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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-QSB



| |  | x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
| |  | -----------------------------------------------------------------------------------

For the quarterly period ended September 30, 2003

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 small business issuer 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(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 October 15, 2003, there
were 2,403,250 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



|                                                                  |                                                                                                                      |  |  |  |  |  |  | 
|----------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I-FINANCIAL INFORMATION                                     
|Item 1. CONDENSED FINANCIAL STATEMENTS                           
|                                                                  | Condensed Consolidated Balance Sheets  September 30, 2003 and December 31, 2002                                    
|                                                                  | Condensed Consolidated Statements of Income  Three and Nine Months Ended September 30, 2003 and 2002               
|                                                                  | Condensed Consolidated Statements of Changes in Stockholders Equity  Nine Months Ended September 30, 2003 and 2002
|                                                                  | Condensed Consolidated Statements of Cash Flow  Nine Months ended September 30, 2003 and 2002                      
|Item 2. Managements Discussion and Analysis or Plan of Operation
|Item 3. Controls and Procedures                                  
|PART II -OTHER INFORMATION                                       
|Item 1. Legal Proceedings                                        
|Item 2. Changes in Securities                                    
|Item 3. Defaults Upon Senior Securities                          
|Item 4. Submission of Matters to a Vote of Security Holders      
|Item 5. Other Information                                        
|Item 6. Exhibits and Reports on Form 8-K                         
|SIGNATURES                                                       
|302 Certification of Chief Executive Officer                     
|302 Certification of Chief Financial Officer                     
|906 Certification of CEO & CFO                                   



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##### Table of Contents



Monarch Community Bancorp, Inc.
Index

PART I - FINANCIAL INFORMATIONItem 1 -
    
    Condensed Financial Statements:Condensed Consolidated Balance Sheets  September 30, 2003 and
December 31, 2002
    
    1Condensed Consolidated Statements of Income  Three and Nine Months
Ended September 30, 2003 and 2002
    
    2Condensed Consolidated Statements of Changes in Stockholders Equity -
Nine Months Ended September 30, 2003 and 2002
    
    3Condensed Consolidated Statements of Cash Flow  Nine Months ended
September 30, 2003 and 2002
    
    4Notes to Condensed Consolidated Financial Statements
    
    5Item 2 -
    
    Managements Discussion and Analysis or Plan of Operation
    6-11Item 3
    
    Controls and Procedures
    
    11PART II - OTHER INFORMATIONItem 1 -
    
    Legal Proceedings
    
    12Item 2 -
    
    Changes in Securities
    
    12Item 3 -
    
    Defaults Upon Senior Securities
    
    12Item 4 -
    
    Submission of Matters to a Vote of Security Holders
    
    12Item 5 -
    
    Other Information
    
    12Item 6 -
    
    Exhibits and Reports on Form 8-K
    
    12SIGNATURES






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PART I  FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS




Condensed Consolidated Balance Sheets

(unaudited)September 30,
    
    
    December 31,2003
    
    
    2002(Dollars in thousands,except per share data)ASSETSCash and due from banks
    
    $
    5,887
    
    
    $
    4,144Federal Funds sold and overnight deposits
    
    
    23,536
    
    
    
    16,063Total cash and cash equivalents
    
    
    29,423
    
    
    
    20,207Securities-Available for sale
    
    
    17,808
    
    
    
    17,160Securities-Held to maturity
    
    
    295
    
    
    
    274Other securities
    
    
    2,983
    
    
    
    2,807Real Estate Investment  Limited partnership, at equity
    
    
    1,449
    
    
    
    1,554Loans held for sale
    
    
    863
    
    
    
    1,527Loans, net of allowance for loan losses
    
    
    145,897
    
    
    
    145,162Accrued interest receivable
    
    
    1,150
    
    
    
    1,275Foreclosed assets, net
    
    
    2,325
    
    
    
    2,022Premises and equipment
    
    
    4,266
    
    
    
    4,569Deferred income taxes
    
    
    937
    
    
    
    556Other assets
    
    
    1,151
    
    
    
    872Total assets
    
    $
    208,547
    
    
    $
    197,985LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Noninterest-bearing
    
    
    5,195
    
    
    
    3,046Interest-bearing
    
    
    105,922
    
    
    
    103,698Total deposits
    
    
    111,117
    
    
    
    106,744Federal Home Loan Bank advances
    
    
    57,500
    
    
    
