##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 Commission file number 0-49814
 MONARCH COMMUNITY BANCORP, INC.
  Maryland
    
    04-3627031(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)375 North Willowbrook Road, Coldwater, Michigan
    
    49036(Address of principal executive offices)
    
    (Zip Code)
 : (517) 278-4566   None   Common Stock, par value $.01 per share
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IITEM 1. BusinessITEM 1A. Risk FactorsITEM 1B. Unresolved Staff Comments  NoneITEM 2. PropertiesITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of Security HoldersPART IIITEM 5. Market for the Companys Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesITEM 6. Selected Financial DataITEM 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskITEM 8. Financial StatementsITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureITEM 9A. Controls and ProceduresITEM 9B. Other Information  Not ApplicablePART IIIITEM 10. Directors and Officers of the RegistrantITEM 11. Executive CompensationITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersITEM 13. Certain Relationships and Related TransactionsITEM 14. Principal Accountant Fees and ServicesPART IVITEM 15. Exhibits and Financial Statement SchedulesSIGNATURESExhibit IndexManagement Continuity Agreement2003 Recognition and Retention Plan Restricted Stock AgreementRegistrant's Conflict of Interest and Ethics PolicySubsidiaries of the RegistrantConsent of Plante & Moran, PLLCRule 13a-14(a) Certification of the Company's President and Chief Executive OfficerRule 13a-14(a) Certification of the Company's Chief Financial OfficerSection 1350 Certification    Table of Contents  
 PART I
 
 ITEM 1. Business
 General
         2




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##### Table of Contents



Forward-Looking Statements
  Employees
  Market Area
   Lending Activities
 General.
  3




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##### Table of Contents



Loan Portfolio Composition .
 December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Real Estate Loans:One-to-four family
    
    $
    138,473
    
    
    $
    141,251
    
    
    $
    93,056
    
    
    $
    100,235
    
    
    $
    95,445Multi-family
    
    
    3,534
    
    
    
    4,042
    
    
    
    485
    
    
    
    172
    
    
    
    245Commercial
    
    
    33,162
    
    
    
    42,746
    
    
    
    22,728
    
    
    
    17,801
    
    
    
    14,898Construction or development
    
    
    5,415
    
    
    
    8,853
    
    
    
    9,451
    
    
    
    7,177
    
    
    
    6,785Total real estate loans
    
    
    180,584
    
    
    
    196,892
    
    
    
    125,720
    
    
    
    125,385
    
    
    
    117,373Other loans:Consumer loans:Automobile
    
    
    2,447
    
    
    
    2,631
    
    
    
    1,546
    
    
    
    2,233
    
    
    
    3,287Home equity
    
    
    16,170
    
    
    
    14,234
    
    
    
    9,613
    
    
    
    11,629
    
    
    
    14,084Manufactured housing
    
    
    576
    
    
    
    784
    
    
    
    930
    
    
    
    1,274
    
    
    
    1,557Other
    
    
    7,745
    
    
    
    6,645
    
    
    
    3,795
    
    
    
    4,655
    
    
    
    1,800Total consumer loans
    
    
    26,938
    
    
    
    24,294
    
    
    
    15,884
    
    
    
    19,791
    
    
    
    20,728Commercial Business Loans
    
    
    9,086
    
    
    
    5,330
    
    
    
    2,695
    
    
    
    2,130
    
    
    
    1,884Total other loans
    
    
    36,024
    
    
    
    29,624
    
    
    
    18,579
    
    
    
    21,921
    
    
    
    22,612Total Loans
    
    
    216,608
    
    
    
    226,516
    
    
    
    144,299
    
    
    
    147,306
    
    
    
    139,985Less:Allowance for loan losses
    
    
    2,895
    
    
    
    6,385
    
    
    
    2,618
    
    
    
    1,735
    
    
    
    1,683Net deferred loan fees
    
    
    640
    
    
    
    808
    
    
    
    454
    
    
    
    406
    
    
    
    563Loans in process
    
    
    
    
    
    
    6
    
    
    
    2
    
    
    
    2
    
    
    
    18Total Loans, net
    
    $
    213,073
    
    
    $
    219,317
    
    
    $
    141,225
    
    
    $
    145,163
    
    
    $
    137,721
 4




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December 31, 2005
    
    
    December 31,2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Fixed-Rate LoansReal Estate Loans:One-to-four family
    
    $
    79,858
    
    
    
    36.9
    %
    
    $
    78,937
    
    
    
    34.8
    %Multi-family
    
    
    1,906
    
    
    
    0.9
    %
    
    
    1,669
    
    
    
    0.7
    %Commercial
    
    
    11,946
    
    
    
