
        
        
        2,463Income - Before income taxes
        
        
        658
        
        
        405Income Taxes
        
        
        164
        
        
        75Net Income
        
        $
        494
        
        $
        330Earnings Per ShareBasic
        
        $
        0.21
        
        $
        0.13Diluted
        
        $
        0.21
        
        $
        0.13



See accompanying notes to condensed
consolidated financial statements.




2



Condensed Consolidated Statements of
Changes in Stockholders Equity (Unaudited)




Common Stock
        
        
        
        
        
        AccumulatedNumber
        
        
        
        Additional
        
        
        
        Otherof
        
        
        
        Paid in
        
        Retained
        
        Comprehensive
        
        UnearnedShares
        
        Amount
        
        Capital
        
        Earnings
        
        Income
        
        Compensation
        
        TotalBalance- 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
        )
        $
        Repurchase of 50,000 shares
        
        (50
        )
        
        
        
        
        (599
        )
        
        
        
        
        
        
        
        
        
        
        (599
        )Stock option expenses
        
        
        
        
        
        
        
        22
        
        
        
        
        
        
        
        
        
        
        
        22Comprehensive Income:Net Income
        
        
        
        
        
        
        
        
        
        
        330
        
        
        
        
        
        
        
        
        330Change in unrealized loss onsecurities
            available-for-sale,
        
        
        
        
        
        
        
        
        
        
        
        
        
        (15
        )
        
        
        
        
        (15
        )Total comprehensive income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        315Dividends paid ($0.06/share)
        
        
        
        
        
        
        
        
        
        
        (160
        )
        
        
        
        
        
        
        
        (160
        )Balance- March 31, 2006
        
        2,664
        
        $
        27
        
        $
        27,619
        
        $
        14,571
        
        $
        (170
        )
        $
        (1,893
        )
        $
        40,154Balance- January 1, 2007
        
        2,534
        
        $
        25
        
        $
        26,191
        
        $
        15,319
        
        $
        (63
        )
        $
        (1,486
        )
        $
        39,986Stock option expenses
        
        
        
        
        
        
        
        22
        
        
        
        
        
        
        
        
        
        
        
        22Comprehensive Income:Net Income
        
        
        
        
        
        
        
        
        
        
        494
        
        
        
        
        
        
        
        
        494Change
            in unrealized loss onsecurities
            available-for-sale,
        
        
        
        
        
        
        
        
        
        
        
        
        
        41
        
        
        
        
        
        41Total comprehensive income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        535Dividends paid ($0.07/share)
        
        
        
        
        
        
        
        
        
        
        (177
        )
        
        
        
        
        
        
        
        (177
        )Balance- March 31, 2007
        
        2,534
        
        $
        25
        
        $
        26,213
        
        $
        15,636
        
        $
        (22
        )
        $
        (1,486
        )
        $
        40,366



See accompanying notes to condensed
consolidated financial statements.




3



CondensedConsolidated
Statements of Cash Flows (Unaudited)

Three Months
        
        Three MonthsEnded
        
        EndedMarch 31,
        
        March 31,2007
        
        2006(Dollars in  thousands)Cash Flows From Operating ActivitiesNet Income
        
        $
        494
        
        $
        330Adjustments to reconcile net income to net cash from operating activitiesDepreciation and amortization
        
        
        278
        
        
        336Provision for loan losses
        
        
        225
        
        
        Stock option expense
        
        
        22
        
        
        22Gain on sale of foreclosed assets
        
        
        (66
        )
        
        (32
        )Mortgage loans originated for sale
        
        
        (8,373
        )
        
        (3,295
        )Proceeds from sale of mortgage loans
        
        
        7,821
        
        
        2,989Gain on sale of mortgage loans
        
        
        (193
        )
        
        (68
        )Loss on sale of available for sale securities
        
        
        19
        
        
        Loss on disposal of equipment
        
        
        4
        
        
        Net change in:Deferred loan fees
        
        
        7
        
        
        37Accrued interest receivable
        
        
        66
        
        
        (121
        )Other assets
        
        
        261
        
        
        733Accrued expenses and other liabilities
        
        
        31
        
        
        159Net cash provided by operating activities
        
        
        596
        
        
        1,090Cash
            Flows From Investing ActivitiesActivity
            in available-for-sale securities:Purchases
        