    52,500Accrued expenses and other liabilities
    
    
    2,696
    
    
    
    1,792Total liabilities
    
    
    171,313
    
    
    
    161,036Commitments and contingent liabilities
    
    
    
    
    
    
    Stockholders equityCommon stock-$0.01 par value
authorized-20,000,000 shares
issued and outstanding-2,403,250 shares at September 30, 2003 and
2,314,375 shares at December 31, 2002
    
    
    24
    
    
    
    23Additional paid in capital
    
    
    23,303
    
    
    
    22,149Retained earnings
    
    
    16,653
    
    
    
    16,379Accumulated other comprehensive income
    
    
    75
    
    
    
    64Unearned Compensation
    
    
    (2,821
    )
    
    
    (1,666
    )Total stockholders equity
    
    
    37,234
    
    
    
    36,949Total liabilities and stockholders equity
    
    $
    208,547
    
    
    $
    197,985


See accompanying notes to condensed consolidated financial statements

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Condensed Consolidated Statements of Income

Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002(Dollars in thousands)Interest IncomeLoans, including fees
    
    $
    2,725
    
    
    $
    3,119
    
    
    $
    8,568
    
    
    $
    9,389Investment securities
    
    
    155
    
    
    
    47
    
    
    
    454
    
    
    
    138Federal funds sold and overnight deposits
    
    
    63
    
    
    
    87
    
    
    
    195
    
    
    
    194Total interest income
    
    
    2,943
    
    
    
    3,253
    
    
    
    9,217
    
    
    
    9,721Interest ExpenseDeposits
    
    $
    694
    
    
    
    811
    
    
    
    2,190
    
    
    
    2,552Federal Home Loan bank advances
    
    
    809
    
    
    
    804
    
    
    
    2,388
    
    
    
    2,352Total interest expense
    
    
    1,503
    
    
    
    1,615
    
    
    
    4,578
    
    
    
    4,904Net Interest Income
    
    
    1,440
    
    
    
    1,638
    
    
    
    4,639
    
    
    
    4,817Provisions for Loan Losses
    
    
    135
    
    
    
    100
    
    
    
    1,157
    
    
    
    277Net Interest Income after Provision
for Loan Losses
    
    
    1,305
    
    
    
    1,538
    
    
    
    3,482
    
    
    
    4,540Noninterest IncomeFees and service charges
    
    
    246
    
    
    
    241
    
    
    
    724
    
    
    
    675Loan servicing fees
    
    
    55
    
    
    
    50
    
    
    
    154
    
    
    
    148Net gain on sale of loans
    
    
    452
    
    
    
    340
    
    
    
    1,490
    
    
    
    506Net (loss) on securities sales
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )Net gain (loss) on disposal of
premises and equipment
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (35
    )Other income
    
    
    5
    
    
    
    (52
    )
    
    
    86
    
    
    
    27Total noninterest income
    
    
    757
    
    
    
    537
    
    
    
    2,453
    
    
    
    1,319Noninterest ExpensesSalaries and employees benefits
    
    
    925
    
    
    
    881
    
    
    
    2,652
    
    
    
    2,586Occupancy and equipment
    
    
    181
    
    
    
    197
    
    
    
    559
    
    
    
    593Data processing
    
    
    89
    
    
    
    86
    
    
    
    271
    
    
    
    285Mortage banking
    
    
    98
    
    
    
    90
    
    
    
    331
    
    
    
    181NOW account expense
    
    
    38
    
    
    
    39
    
    
    
    111
    
    
    
    124Professional fees
    
    
    69
    
    
    
    50
    
    
    
    309
    
    
    
    152Office supplies and forms
    
    
    18
    
    
    
    93
    
    
    
    93
    
    
    
    160Advertising and promotion
    
    
    24
    
    
    
    49
    
    
    
    58
    
    
    
    91Other general and administrative
    
    
    239
    
    
    
    232
    
    
    
    673
    
    
    
    721Total noninterest expense
    
    
    1,681
    
    
    
    1,717
    
    
    
    5,057
    
    
    
    4,893Income  Before Income Taxes
    
    
    381
    
    
    
    358
    
    
    
    878
    
    
    
    966Income Taxes
    
    
    105
    
    
    
    121
    
    
    
    247
    
    
    
    334Net Income
    
    $
    276
    
    
    $
    237
    
    
    $
    631
    
    
    $
    632


See accompanying notes to condensed consolidated financial statements

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Condensed Consolidated Statements of Changes in Stockholders Equity

AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid in
    
    
    Retained
    
    
    Comprehensive
    
    
    UnearnedStock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Compensation
    
    
    Total(Dollars in thousands,except per share data)Balance, January 1, 2002
    
    $
    0
    
    
    $
    0
    
    
    $
    15,365
    
    
    $
    0
    
    
    $
    0
    
    
    $
    15,365Issuance of common stock in
connection with the Banks
conversion from mutual to
stock-owned holding company
    
    
    23
    
    
    
    22,124
    
    
    
    
    
    
    
    
    
    
    
    (1,852
    )
    
    $
    20,295Comprehensive Income
- Net Income
    
    
    
    
    
    
    
    
    
    
    632
    
    
    
    
    
    
    
    
    
    
    
    632Balance, September 30, 2002
    
    $
    23
    
    
    $
    22,124
    
    
    $
    15,997
    
    
    $
    
    
    
    $
    (1,852
    )
    
    $
    36,292Balance, January 1, 2003
    
    $
    23
    
    
    $
    22,149
    
    
    $
    16,379
    
    
    $
    64
    
    
    
    ($1,666
    )
    
    $
    36,949Issuance of 88,875 shares of
common stock at $13/share
awarded in connection with
Restricted Stock Plan
    
    
    1
    
    
    
    1,154
    
    
    
    
    
    
    
    
    
    
    
    (1,155
    )
    
    
    Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    631
    
    
    
    
    
    
    
    
    
    
    
    631Change in unrealized
gain on securities available
for sale, net of tax of $4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    642Dividends paid ($0.15/share)
    
    
    
    
    
    
    
    
    
    
    (357
    )
    
    
    
    
    
    
    
    
    
    
    (357
    )Balance, September 30, 2003
    
    $
    24
    
    
    $
    23,303
    
    
    $
    16,653
    
    
    $
    75
    
    
    $
    (2,821
    )
    
    $
    37,234


See accompanying notes to condensed consolidated financial statements

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Condensed Consolidated Statements of Cash Flows

Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2003
    
    
    2002(Dollars in thousands)Cash Flows from Operating ActivitiesNet Income
    
    $
    631
    
    
    $
    632Adjustments to reconcile net income to net cash from operating activities:Depreciation
    
    
    324
    
    
    
    348Provision for Loan Losses
    
    
    1,157
    
    
    
    277Amortization
    
    
    609
    
    
    
    181(Gain) Loss on sale of foreclosed assets
    
    
    32
    
    
    
    22Deferred income taxes
    
    
    (385
    )
    
    
    (118
    )Mortgage loans originated for sale
    
    
    (53,864
    )
    
    
    (21,055
    )Proceeds from sale of mortgage loans
    
    
    56,029
    
    
    
    17,735Gain on sale of mortgage loans
    
    
    (1,501
    )
    
    
    (513
    )(Gain) Loss on disposal of premises and equipment
    
    
    
    
    
    
    35Net change in:Trading assets
    
    
    
    
    
    
    258Deferred loan fees
    
    
    (47
    )
    
    
    (86
    )Accrued interest receivable
    
    
    125
    
    
    
    46Other assets
    
    
    (505
    )
    
    
    43Accrued expenses and other liabilities
    
    
    904
    
    
    
    1,173Net cash provided by (used in) operating activities
    
    
    3,509
    
    
    
    (1,022
    )Cash Flows from Investing ActivitiesProceeds from maturities of HTM securities
    
    
    270
    
    
    
    Purchases of HTM securities
    
    
    (291
    )
    
    
    Proceeds from maturities of AFS securities
    
    
    2,730
    
    
    
    77Purchases of available for sale securities
    
    
    (3,641
    )
    
    
    (1,039
    )Purchases of other securities
    
    
    (176
    )
    
    
    (254
    )Loan originations and principal collections, net
    
    
    (4,141
    )
    
    
    (5,235
    )Proceeds from sale of foreclosed assets
    
    
    1,961
    
    
    
    1,919Proceeds from sale of premises and equipment
    
    
    
    
    
    
    17Purchases of premises and equipment
    
    
    (21
    )
    
    
    (121
    )Loan to Employee Stock Ownership Plan
    
    
    
    
    
    
    (1,852
    )Net cash provided by (used in) investing activities
    
    
    (3,309
    )
    