    5.5
    %
    
    
    13,284
    
    
    
    5.9
    %Construction or development
    
    
    3,579
    
    
    
    1.7
    %
    
    
    5,886
    
    
    
    2.6
    %Total real estate loans
    
    
    97,289
    
    
    
    45.0
    %
    
    
    99,776
    
    
    
    44.0
    %Consumer
    
    
    16,886
    
    
    
    7.8
    %
    
    
    14,836
    
    
    
    6.5
    %Commercial Business
    
    
    4,357
    
    
    
    2.0
    %
    
    
    2,104
    
    
    
    0.9
    %Total fixed-rate loans
    
    
    118,532
    
    
    
    54.7
    %
    
    
    116,716
    
    
    
    51.4
    %Adjustable-Rate LoansReal Estate Loans:One-to-four family
    
    $
    58,615
    
    
    
    27.1
    %
    
    $
    62,314
    
    
    
    27.5
    %Multi-family
    
    
    1,628
    
    
    
    0.7
    %
    
    
    2,373
    
    
    
    1.0
    %Commercial
    
    
    21,216
    
    
    
    9.8
    %
    
    
    29,462
    
    
    
    13.0
    %Construction or development
    
    
    1,836
    
    
    
    0.8
    %
    
    
    2,967
    
    
    
    1.3
    %Total real estate loans
    
    
    83,295
    
    
    
    38.4
    %
    
    
    97,116
    
    
    
    42.8
    %Consumer
    
    
    10,052
    
    
    
    4.6
    %
    
    
    9,458
    
    
    
    4.4
    %Commercial Business
    
    
    4,729
    
    
    
    2.2
    %
    
    
    3,226
    
    
    
    1.4
    %Total adjustable-rate loans
    
    
    98,076
    
    
    
    45.3
    %
    
    
    109,800
    
    
    
    48.6
    %Total loans
    
    
    216,608
    
    
    
    100.0
    %
    
    
    226,516
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    2,895
    
    
    
    
    
    
    
    6,385Net deferred loan fees
    
    
    640
    
    
    
    
    
    
    
    808Loans in process
    
    
    
    
    
    
    
    
    
    
    6Total Loans, net
    
    $
    213,073
    
    
    
    
    
    
    $
    219,317
 5




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Real EstateMulti-family and
    
    Construction orOne-to-Four Family
    
    Commercial
    
    Development
    
    Consumer
    
    Commercial Business
    
    TotalWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageAmount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate(Dollars in Thousands)Due to Mature:One year or less (1)
    
    
    5,996
    
    
    
    6.64
    %
    
    
    1,160
    
    
    
    6.88
    %
    
    
    4,323
    
    
    
    5.80
    %
    
    
    1,302
    
    
    
    8.34
    %
    
    
    2,069
    
    
    
    7.90
    %
    
    
    14,850
    
    
    
    6.74
    %After one year
through five years
    
    
    19,143
    
    
    
    6.75
    %
    
    
    9,323
    
    
    
    7.32
    %
    
    
    55
    
    
    
    7.00
    %
    
    
    9,864
    
    
    
    8.11
    %
    
    
    4,329
    
    
    
    7.48
    %
    
    
    42,714
    
    
    
    7.26
    %After five years
    
    
    113,334
    
    
    
    6.60
    %
    
    
    26,213
    
    
    
    7.01
    %
    
    
    1,037
    
    
    
    6.04
    %
    
    
    15,772
    
    
    
    7.25
    %
    
    
    2,688
    
    
    
    8.10
    %
    
    
    159,044
    
    
    
    6.75
    %
 
 (1)
    
    Includes demand loans.  6




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One-to-Four Family Residential Real Estate Lending.
         7




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Multi-family and Commercial Real Estate Lending
     Construction and Development Lending
   8




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Consumer and Other Lending
        Commercial Business Lending
 9




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Loan Originations, Purchases, Sales and Repayments
   10




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Years EndedDecember 31,2005
    
    
    2004(Dollars in thousands)Originations by type:Real Estate:One-to-four family
    
    $
    66,638
    
    
    $
    80,961Multi-family
    
    
    719
    
    
    
    845Commercial
    
    
    6,884
    
    
    
    16,854Construction or development
    
    
    10,716
    
    
    
    14,917Total real estate loans
    
    
    84,957
    
    
    
    113,577Consumer Loans:Automobile
    
    
    1,454
    
    
    
    1,469Home Equity
    
    
    11,576
    
    
    
    10,348Mobile Homes
    
    
    19
    
    
    
    23Other
    
    
    4,194
    
    
    
    4,580Commercial business
    
    
    5,822
    
    
    