        
        (3,819
        )
        
        (1,993
        )Proceeds
            from sales of securities
        
        
        2,928
        
        
        Proceeds
            from maturities of securities
        
        
        42
        
        
        2,715Activity in held-to-maturity securities:Purchases
        
        
        
        
        
        (4
        )Loan originations and principal collections, net
        
        
        3,346
        
        
        (6,096
        )Proceeds
            from sale of foreclosed assets
        
        
        430
        
        
        953Purchase of premises and equipment
        
        
        (37
        )
        
        (56
        )Net cash provided by (used in) investing activities
        
        
        2,890
        
        
        (4,481
        )Cash
            Flows From Financing ActivitiesNet increase in deposits
        
        
        876
        
        
        10,748Repurchase of common stock
        
        
        
        
        
        (599
        )Dividends paid
        
        
        (177
        )
        
        (160
        )Proceeds from FHLB advances
        
        
        2,500
        
        
        Repayment
            of FHLB advances
        
        
        (2,500
        )
        
        (5,386
        )Net cash provided by financing activities
        
        
        699
        
        
        4,603Net Increase in Cash and Cash Equivalents
        
        
        4,185
        
        
        1,212Cash and Cash Equivalents- Beginning
        
        
        15,297
        
        
        16,286Cash and Cash Equivalents -End
        
        $
        19,482
        
        $
        17,498Supplemental Cash Flow Information:Cash paid for:Interest
        
        
        2,331
        
        
        1,860Income taxes
        
        
        100
        
        
        Noncash
            investing activities:Loans transferred to foreclosed assets
        
        
        117
        
        
        572Issuance 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 TOCONDENSED 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.



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 First Insurance Agency.  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.  The Bank also owns a 24.98% interest in a limited partnership formed to construct and operate multi-family housing units.



BASIS OF PRESENTATION



The condensed consolidated financial statements of the Corporation include the accounts of Monarch Community Bank 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, 2006 filed with the Securities and Exchange Commission.



The results of operations for the three month period ended March 31, 2007 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.



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 2006 amounts have been reclassified to conform to the 2007 presentation.









5



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
        
        Three MonthsEnded
        
        EndedMarch 31, 2007
        
        March 31, 2006Basic earnings per shareNumerator:Net income
        
        $
        494
        
        $
        330Denominator:Weighted average common shares outstanding
        
        
        2,534
        
        
        2,682Less: Average unallocated ESOP shares
        
        
        (93
        )
        
        (111
        )Less: Average non-vested RRP shares
        
        
        (42
        )
        
        (56
        )Weighted average common shares outstandingfor basic earnings per share
        
        
        2,399
        
        
        2,515Basic earnings per share
        
        $
        0.21
        
        $
        0.13Diluted earnings per shareNumerator:Net income
        
        $
        494
        
        $
        330Denominator:Weighted average common shares outstandingfor basic earnings per share
        
        
        2,399
        
        
        2,515Add: Dilutive effects of restricted stock and stock options
        
        
        
        
        
        Weighted average common shares and dilutivepotential
            common shares outstanding
        
        
        2,399
        
        
        2,515Diluted earnings per share
        
        $
        0.21
        
        $
        0.13



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 for the quarters ended March 31, 2007 and 2006 respectively.









  6



STOCK-BASED COMPENSATION, continued



Options granted in the first quarter of 2007, 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 2007 and 2006, 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):




Quarters endedMarch 31,
        
        
        
        
        March 31,2007
        
        
        
        
        2006As reported net income
        
        $
        
        
        494
        
        
        $
        
        
        330Stock option expenses
        
        
        
        
        22
        
        
        
        
        
        22Less: additional stock-based compensation determinedunder the fair value method, net of tax
        
        
        
        
        (22
        )
        
        
        