    
    (6,488
    )Cash Flows from Financing ActivitiesNet increase (decrease) in deposits
    
    
    4,373
    
    
    
    (4,575
    )Proceeds from FHLB advances
    
    
    5,000
    
    
    
    11,000Repayment of FHLB advances
    
    
    
    
    
    
    (1,000
    )Issuance of Common Stock
    
    
    
    
    
    
    22,147Issuance of dividend
    
    
    (357
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    9,016
    
    
    
    27,572Net increase in cash and cash equivalents
    
    
    9,216
    
    
    
    20,062Cash and cash equivalents -January 1
    
    
    20,207
    
    
    
    16,312Cash and cash equivalents -September 30
    
    $
    29,423
    
    
    $
    36,374Supplemental Cash Flow Information:Cash paid for interest
    
    
    4,656
    
    
    
    4,929Cash paid for income taxes
    
    
    460
    
    
    
    310Noncash investing activity  loans transferred to foreclosed assets
    
    
    2,296
    
    
    
    1,928


See accompanying notes to condensed consolidated financial statements

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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
limited liability company that reinsures credit life and disability insurance,
a minority ownership in a limited liability company that operates a title
insurance agency, 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, 2002 filed with the Securities and Exchange
Commission.

The results of operations for the three and nine month periods ended September
30, 2003 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
    
    
    Nine Months EndedSeptember 30, 2003
    
    
    September 30, 2003The weighted average share reconciliation is as follows:Weighted average shares outstanding
    
    
    2,403,250
    
    
    
    2,366,463Less: Average nonvested RRP shares
    
    
    (   88,875
    )
    
    
    (52,088
    )Weighted average for basic EPS
    
    
    2,314,375
    
    
    
    2,314,375Dilutive affect of restricted stock and stock options
    
    
    28,723
    
    
    
    2,542Weighted average for dilutive EPS
    
    
    2,343,098
    
    
    
    2,316,917Earnings per share are as follows:Basic
    
    $
    0.12
    
    
    $
    0.27Diluted
    
    $
    0.12
    
    
    $
    0.27


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Earnings per share data does not apply to the periods prior to the conversion
since the Bank was a mutual savings and loan association with no stock
outstanding.




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
joint policy statement on the allowance for loan losses methodologies issued by
the Federal Financial Institutions Examination Council. Accordingly, the
allowance for loan losses includes a reserve calculation based on an evaluation
of loans determined to be impaired, risk ratings, historical losses, loans past
due, and other subjective factors.

FINANCIAL CONDITION

Securities

Securities totaled $21.1 million at September 30, 2003 as compared to $20.2
million at December 31, 2002. During the nine months ended September 30, 2003
Monarch purchased $3.3 million in government agency bonds and $327,000 of
tax-exempt bonds that are classified as available for sale and $291,000 of an
installment purchase contract from a local municipality, which is classified as
held to maturity. Securities are purchased to increase yields while maintaining
sufficient liquidity. Management will continue to monitor the asset liability
mix and liquidity position of the Bank and may invest in additional securities
in the future.

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Loans

The Banks net loan portfolio increased by $.7 million, or .5%, from $145.1
million at December 31, 2002 to $145.8 million at September 30, 2003. There
was an increase in real estate loans by $3.8 million, or 3.0%. This increase
was primarily from construction and development loans, which increased $3.3
million. Consumer loans decreased by $3.3 million, or 16.6%, from $19.8 million
at December 31, 2002 to $16.4 million at September 30, 2003. All categories of
consumer loans decreased over this period with the largest decrease in equity
loans ($1.7 million). Commercial business loans increased by $1.0 million.
The portion of the Banks loan portfolio represented by real estate loans was
86.8% at September 30, 2003 compared to 85.1% at December 31, 2002.

Deposits

Total deposits increased $4.4 million, or 4.1%, from $106.7 million at December
31, 2002 to $111.1 million at September 30, 2003. Within the deposit totals,
noninterest-bearing deposits increased by $2.1 million and interest-bearing
deposits increased $2.3 million from December 31, 2002 to September 30, 2003.
The noninterest-bearing deposit increase is largely due to increases in
municipal accounts at the Bank. The increase in interest-bearing deposits is
primarily in certificates of deposit, which increased $1.0 million.

Federal Home Loan Bank Advances

Federal Home Loan Bank (FHLB) advances increased by $5.0 million, or 9.5%, from
$52.5 million at December 31, 2002 to $57.5 million at September 30, 2003. 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.