    3,666Total loans originated
    
    
    108,022
    
    
    
    133,663Sales and Repayments:One-to-four family loans sold
    
    
    26,635
    
    
    
    29,808Commercial real estate loans sold
    
    
    4,793
    
    
    
    Principal repayments
    
    
    86,393
    
    
    
    95,431Total reductions
    
    
    117,821
    
    
    
    125,239Loans acquired in acquisition
    
    
    
    
    
    
    73,793Increase (decrease) in other items, net
    
    
    (3,555
    )
    
    
    4,125Net increase (decrease)
    
    $
    (6,244
    )
    
    $
    78,092
 11




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Asset Quality
   12




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##### Table of Contents



Delinquent Loans.
 December 31, 2005Loans Delinquent For:60-89 Days
    
    
    90 Days and Over
    
    
    Total Delinquent LoansPercent of
    
    
    
    
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    
    
    
    
    Percent ofLoan
    
    
    
    
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    
    
    
    
    LoanNumber
    
    
    Amount
    
    
    Category
    
    
    Number
    
    
    Amount
    
    
    Category
    
    
    Number
    
    
    Amount
    
    
    Category(Dollars in Thousands)Real EstateOne-to-four family
    
    
    30
    
    
    $
    1,478
    
    
    
    1.07
    %
    
    
    5
    
    
    $
    280
    
    
    
    0.20
    %
    
    
    35
    
    
    $
    1,758
    
    
    
    1.27
    %Multi-family
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Commercial
    
    
    2
    
    
    
    119
    
    
    
    0.36
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    2
    
    
    
    119
    
    
    
    0.36
    %Construction or development
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Total real estate loans
    
    
    32
    
    
    $
    1,597
    
    
    
    0.88
    %
    
    
    5
    
    
    $
    280
    
    
    
    0.16
    %
    
    
    37
    
    
    $
    1,877
    
    
    
    1.04
    %Consumer
    
    
    7
    
    
    
    78
    
    
    
    0.29
    %
    
    
    1
    
    
    
    8
    
    
    
    0.03
    %
    
    
    8
    
    
    
    86
    
    
    
    0.32
    %Commercial Business
    
    
    3
    
    
    
    453
    
    
    
    4.99
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    3
    
    
    
    453
    
    
    
    4.99
    %Total
    
    
    42
    
    
    $
    2,128
    
    
    
    0.98
    %
    
    
    6
    
    
    $
    288
    
    
    
    0.13
    %
    
    
    48
    
    
    $
    2,416
    
    
    
    1.11
    %
 December 31, 2004Loans Delinquent For:60-89 Days
    
    
    90 Days and Over
    
    
    Total Delinquent LoansPercent of
    
    
    
    
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    
    
    
    
    Percent ofLoan
    
    
    
    
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    
    
    
    
    LoanNumber
    
    
    Amount
    
    
    Category
    
    
    Number
    
    
    Amount
    
    
    Category
    
    
    Number
    
    
    Amount
    
    
    Category(Dollars in Thousands)Real EstateOne-to-four family
    
    
    37
    
    
    $
    2,020
    
    
    
    1.43
    %
    
    
    39
    
    
    $
    1,866
    
    
    
    1.32
    %
    
    
    76
    
    
    $
    3,886
    
    
    
    2.75
    %Multi-family
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Commercial
    
    
    1
    
    
    
    14
    
    
    
    0.03
    %
    
    
    6
    
    
    
    1,563
    
    
    
    3.66
    %
    
    
    7
    
    
    
    1,577
    
    
    
    3.69
    %Construction or development
    
    
    1
    
    
    
    189
    
    
    
    2.13
    %
    
    
    1
    
    
    
    220
    
    
    
    2.49
    %
    
    
    2
    
    
    
    409
    
    
    
    4.62
    %Total real estate loans
    
    
    39
    
    
    $
    2,223
    
    
    
    1.13
    %
    
    
    46
    
    
    $
    3,649
    
    
    
    1.85
    %
    
    
    85
    
    
    $
    5,872
    
    
    
    2.98
    %Consumer
    
    
    13
    
    
    
    162
    
    
    
    0.67
    %
    
    
    6
    
    
    
    93
    
    
    
    0.38
    %
    
    
    19
    
    
    
    255
    
    
    
    1.05
    %Commercial Business
    
    
    2
    
    
    
    137
    
    
    
    2.57
    %
    
    
    3
    
    
    
    344
    
    
    
    6.45
    %
    
    
    5
    
    
    
    481
    
    
    
    9.02
    %Total
    
    
    54
    
    
    $
    2,522
    
    
    
    1.11
    %
    
    
    55
    
    
    $
    4,086
    
    
    