        
        (22
        )$
        
        
        494
        
        
        $
        
        
        330As reported earnings per share
        
        $
        
        
        0.21
        
        
        $
        
        
        0.13Proforma earnings per share
        
        $
        
        
        0.21
        
        
        $
        
        
        0.13As reported earnings per diluted share
        
        $
        
        
        0.21
        
        
        $
        
        
        0.13Proforma earnings per diluted share
        
        $
        
        
        0.21
        
        
        $
        
        
        0.13



RECENT ACCOUNTING PRONOUNCEMENTS



In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new Statement. Therefore, calendar-year companies may be able to adopt SFAS No. 159 for their first quarter 2007 financial statements.  The Company has not adopted the standard early, therefore SFAS No. 159 will become applicable for years beginning  January 1, 2008.



The new Statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. Management is currently evaluating the effect of this pronouncement on the Banks financial statements.



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.



  7



FORWARD-LOOKING STATEMENTS, continued



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



CRITICAL ACCOUNTING POLICIES



The nature of the financial services industry is such that, other than described below, the use of estimates and management judgment is not likely to present a material risk to the financial statements.  In cases where estimates or management judgment are required, internal controls and processes are established to provide assurance that such estimates and management judgments are materially correct to the best of managements knowledge.



Allowance for Loan Losses.  Accounting for loan classifications, accrual status, and determination of the allowance for loan losses is based on regulatory guidance. This guidance includes, but is not limited to, generally accepted accounting principles, the uniform retail credit classification and account management policy issued by the Federal Financial Institutions Examination Council, the joint policy statement on the allowance for loan losses methodologies issued by the Federal Financial Institutions Examination Council and guidance issued by the Securities and Exchange Commission. Accordingly, the allowance for loan losses includes a reserve calculation based on an evaluation of loans determined to be impaired, risk ratings, historical losses, loans past due, collateral values and cost of disposal and other subjective factors.



Foreclosed Assets.Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated selling expenses, which consist primarily of commissions that will be paid to an independent real estate agent upon sale of the property. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.



Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of an acquisition over the fair value of net identifiable tangible and intangible assets acquired. Under the provisions of SFAS 142, goodwill is no longer amortized into the income statement over an estimated life, but rather is tested at least annually for impairment. Impairment of goodwill is evaluated by reporting unit and is based on a comparison of the recorded balance of goodwill to the applicable market value or discounted cash flows. To the extent that impairment may exist, the current carrying amount is reduced by the estimated shortfall. Intangible assets which have finite lives are amortized over their estimated useful lives and are subject to impairment testing.



FINANCIAL CONDITION



Assets

Total assets increased $1.3 million, or 0.4%, to $291.3 million at March 31, 2007 compared to $290.0 million at December 31, 2006. Management attributes this limited growth to a strategy for 2007 that emphasizes increased earnings more than asset growth.



Securities

Securities increased to $14.8 million at March 31, 2007 compared to $13.9 million at December 31, 2006.  The increase was attributable to $3.8 million in purchases offset by $2.9 million in securities sold which was as part of ongoing management of the Banks liquidity and investment portfolio.  Purchases made in the first quarter of 2007 were made in order to increase interest yield and the duration of the portfolio.





  8



Loans

The Banks net loan portfolio decreased by $3.6 million, or 1.6%, from $230.2 million at December 31, 2006 to $226.6 million at March 31, 2007.  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, 2007
        