Equity

Total equity was $37.2 million at September 30, 2003 and $36.9 million at
December 31, 2002. This represents 17.8% and 18.7% of total assets at
September 30, 2003 and December 31, 2002, respectively. The increase in equity
over the period was due to continued profitable operations. During the nine
months ended September 30, 2003 the Corporation paid three dividends totaling
$.15 per share of common stock. These dividend payments reduced equity by
$357,000.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income before the provision for loan losses for the quarter ended
September 30, 2003 totaled $1.4 million and represented a decrease of $198,000
compared to the same period one year ago. The Corporations net interest
margin decreased from 3.27% for the quarter ended September 30, 2002 to 2.91%
for the quarter ended September 30, 2003. The net interest margin has been
impacted by the current low market interest rates. During the quarter the Bank
experienced continued loan refinancing to lower rates and limited investment
opportunities without incurring an inordinate amount of interest rate risk. The
decline in the net interest margin was offset by the increase of $24 million of
average interest earning assets. Interest income from loans represented 93% of
total interest income for the third quarter of 2003 compared to 96% for the
same period in 2002.

Net interest income before the provision for loan losses for the nine months
ended September 30, 2003 totaled $4.6 million and represented a decrease of
$178,000 compared to the same period a year ago. The Corporations net interest
margin declined to 3.16% for the nine months ended September 30, 2003 from
3.95% for the nine months ended September 30, 2002 for the same reasons
mentioned in the preceding paragraph.

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.

Nine Months Ended September 30,2003
    
    
    2002Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate(Dollars in Thousands)Federal Funds sold and
Overnight deposit
    
    $
    23,706
    
    
    $
    195
    
    
    
    1.10
    %
    
    $
    15,409
    
    
    $
    194
    
    
    
    1.67
    %Trading assets
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    86
    
    
    
    3
    
    
    
    4.65Investment securities
    
    
    18,001
    
    
    
    343
    
    
    
    2.51
    
    
    
    330
    
    
    
    16
    
    
    
    6.49Other securities
    
    
    3,134
    
    
    
    111
    
    
    
    5.13
    
    
    
    2,578
    
    
    
    119
    
    
    
    6.17Loans
    
    
    150,887
    
    
    
    8,568
    
    
    
    7.59
    
    
    
    144,782
    
    
    
    9,389
    
    
    
    8.67Total earning assets
    
    $
    195,728
    
    
    
    9,217
    
    
    
    6.30
    
    
    $
    163,185
    
    
    
    9,721
    
    
    
    7.96Demand and NOW accounts
    
    $
    14,110
    
    
    
    58
    
    
    
    .55
    
    
    $
    13,789
    
    
    
    116
    
    
    
    1.12Money market accounts
    
    
    10,036
    
    
    
    95
    
    
    
    1.27
    
    
    
    10,715
    
    
    
    148
    
    
    
    1.85Savings deposit
    
    
    16,083
    
    
    
    112
    
    
    
    .93
    
    
    
    17,498
    
    
    
    173
    
    
    
    1.32Certificates of deposit
    
    
    73,375
    
    
    
    1,925
    
    
    
    3.51
    
    
    
    62,476
    
    
    
    2,115
    
    
    
    4.53FHLB advances
    
    
    56,987
    
    
    
    2,388
    
    
    
    5.60
    
    
    
    51,145
    
    
    
    2,352
    
    
    
    6.15Total interest-bearing liabilities
    
    $
    170,591
    
    
    
    4,578
    
    
    
    3.59
    
    
    $
    155,623
    
    
    
    4,904
    
    
    
    4.21Net interest income
    
    
    
    
    
    $
    3,199
    
    
    
    
    
    
    
    
    
    
    $
    4,817Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.71
    %
    
    
    
    
    
    
    
    
    
    
    3.75
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.16
    %
    
    
    
    
    
    
    
    
    
    
    3.95
    %


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Provision for Loan Losses

The provision for loan losses was $135,000 for the quarter ended September 30,
2003 compared to $100,000 for the quarter ended September 30, 2002. The
allowance for loan losses was $2,471,000 at September 30, 2003 and $1,735,000
at December 31, 2002. The allowance as a percent of gross loans was 1.7% and
1.2% at September 30, 2003 and December 31, 2002, respectively. Net charge-offs
for the quarter ended September 30, 2003 totaled $131,000 compared to $93,000
for the quarter ended September 30, 2002. The increased charge-offs in 2003
were the result of more aggressive collection efforts and foreclosure activity
to reduce the level of serious delinquencies.