    1.81
    %
    
    
    109
    
    
    $
    6,608
    
    
    
    2.92
    %
 13




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##### Table of Contents



Non-Performing Assets.
 December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in Thousands)Non-accruing loans:One-to-four family
    
    $
    406
    
    
    $
    1,866
    
    
    $
    908
    
    
    $
    1,372
    
    
    $
    Multi-family
    
    
    
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    Commercial real estate
    
    
    397
    
    
    
    1,708
    
    
    
    1,558
    
    
    
    211
    
    
    
    Construction or development
    
    
    
    
    
    
    220
    
    
    
    645
    
    
    
    
    
    
    
    Consumer
    
    
    8
    
    
    
    93
    
    
    
    101
    
    
    
    55
    
    
    
    Commercial business
    
    
    
    
    
    
    344
    
    
    
    89
    
    
    
    
    
    
    
    Total
    
    
    811
    
    
    
    4,231
    
    
    
    3,619
    
    
    
    1,638
    
    
    
    Accruing loans delinquent 90 days or more:One-to-four family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    864
    
    
    
    2,251Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342
    
    
    
    161Construction or development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257Consumer
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    111
    
    
    
    306Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    1,317
    
    
    
    2,975Foreclosed assets:One-to-four family (1)
    
    
    2,239
    
    
    
    1,560
    
    
    
    2,177
    
    
    
    2,022
    
    
    
    2,437Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    480
    
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    Construction or development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    22
    
    
    
    9
    
    
    
    47
    
    
    
    37
    
    
    
    136Commercial business
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,811
    
    
    
    1,969
    
    
    
    2,224
    
    
    
    2,059
    
    
    
    2,573Total non-performing assets
    
    $
    3,622
    
    
    $
    6,200
    
    
    $
    5,970
    
    
    $
    5,014
    
    
    $
    5,548Total as a percentage of total assets
    
    
    1.31
    %
    
    
    2.23
    %
    
    
    2.94
    %
    
    
    2.53
    %
    
    
    3.29
    %
 
 (1)
    
    Includes $1.3 million, $726,000 and $1.1 million in real estate in
judgment and subject to redemption at December 31, 2005, 2004 and
2003, respectively.  14




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##### Table of Contents



Other Loans of Concern.
     Classified Assets.
   Provision for Loan Losses
 15




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##### Table of Contents



Allowance for Loan Losses
     16




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##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Balance at beginning of year
    
    $
    6,385
    
    
    $
    2,618
    
    
    $
    1,735
    
    
    $
    1,683
    
    
    $
    857Charge-offs:One-to-four family
    
    
    754
    
    
    
    375
    
    
    
    436
    
    
    
    415
    
    
    
    116Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    1,904
    
    
    
    1,306
    
    
    
    
    
    
    
    1
    
    
    
    Construction or development
    
    
    6
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    Consumer
    
    
    204
    
    
    
    118
    
    
    
    122
    
    
    
    152
    
    
    
    206Commercial business
    
    
    386
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,254
    
    
    
    1,799
    
    
    
    573
    
    
    
    568
    
    
    
    322Recoveries:One-to-four family
    
    
    78
    
    
    
    105
    
    
    
    157
    
    
    
    135
    
    
    
    72Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    1
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    Construction or development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    46
    
    
    
    45
    
    
    
    32
    
    
    
    88
    
    
    
    37Commercial business
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    149
    
    
    
    178
    
    
    
    189
    
    
    
    223
    
    
    
    109Net charge-offs
    
    
    3,105
    
    
    
    1,621
    
    
    
    384
    
    
    
    345
    
    
    
    213Allowance acquired in acquisition
    
    
    
    
    
    
    513
    
    
    
    
    
    
    
    
    
    
    
    Additions charged to operations
    
    
    
    
    
    
    4,875
    
    
    
    1,267
    
    
    
    397
    
    
    
    1,039Provision recovered from operations
    
    
    (385
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    $
    2,895
    
    
    $
    6,385
    
    
    $
    2,618
    
    
    $
    1,735
    
    
    $
    1,683Ratio of net charge-offs during the year to average loans
outstanding during the year
    
    
    1.42
    %
    
    
    0.82
    %
    
    
    0.26
    %
    
    
    0.24
    %
    
    
    0.15
    %Allowance as a percentage of non-performing loans
    
    
    356.97
    %
    
    
    150.91
    %
    
    
    69.89
    %
    
    
    58.71
    %
    
    
    56.57
    %Allowance as a percentage of total loans (end of year)
    