        December 31, 2006Amount
        
        Percent
        
        Amount
        
        Percent(Dollars in thousands)Real Estate Loans:One-to-four family
        
        $
        138,236
        
        60.3
        %
        $
        141,679
        
        60.8
        %Multi-family
        
        
        5,500
        
        2.4
        
        
        6,008
        
        2.6Commercial
        
        
        45,093
        
        19.7
        
        
        44,513
        
        19.1Construction or development
        
        
        9,161
        
        4.0
        
        
        9,529
        
        4.1Total real estate loans
        
        
        197,990
        
        86.4
        
        
        201,729
        
        86.6Other loans:Consumer loans:Automobile
        
        
        1,400
        
        0.6
        
        
        1,509
        
        0.6Home equity
        
        
        19,275
        
        8.4
        
        
        19,077
        
        8.3Manufactured housing
        
        
        465
        
        0.2
        
        
        495
        
        0.2Other
        
        
        6,728
        
        2.9
        
        
        7,083
        
        3.0Total consumer loans
        
        
        27,868
        
        12.1
        
        
        28,164
        
        12.1Commercial Business Loans
        
        
        3,375
        
        1.5
        
        
        2,969
        
        1.3Total
            other loans
        
        
        31,243
        
        13.6
        
        
        31,133
        
        13.4Total
            Loans
        
        
        229,233
        
        100.0
        %
        
        232,862
        
        100.0
        %Less:Allowance for loan losses
        
        
        2,098
        
        
        
        
        2,024Net deferred loan fees
        
        
        584
        
        
        
        
        591Loans in process
        
        
        
        
        
        
        
        Total
            Loans, net
        
        $
        226,551
        
        
        
        $
        230,247





One-to-four family loans decreased as a result of a $2.7 million decrease in adjustable rate mortgages and a $0.8 million decrease in all other mortgages (including fixed rate and balloon mortgages).  This is attributed to a much higher level of loans sold by the Bank in the first quarter of 2007.   Other changes in the Banks loan portfolio during the first quarter of 2007 were not significant.  The Bank expects future loan growth to come primarily from commercial lending.



The allowance for loan losses was $2,098,000 at March 31, 2007 and $2,024,000 at December 31, 2006, an increase of $74,000 primarily due to $199,000 in charge-offs, $48,000 in recoveries, and a $225,000 provision for loan losses (see Provision for Loan Losses below). Charge-offs for the quarter ended March 31, 2007 included $84,000 of one-to-four family mortgage loans, $95,000 of consumer loans (including overdrafts), $17,000 of commercial business loans not collateralized by real estate and $3,000 of commercial business loans collateralized by real estate. Of the $48,000 in recoveries for the quarter ended March 31, 2007, $43,000 was from consumer loans (including overdrafts).  See Provision for Loan Losses below for further explanation regarding charge-offs.



Deposits

Total deposits increased $0.8 million, or 0.4%, from $192.6 million at December 31, 2006 to $193.4 million at March 31, 2007. The increase can be attributed to a $2.4 million increase in non-interest bearing accounts, a $0.6 million increase in interest bearing demand and NOW accounts, a $2.4 million decrease in certificates of deposit, and a $0.2 million increase in all other types of deposits combined. The decrease in certificates of deposit was primarily a result of improved liquidity, lower interest rates in our market, and less reliance on brokered deposits.   Brokered deposits have been managed to provide additional liquidity or reduce excess liquidity depending on current conditions. Management expects future deposit growth to come from increased sales and marketing efforts to attract lower cost savings and checking accounts as well as product enhancement.



Federal Home Loan Bank Advances

Total Federal Home Loan Bank (FHLB) advances remained at $54.5 million as of March 31, 2007 and December 31, 2006. Total proceeds from and repayments of FHLB advances for the three months ended March 31, 2007 total were $2.5 million. 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 below, and also see Liquidity later in this report regarding available borrowings.



  9



Equity

Total equity was $40.4 million at March 31, 2007 compared to $40.0 million at December 31, 2006. This represents 13.9% and 13.8% of total assets at March 31, 2007 and December 31, 2006, respectively. Increases in equity primarily resulted from $494,000 in year-to-date net income and a $41,000 decrease in other comprehensive loss arising from a reduction in the unrealized loss on securities.  Decreases in equity for the three months ended March 31, 2007 included $177,000 in dividend payments.  Management considers its equity position to be strong.



As of April 25, 2007, the previously disclosed reverse merger transaction will result in a repurchase of approximately 123,000 shares totaling approximately $1.7 million.



RESULTS OF OPERATIONS



Net Interest Income

Net interest income before the provision for loan losses for the quarter ended March 31, 2007 decreased $42,000 compared to the same period one year ago. The decrease came primarily from a $486,000 increase in deposit interest expense offset by a $395,000 increase in interest income on loans, investment securities, federal funds sold and overnight deposits combined, and a $49,000 decrease in interest expense on FHLB advances.  The Banks net interest margin decreased to 3.20% for the quarter ended March 31, 2007 from 3.46% for the quarter ended March 31, 2006 as our change in deposit yield increased more than our change in loan yield.