The provision for loan losses for the nine months ended September 30, 2003 was
$1.2 million compared to $277,000 for the same period in 2002. The increased
provision was the result of increased charge offs in 2003 and the increase in
non-performing loans, which is further discussed below. Net charge-offs for the
nine months ended September 30, 2003 were $421,000 compared to $234,000 for the
same period in 2002.

The following table presents non-performing assets and certain asset quality
ratios at September 30, 2003 and December 31, 2002.

September 30, 2003
    
    
    December 31, 2002(Dollars in thousands)Non-performing loans
    
    $
    2,948
    
    
    $
    2,955Real estate in judgment
    
    
    942
    
    
    
    1,136Foreclosed and repossessed assets
    
    
    1,460
    
    
    
    923Total non-performing assets
    
    $
    5,350
    
    
    $
    5,014Non-performing loans to total loans
    
    
    2.02
    %
    
    
    2.04
    %Non-performing assets to total assets
    
    
    2.57
    %
    
    
    2.53
    %Allowance for loan losses to non-performing loans
    
    
    83.82
    %
    
    
    58.71
    %Allowance for loan losses to loans receivable
    
    
    1.67
    %
    
    
    1.18
    %


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 September 30, 2003, $919,000 is owing on a 20 year fixed rate
loan and $645,000 is owing on a one-year note. The $919,000 loan was 152 days
delinquent as of September 30, 2003 and the $645,000 loan matured May 1, 2003
and was not paid or renewed at September 30, 2003. The Bank has a commitment
through January 2004 from the Small Business Administration (SBA) to purchase
the $645,000 loan. Due to current financial difficulties of the borrower, the
SBA has not purchased the loan and has indicated it will not until the
Borrowers financial status improves. The entire loan relationship has been
classified by management as doubtful as of September 30, 2003.

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

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specifically identifiable problem credit or portfolio segment as of the
evaluation date, managements estimate of the effect of this condition may be
reflected as a specific allowance applicable to this credit or portfolio
segment.

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

Noninterest Income

Noninterest income increased by $220,000 to $757,000 for the quarter ended
September 30, 2003 as compared to $537,000 for the quarter ended September 30,
2002. Gain on sale of loans increased to $452,000 compared to $340,000 for the
same period a year ago as mortgage banking activities have increased
significantly. Other income increased by $57,000 as compared to the same
period a year ago primarily because net losses on sale of real estate owned
were $2,000 for the three months ended September 30, 2003 compared to $54,000
for the same period in 2002.

Noninterest income increased by $1.1 to $2.5 million for the nine months ended
September 30, 2003 as compared to $1.3 million for the nine months ended
September 30, 2002. The increase was primarily from increased gain on sale of
loans which were $1.5 million for the nine months ended September 30, 2003
compared to $506,000 for the same period in 2002. The Bank expects the volume
of loan refinancing to slow due to a rise in market interest rates during the
quarter ended September 30, 2003, which will result in lower gain on sale of
loans through the remainder of 2003.

Noninterest Expense

Noninterest expense decreased by $36,000 for the quarter ended September 30,
2003 compared to the quarter ended September 30, 2002. Salaries and benefits
increased $44,000. Expense related to the Employee Stock Ownership Plan and the
Recognition and Retention Plan were partially offset by decreases in wage
expense and 401(k) employer contribution. Advertising and promotion decreased
$25,000 and office supplies and forms decreased $75,000. These expenses were
abnormally high during the three months ended September 30, 2002 due to the
Company changing its name July 1, 2002. Professional services, which includes
legal, accounting/auditing and stock-related expenses, increased $19,000
primarily due to additional services required as the result of being a public
company.