    
    1.34
    %
    
    
    2.82
    %
    
    
    1.81
    %
    
    
    1.18
    %
    
    
    1.22
    %
 17




---



##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003Amount of
    
    
    Percentage
    
    
    Amount of
    
    
    Percentage
    
    
    Amount of
    
    
    PercentageLoan Loss
    
    
    of
    
    
    Loan Loss
    
    
    of
    
    
    Loan Loss
    
    
    ofAllowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    LoansOne-to-four family
    
    $
    1,378
    
    
    
    63.9
    %
    
    $
    1,516
    
    
    
    62.4
    %
    
    $
    624
    
    
    
    64.5
    %Multi-family and non-residential
real estate
    
    
    1,091
    
    
    
    17.0
    %
    
    
    4,513
    
    
    
    20.6
    %
    
    
    1,239
    
    
    
    16.1
    %Construction or development
    
    
    17
    
    
    
    2.5
    %
    
    
    27
    
    
    
    3.9
    %
    
    
    507
    
    
    
    6.5
    %Consumer
    
    
    254
    
    
    
    12.4
    %
    
    
    261
    
    
    
    10.7
    %
    
    
    173
    
    
    
    11.0
    %Commercial business
    
    
    155
    
    
    
    4.2
    %
    
    
    68
    
    
    
    2.4
    %
    
    
    75
    
    
    
    1.9
    %Total
    
    $
    2,895
    
    
    
    100.0
    %
    
    $
    6,385
    
    
    
    100.0
    %
    
    $
    2,618
    
    
    
    100.0
    %
 2002
    
    
    2001Amount of
    
    
    Percentage
    
    
    Amount of
    
    
    PercentageLoan Loss
    
    
    of
    
    
    Loan Loss
    
    
    ofAllowance
    
    
    Loans
    
    
    Allowance
    
    
    LoansOne-to-four family
    
    $
    805
    
    
    
    68.0
    %
    
    $
    821
    
    
    
    68.2
    %Multi-family and non-residential
real estate
    
    
    686
    
    
    
    12.2
    %
    
    
    10
    
    
    
    10.8
    %Construction or development
    
    
    33
    
    
    
    4.9
    %
    
    
    27
    
    
    
    4.8
    %Consumer
    
    
    201
    
    
    
    13.4
    %
    
    
    302
    
    
    
    14.8
    %Commercial business
    
    
    10
    
    
    
    1.5
    %
    
    
    523
    
    
    
    1.4
    %$
    1,735
    
    
    
    100.0
    %
    
    $
    1,683
    
    
    
    100.0
    %
 Investment Activities
    18




---



##### Table of Contents



December 31, 2005
    
    
    December 31, 2004Percent of
    
    
    
    
    
    
    
    
    
    
    Percent ofFair
    
    
    Total
    
    
    
    
    
    
    Fair
    
    
    TotalAmortized
    
    
    Market
    
    
    Fair Market
    
    
    Amortized
    
    
    Market
    
    
    Fair MarketCost
    
    
    Value
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Value(Dollars in Thousands)Available-for-sale securities:U.S. Treasury obligations
    
    $
    
    
    
    $
    
    
    
    
    0.0
    %
    
    $
    
    
    
    $
    
    
    
    
    0.0
    %U.S. government agency obligations
    
    
    11,961
    
    
    
    11,773
    
    
    
    80.8
    %
    
    
    3,984
    
    
    
    3,989
    
    
    
    47.9
    %Mortgage-backed securities
    
    
    1,317
    
    
    
    1,278
    
    
    
    8.8
    %
    
    
    1,677
    
    
    
    1,675
    
    
    
    20.1
    %Obligations of states and
political subdivisions
    
    
    1,293
    
    
    
    1,286
    
    
    
    8.8
    %
    
    
    2,394
    
    
    
    2,393
    
    
    
    28.7
    %Total available-for-sale securities
    
    $
    14,571
    
    
    $
    14,337
    
    
    
    98.4
    %
    
    $
    8,055
    
    
    $
    8,057
    
    
    
    96.8
    %Held-to-maturity securities:Municipal security
    
    $
    247
    
    
    $
    236
    
    
    
    1.6
    %
    
    $
    267
    
    
    $
    268
    
    
    
    3.2
    %Total investment securities
    
    $
    14,818
    
    
    $
    14,573
    
    
    
    100.0
    %
    
    $
    8,322
    
    
    $
    8,325
    
    
    
    100.0
    %
 December 31, 2003Percent ofFair
    
    
    TotalAmortized
    
    
    Market
    
    
    Fair MarketCost
    
    
    Value
    
    
    ValueAvailable-for-sale securities:U.S. Treasury obligations
    
    $
    5,177
    
    
    $
    5,230
    
    
    