Our net interest margin decreased primarily from offering certificates of deposit and money market accounts at high interest rates that increased the Banks cost of funds. Interest income from loans represented 92.1% of total interest income for the quarter ended March 31, 2007 compared to 92.4% for the same period in 2006. The Banks ability to maintain its net interest margin is heavily dependent on future loan demand and its ability to attract core deposits to offset the effect of higher cost certificates of deposit and borrowings.



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 MonthsEndedMarch31,2007
        
        2006Average
        
        Interest
        
        
        
        Average
        
        InterestOutstanding
        
        Earned/
        
        Yield/
        
        Outstanding
        
        Earned/
        
        Yield/Balance
        
        Paid
        
        Rate
        
        Balance
        
        Paid
        
        Rate(dollarsin thousands)Fed Funds and overnight deposits
        
        $
        11,149
        
        $
        141
        
        5.13
        %
        $
        7,601
        
        $
        99
        
        5.28
        %Investment securities
        
        
        14,198
        
        
        155
        
        4.43
        
        
        13,906
        
        
        140
        
        4.08Other securities
        
        
        4,174
        
        
        52
        
        5.05
        
        
        4,773
        
        
        67
        
        5.69Loans receivable
        
        
        229,580
        
        
        4,079
        
        7.21
        
        
        218,619
        
        
        3,726
        
        6.91Total earning assets
        
        $
        259,101
        
        $
        4,427
        
        6.93
        
        $
        244,899
        
        $
        4,032
        
        6.68Demand and NOW Accounts
        
        $
        33,208
        
        $
        16
        
        0.20
        
        $
        34,507
        
        
        18
        
        0.21Money market accounts
        
        
        22,384
        
        
        204
        
        3.70
        
        
        16,565
        
        
        101
        
        2.47Savings accounts
        
        
        22,661
        
        
        23
        
        0.41
        
        
        26,503
        
        
        27
        
        0.41Certificates of deposit
        
        
        115,604
        
        
        1,386
        
        4.86
        
        
        100,868
        
        
        997
        
        4.01Federal Home Loan Bank Advances
        
        
        52,910
        
        
        724
        
        5.55
        
        
        57,428
        
        
        773
        
        5.46Total interest bearing liabilities
        
        $
        246,767
        
        
        2,353
        
        3.87
        
        $
        235,871
        
        
        1,916
        
        3.29Net interest income
        
        
        
        
        $
        2,074
        
        
        
        
        
        
        $
        2,116Net interest spread
        
        
        
        
        
        
        
        3.06
        %
        
        
        
        
        
        
        3.39
        %Net interest margin
        
        
        
        
        
        
        
        3.20
        %
        
        
        
        
        
        
        3.46
        %





  10



Provision for Loan Losses

The Bank recorded a $225,000 provision for loan losses for the quarter ended March 31, 2007 whereas the Bank recorded no provision for loan losses for the quarter ended March 31, 2006. The level of non-performing assets, net charge-offs and additional loan impairment were primary considerations in determining the need for the provision. Net charge-offs for the quarter ended March 31, 2007 totaled $151,000 compared to $102,000 for the quarter ended March 31, 2006.  The level of non-performing assets slightly increased (see table to follow), and total loan impairment increased $80,000 on a downgraded commercial loan and $31,000 on two other substandard commercial loans on the Banks watch list.   If the level of non-performing assets and/or net charge-offs significantly increases and/or asset quality does not continue to stabilize, additional provisions for loan losses may be needed.



The following table presents non-performing assets and certain asset quality ratios at March 31, 2007 and December 31, 2006.