Noninterest expense increased by $164,000 to $5.0 million for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002.
Salaries and benefits increased $66,000 as expenses related to the Employee
Stock Ownership Plan of $180,000 and the Recognition and Retention Plan of
$96,000 as well as an increase of $20,000 in payroll taxes offset decreases in
wage expense and 401(k) employer contribution. Mortgage banking increased by
$150,000 for the nine months ended September 30, 2003. This increase was due to
accelerated amortization of mortgage servicing rights associated with loans
serviced for others that prepay. Professional services increased $157,000 for
the reason above as well as adoption and shareholder approval of our Stock
Option and Incentive Plan and Recognition and Retention Plan. Advertising and
promotion decreased $33,000 and office supplies and forms decreased $67,000 for
the same reasons noted above. Other general and administrative expenses
decreased $48,000 for the nine months ended September 30, 2003 compared to the
same period in 2002. This decrease was primarily due to a decrease in real
estate owned expense to $66,000 for the nine months ended September 30, 2003
compared to $168,000 for the nine months ended September 30, 2002. This was
offset by additional operating expense for the nine months ended September 30,
2003, primarily a one-time $28,000 fee paid to the State of Michigan due to the
Company being a Maryland corporation.

Federal Income Tax Expense

The provision for federal income tax was 28% of pretax income for the nine
months ended September 30, 2003 as compared to 35% for the nine months ended
September 30, 2002. 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 as well as
tax benefits recorded on the limited partnership investment in 2003.

STOCK-BASED COMPENSATION

The Corporation accounts for stock-based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.

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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 September 30, 2003, the total approved loan origination
commitments outstanding including the unadvanced portion of construction loans
amounted to $4.1 million. Unused commercial and consumer lines of credit were
$5.5 million as of September 30, 2003; there were no outstanding letters of
credit as of that date. Certificates of deposit scheduled to mature in one
year or less at September 30, 2003 totaled $ 25.1 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 September 30, 2003 and
based on current collateral levels, Monarch could borrow an additional $ 6.6
million from the Federal Home Loan Bank at prevailing interest rates. This
borrowing capacity can be increased in the future if Monarch pledges additional
collateral to the Federal Home Loan Bank. Monarch anticipates that it will
continue to have sufficient funds, through deposits and borrowings, to meet its
current commitments.

The Banks total cash and cash equivalents increased by $9.2 million during the
nine-month period ended September 30, 2003 compared to a $20.0 million increase
for the same period in 2002. Net cash provided by operating activities totaled
$3.5 million for the nine months ended September 30, 2003 as compared to net
cash used in operating activities of $1.0 million for the nine months ended
September 30, 2002. Net cash used in investing activities totaled $3.3 million
for the nine months ended September 30, 2003 as compared to net cash used in
investing activities of $6.5 million for the nine months ended September 30,
2002. The primary reason for this fluctuation was there was $1.1 million less
cash used for loans during the nine months ended September 30, 2003 as compared
to the same period in 2002 and there was $1.8 million cash used for the loan to
the ESOP in 2002. Net cash provided by financing activities totaled $9.0
million for the nine months ended September 30, 2003, due to increases in
deposits and the proceeds from additional borrowings. Net cash provided by
financing activities totaled $27.6 million for the nine months ended September
30, 2002 due primarily to the issuance of common stock ($22 million) and
borrowings of $11 million.

CAPITAL RESOURCES

The Bank is subject to various regulatory capital requirements. As of
September 30, 2003, the Bank met the regulatory standards to be classified as
well capitalized. The Banks regulatory capital ratios as of September 30,
2003 were as follows: tangible capital, 13.7%; leverage capital, 13.7 %; and
total risk-based capital, 24.1%. The regulatory capital requirements to be
considered well capitalized are 3.0%, 5.0%, and 10.0%, respectively. The Bank
anticipates it will remain well capitalized after the consummation of the
merger with Marshall Savings Bank (MSB Financial) which is expected to be
completed in the first quarter of 2004.




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 September 30, 2003, 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 September 30, 2003, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

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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.




OTHER INFORMATION




Item 1. LEGAL PROCEEDINGS

None




Item 2. CHANGES IN 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) |  | On September 5, 2003 the Registrant filed a Current Report on
Form 8-K related to its announcement of its proposed purchase of MSB
Financial, Inc. pursuant to which MSB Financial, Inc. will be merged
with and into Registrant.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | On September 26, 2003 the Registrant filed a Current Report on
Form 8-K related to the execution of an Amended and Restated
Agreement and Plan of Merger to make certain technical revisions to
the previously executed Agreement and Plan of Merger.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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: October 30, 2003
    
    By:
    
    /s/ John R. SchrollJohn R. Schroll
President and Chief Executive OfficerDate: October 30, 2003
    
    And:
    
    /s/ William C. KurtzWilliam C. Kurtz
Senior Vice President and Treasurer


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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.


Page 13