    26.2
    %U.S. government agency obligations
    
    
    9,616
    
    
    
    9,653
    
    
    
    48.4
    %Mortgage-backed securities
    
    
    1,046
    
    
    
    1,034
    
    
    
    5.2
    %Obligations of states and
political subdivisions
    
    
    3,697
    
    
    
    3,731
    
    
    
    18.7
    %Total available-for-sale securities
    
    $
    19,536
    
    
    $
    19,648
    
    
    
    98.5
    %Held-to-maturity securities:Municipal security
    
    $
    286
    
    
    $
    302
    
    
    
    1.5
    %Total investment securities
    
    $
    19,822
    
    
    $
    19,950
    
    
    
    100.0
    %
 19




---



##### Table of Contents



Less than 1 year
    
    
    1 to 5 years
    
    
    5 to 10 years
    
    
    Over 10 years
    
    
    Total SecuritiesWgt
    
    
    
    
    
    
    Wgt
    
    
    
    
    
    
    Wgt
    
    
    
    
    
    
    Wgt
    
    
    
    
    
    
    WgtAmortized
    
    
    Ave
    
    
    Amortized
    
    
    Ave
    
    
    Amortized
    
    
    Ave
    
    
    Amortized
    
    
    Ave
    
    
    Amortized
    
    
    AveCost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield(Dollars in Thousands)Available-for-sale securities:U.S. government agency obligations
    
    $
    3,990
    
    
    
    3.87
    %
    
    $
    7,972
    
    
    
    3.81
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    11,962
    
    
    
    3.83
    %Mortgage-backed securities
    
    
    
    
    
    
    0.00
    %
    
    
    505
    
    
    
    3.67
    %
    
    
    811
    
    
    
    4.39
    %
    
    
    
    
    
    
    0.00
    %
    
    
    1,316
    
    
    
    4.11
    %Obligations of states and
political subdivisions
    
    
    770
    
    
    
    3.05
    %
    
    
    523
    
    
    
    4.14
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    1,293
    
    
    
    3.49
    %Total available-for-sale securities
    
    
    4,760
    
    
    
    3.74
    %
    
    
    9,000
    
    
    
    3.82
    %
    
    
    811
    
    
    
    4.39
    %
    
    
    
    
    
    
    0.00
    %
    
    
    14,571
    
    
    
    3.83
    %Held-to-maturity securities:Municipal security
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    247
    
    
    
    6.55
    %
    
    
    247
    
    
    
    6.55
    %Total investment securities
    
    $
    4,760
    
    
    
    3.74
    %
    
    $
    9,000
    
    
    
    3.82
    %
    
    $
    811
    
    
    
    4.39
    %
    
    $
    247
    
    
    
    6.55
    %
    
    $
    14,818
    
    
    
    3.87
    %
 Sources of Funds
 General.
 Deposits .
  20




---



##### Table of Contents



Year EndedDecember 31,2005
    
    
    2004(Dollars in Thousands)Opening balance
    
    $
    167,733
    
    
    $
    107,240Deposits acquired
    
    
    
    
    
    
    70,216Net deposits (withdrawals)
    
    
    1,502
    
    
    
    (12,683
    )Interest credited
    
    
    3,511
    
    
    
    2,960Ending balance
    
    $
    172,746
    
    
    $
    167,733Net increase
    
    $
    5,013
    
    
    $
    60,493Percent increase
    
    
    2.99
    %
    
    
    56.41
    %
  Year Ended December 31,2005
    
    
    2004Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total(Dollars in Thousands)Transaction and Savings Deposits:Non-interest bearing accounts
    
    $
    7,426
    
    
    
    4.3
    %
    
    $
    5,198
    
    
    
    3.1
    %Savings accounts
    
    
    26,536
    
    
    
    15.4
    %
    
    
    29,177
    
    
    
    17.4
    %Checking & NOW accounts
    
    
    26,083
    
    
    
    15.1
    %
    
    
    27,843
    
    
    
    16.6
    %Money market accounts
    
    
    15,767
    
    
    
    9.1
    %
    
    
    19,114
    
    
    
    11.4
    %Total transaction and savings
    
    $
    75,812
    
    
    
    43.9
    %
    
    $
    81,332
    
    
    
    48.5
    %Certificates:0.00-1.99%
    
    
    332
    
    
    
    0.2
    %
    
    
    18,658
    
    
    
    11.1
    %2.00-3.99%
    
    
    44,413
    
    
    
    25.7
    %
    
    
    49,714
    
    
    
    29.6
    %4.00-5.99%
    
    
    51,895
    
    
    
    30.0
    %
    
    
    15,836
    
    
    
    9.4
    %6.00-7.99%
    
    
    294
    
    
    