March 31, 2007
        
        December 31, 2006(Dollars in thousands)Non-performing loans
        
        $
        772
        
        $
        468Real estate in judgment
        
        
        684
        
        
        895Foreclosed and repossessed assets
        
        
        775
        
        
        785Total non-performing assets
        
        $
        2,231
        
        $
        2,148Non-performing loans to total loans
        
        
        0.34
        %
        
        0.20
        %Non-performing assets to total assets
        
        
        0.77
        %
        
        0.74
        %Allowance for loan losses to non-performing loans
        
        
        271.76
        %
        
        432.48
        %Allowance for loan losses to net loans receivable
        
        
        0.93
        %
        
        0.88
        %





The Bank had 8 non-performing loan relationships as of March 31, 2007 compared to 10 non-performing loan relationships as of December 31, 2006.  The stabilization of our asset quality remains a high priority for management.



Non-interest Income

Non-interest income increased $248,000 or 33.0%, to $1.0 million for the quarter ended March 31, 2007 as compared to $752,000 for the quarter ended March 31, 2006. Fees and service charges increased to $600,000 from $458,000 for the same period a year ago primarily due to a $74,000 increase in loan related fees (from $208,000 to $282,000)  and a $62,000 increase in deposit related fees (from $367,000 to $429,000). Loan related fees increased primarily as a result of the Bank developing new mortgage banking relationships with six brokerage companies since the end of June 2006 which led to $57,000 in brokerage fee income for the quarter with other increases in loan related fees coming from a $10,000 increase in construction loan fees and a $7,000 increase in all other loan related fees.  The increase in deposit related fees was a result of a $51,000 increase in NSF fees (from $251,000 to $302,000), a $5,000
increase in ATM/Debit Card income, and a $6,000 increase in all other deposit related fee income.



Gain on sale of loans increased $125,000 (from $68,000 to $193,000) for the same quarter a year ago as mortgage banking activities sharply increased in the last six months. The Bank sold 61 loans for the quarter ended March 31, 2007 compared to 28 for the quarter ended March 31, 2006 due to increased management focus on secondary market lending. Other income decreased $13,000 for the quarter ended March 31, 2007 compared to the same period in 2006 primarily due to a $19,000 loss on the sale of securities as management replaced two federal agency securities and one taxable municipal security with three federal agency securities earning higher interest rates.  Management expects to recover this loss with the increase in interest income from the new securities by the end of 2007.



Non-interest Expense

Non-interest expense decreased $272,000 or 11.0%, for the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006. Salaries and employee benefits decreased $173,000 as a result of downsizing certain department staffing levels in the fourth quarter of 2006. The Bank has 79 full-time equivalent employees as of March 31, 2007 compared to 95 full-time equivalent employees as of March 31, 2006. Professional services expense decreased $16,000 primarily from reduced regulatory examination expense. Repossessed property expense decreased $34,000 for the quarter ended March 31, 2007 compared to the same period in 2006 as the level of foreclosed properties decreased from $2.5 million as of March 31, 2006 to $1.4 million as of March 31, 2007. Amortization of core deposit intangible decreased $18,000 for the quarter ended March 31, 2007 as amortization of this asset continues to slow from year to year.
Management expects to continue to see an expense of approximately $18,000 per month for the remainder of 2007 compared to approximately $23,000 for the first quarter of 2007. Other general and administrative expense decreased $31,000 primarily due to a $30,000 reduction in advertising and promotion expense where modifications to the Banks marketing strategy were made for 2007. Expense control and revenue enhancement continue to be priorities for management as efforts continue on improving efficiency.





  11



Federal Income Tax Expense

The Companys provision for federal income taxes increased $89,000 for the quarter ended March 31, 2007 compared to the same period in 2006 as our net income before taxes increased $253,000. The effective tax rate for the quarter ended March 31, 2007 was 24.9% of income before tax as compared to 18.5% for the same period in 2006.  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 as well as fluctuation of permanent book and tax differences such as non-taxable income and non-deductible expenses.



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, 2007 totaled $82.7 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, 2007 and based on current collateral levels, the Bank could borrow an additional $21.7 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.