    0.2
    %
    
    
    2,193
    
    
    
    1.3
    %Total certificates
    
    
    96,934
    
    
    
    56.1
    %
    
    
    86,401
    
    
    
    51.5
    %Total deposits
    
    $
    172,746
    
    
    
    100.0
    %
    
    $
    167,733
    
    
    
    100.0
    %
 21




---



##### Table of Contents



MaturityOver
    
    
    Over
    
    
    Over3 Months
    
    
    3 to 6
    
    
    6 to 12
    
    
    12or less
    
    
    Months
    
    
    Months
    
    
    Months
    
    
    Total(Dollars in Thousands)Certificates of deposit less than $100,000
    
    $
    14,297
    
    
    $
    11,775
    
    
    $
    13,439
    
    
    $
    21,474
    
    
    $
    60,985Certificates of deposit of $100,000 or more
    
    
    3,365
    
    
    
    7,735
    
    
    
    9,440
    
    
    
    15,409
    
    
    
    35,949Total certificates of deposit
    
    $
    17,662
    
    
    $
    19,510
    
    
    $
    22,879
    
    
    $
    36,883
    
    
    $
    96,934
  Percent0.00-1.99%
    
    
    2.00-3.99%
    
    
    4.00-5.99%
    
    
    6.00-7.99%
    
    
    Total
    
    
    of Total(Dollars in Thousands)Certificate accounts
maturing in quarter ending:March 31, 2006
    
    $
    177
    
    
    $
    15,277
    
    
    $
    1,914
    
    
    $
    294
    
    
    $
    17,662
    
    
    
    18.2
    %June 30, 2006
    
    
    99
    
    
    
    12,655
    
    
    
    6,753
    
    
    
    
    
    
    
    19,507
    
    
    
    20.1
    %September 30, 2006
    
    
    43
    
    
    
    4,469
    
    
    
    7,559
    
    
    
    
    
    
    
    12,071
    
    
    
    12.5
    %December 31, 2006
    
    
    
    
    
    
    859
    
    
    
    9,949
    
    
    
    
    
    
    
    10,808
    
    
    
    11.1
    %March 31, 2007
    
    
    13
    
    
    
    2,716
    
    
    
    4,348
    
    
    
    
    
    
    
    7,077
    
    
    
    7.3
    %June 30, 2007
    
    
    
    
    
    
    963
    
    
    
    3,000
    
    
    
    
    
    
    
    3,963
    
    
    
    4.1
    %September 30, 2007
    
    
    
    
    
    
    551
    
    
    
    4,083
    
    
    
    
    
    
    
    4,634
    
    
    
    4.8
    %December 31, 2007
    
    
    
    
    
    
    506
    
    
    
    2,732
    
    
    
    
    
    
    
    3,238
    
    
    
    3.3
    %March 31, 2008
    
    
    
    
    
    
    2,469
    
    
    
    97
    
    
    
    
    
    
    
    2,566
    
    
    
    2.6
    %June 30, 2008
    
    
    
    
    
    
    1,402
    
    
    
    274
    
    
    
    
    
    
    
    1,676
    
    
    
    1.7
    %September 30, 2008
    
    
    
    
    
    
    531
    
    
    
    3,376
    
    
    
    
    
    
    
    3,907
    
    
    
    4.0
    %December 31, 2008
    
    
    
    
    
    
    433
    
    
    
    3,040
    
    
    
    
    
    
    
    3,473
    
    
    
    3.6
    %Thereafter
    
    
    
    
    
    
    1,582
    
    
    
    4,770
    
    
    
    
    
    
    
    6,352
    
    
    
    6.6
    %Total
    
    $
    332
    
    
    $
    44,413
    
    
    $
    51,895
    
    
    $
    294
    
    
    $
    96,934
    
    
    
    100.0
    %Percent of total
    
    
    0.34
    %
    
    
    45.82
    %
    
    
    53.54
    %
    
    
    0.30
    %
 22




---



##### Table of Contents



Borrowings .
   December 31,2005
    
    
    2004(Dollars in Thousands)Maximum Balance:FHLB advances
    
    $
    65,787
    
    
    $
    66,253Average Balance:FHLB advances
    
    $
    61,842
    
    
    $
    62,643
  December 31,2005
    
    
    2004(Dollars in Thousands)FHLB advances
    
    $
    59,562
    
    
    $
    65,955Weighted average interest
rate of FHLBFHLB advances
    
    
    5.36
    %
    
    
    5.34
    %
 Subsidiary and Other Activities
   23




---



##### Table of Contents



Competition
  Employees
  Federal and State Taxation
 Federal Taxation
 General.
 Method of Accounting.
 Bad Debt Reserves.
 Taxable Distributions and Recapture.
 Minimum Tax.
 Corporate Dividends-Received Deduction.
 24