The Banks total cash and cash equivalents increased by $4.2 million during the quarter ended March 31, 2007 compared to a $1.2 million increase for the same period in 2006. The primary sources of cash for the quarter ended March 31, 2007 were $7.8 million in proceeds from the sale of mortgage loans, $3.3 million of principal collections net of loan originations, $2.9 million in purchases of available-for-sale investment securities, $2.5 million in proceeds from FHLB advances, and a $0.9 million increase in deposits compared to a $10.7 million increase in deposits, $3.0 million in proceeds from the sale of mortgage loans, and $2.7 million in proceeds from maturities of available-for-sale investment securities for the quarter ended March 31, 2006. The primary uses of cash for the quarter ended March 31, 2007 were $8.4 million of mortgage loans originated for sale, $3.8 million in purchases of
available-for-sale securities, and $2.5 million in repayments of FHLB advances compared to $6.1 million in loan originations in excess of principal collections, $5.4 million in repayments of FHLB advances, $3.3 million in loans originated for sale, and $2.0 million in purchases of available-for-sale investment securities for the quarter ended March 31, 2006. Management expects future cash flows for the remainder of  2007 to have a similar pattern to what occurred in the first quarter.






  12



CONTRACTUAL OBLIGATIONS



The Corporation has certain obligations and commitments to make future payments under contracts.  At March 31, 2007, the aggregate contractual obligations and commitments are:




Contractual Obligations
        
        Payments Due by PeriodLess than
        
        1-3
        
        3-5
        
        AfterTotal
        
        1 year
        
        years
        
        years
        
        5 years(Dollars in Thousands)Certificates of deposit
        
        $
        110,444
        
        $
        81,122
        
        $
        20,851
        
        $
        8,353
        
        $
        118FHLB advances
        
        
        54,476
        
        
        19,146
        
        
        14,813
        
        
        10,342
        
        
        10,175Total
        
        $
        169,856
        
        $
        100,268
        
        $
        35,664
        
        $
        18,695
        
        $
        10,293




Other Commitments
        
        Amount of commitment expiration  per periodLess than
        
        1-3
        
        3-5
        
        AfterTotal
        
        1 year
        
        years
        
        years
        
        5 years(Dollars in Thousands)Commitments to grant loans
        
        $
        4,942
        
        $
        4,942
        
        $
        
        
        $
        
        
        $
        Unfunded commitments under HELOCs
        
        
        17,125
        
        
        1,134
        
        
        4,225
        
        
        4,364
        
        
        7,402Unfunded commitments under Commercial LOCs
        
        
        1,681
        
        
        762
        
        
        570
        
        
        349
        
        
        Letters of credit
        
        
        12
        
        
        12
        
        
        
        
        
        
        
        
        Total
        
        $
        23,760
        
        $
        6,850
        
        $
        4,795
        
        $
        4,713
        
        $
        7,402





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, 2007, the Bank met the regulatory standards to be classified as well capitalized.  The Banks regulatory capital ratios as of March 31, 2007 were as follows: Tier 1 leverage ratio 10.35%, Tier 1 risk-based capital ratio 14.18%; and total risk-based capital, 15.22%.  The regulatory capital requirements to be considered well capitalized are 5.0%, 6.0%, 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.



The Corporations primary tool for assessing IRR is a model that uses scenario analysis to evaluate the IRR 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 levels, from least risk to most risk, are; minimal, moderate, significant, high and imminent threat. Data from the model, as of March 31, 2007, December 31, 2006, and March 31, 2006 indicates that the
Banks IRR level remains minimal.





  13



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, 2007 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, 2007, 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.



  14



PART II-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, 2006, 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



None




Item 3.
        DEFAULTS UPON SENIOR SECURITIES



Not applicable




Item 4.
        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.




Item 5.
        OTHER INFORMATION



Not applicable




Item 6.
        EXHIBITS



See the index to exhibits.









  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 4, 2007
        By:/s/ Donald L. DenneyDonald L. DenneyPresident and Chief Executive OfficerDate: May 4, 2007
        And:/s/ William C. KurtzWilliam C. KurtzSenior Vice President, Chief Operations Officer andacting Chief Financial Officer(Principal Financial Officer)





  16



INDEX TO EXHIBITS






Exhibit No.
        Description of Exhibit31.1
        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