---



##### Table of Contents



State Taxation
  Regulation and Supervision
 General .
 Federal Regulation of Savings Banks .
      25




---



##### Table of Contents



Insurance of Accounts and Regulation by the FDIC .
     Regulatory Capital Requirements .
     26




---



##### Table of Contents



Limitations on Dividends and Other Capital Distributions .
 Liquidity .
 Qualified Thrift Lender Test .
 27




---



##### Table of Contents



Community Reinvestment Act .
  Transactions with Affiliates .
  Holding Company Regulation.
  Federal Securities Law .
 28




---



##### Table of Contents



Federal Reserve System .
  Federal Home Loan Bank System .
  Sarbanes-Oxley Act.
   29




---



##### Table of Contents




    
    audit committees;
    
    certification of financial statements by the chief executive officer and
the chief financial officer;
    
    the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuers securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement;
    
    a prohibition on insider trading during pension plan black out periods;
    
    disclosure of off-balance sheet transactions;
    
    expedited filing requirements for Form 4s;
    
    disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
    
    real time filing of periodic reports;
    
    the formation of a public accounting oversight board
    
    auditor independence
    
    various increased criminal penalties for violations of securities laws.
  
 ITEM 1A. Risk Factors
  Our future profits may be affected by our inability to grow core deposits
  We are making commercial real estate loans outside of our normal market area
  We are dependent on the strength of our local economy for our growth and profitability
  Our loan portfolio possesses increased risk due to our subprime residential lending
  30




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##### Table of Contents



If we lose our executive officers, it could adversely affect our operations
  The amount of common stock controlled by insiders, our articles of incorporation and bylaws and
state and federal statutory and regulatory provisions could discourage hostile acquisitions of
control
  
    
    the staggered terms of the members of the Board of Directors;
    
    an 80% shareholder vote requirement for the approval of any merger or consolidation
of Monarch Community Bancorp into any entity that directly or indirectly owns 10% or
more of Monarch Community Bancorp voting stock if the transaction is not approved in
advance by at least a majority of the disinterested members of Monarch Community
Bancorps Board of Directors;
    
    supermajority shareholder vote requirements for the approval of certain amendments
to Monarch Community Bancorps articles of incorporation and bylaws;
    
    a prohibition of any holder of common stock voting more than 10% of the outstanding
common stock;
    
    elimination of cumulative voting by shareholders in the election of directors;
    
    restrictions requiring Board members to live or work in Branch Countys market area;
    
    restrictions on the acquisition of our equity securities;
    
    the authorization of five million shares of preferred stock that could be issued
without shareholder approval on terms or in circumstances that could deter a future
takeover attempt; and
    
    the increase in the number of authorized shares and the reclassification of shares
without stockholder approval.
  The low trading volume in our common stock may make the value of the stock volatile and may
make it difficult for shareholders to sell their shares when they desire
  
 ITEM 1B. Unresolved Staff Comments  None
 31




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##### Table of Contents



ITEM 2. Properties
   Owned/Location
    
    County
    
    
    LeasedMain Office375 North Willowbrook Road
    
    Branch
    
    OwnedColdwater, Michigan 49036Branch Offices30 West Chicago Street
    
    Branch
    
    OwnedColdwater, Michigan 49036365 N. Broadway
    
    Branch
    
    OwnedUnion City, Michigan 490941 West Carleton Road
    
    Hillsdale
    
    OwnedHillsdale, Michigan 4924215975 West Michigan Avenue
    
    Calhoun
    
    OwnedMarshall, Michigan 49068107 North Park
    
    Calhoun
    
    OwnedMarshall, Michigan 49068Other Facilities34 Grand Street (Garage)
    
    Branch
    
    OwnedColdwater, Michigan 4903624 Grand Street (Drive through)
    
    Branch
    
    OwnedColdwater, Michiagn 4903687 Marshall Street (Leased to others)
    
    Branch
    
    OwnedColdwater, Michigan 49036119 Grand Street (Leased to others)
    
    Calhoun
    
    OwnedMarshall, Michigan 49068
  32




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##### Table of Contents



ITEM 3. Legal Proceedings
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 ITEM 5. Market for the Companys Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
  Year
    
    
    Quarter ending
    
    High
    
    
    Low2004
    
    
    
    March 31
    
    $
    16.35
    
    
    $
    15.59June 30
    
    $
    15.95
    
    
    $
    13.00September 30
    
    $
    14.45
    
    
    $
    13.26December 31
    
    $
    14.23
    
    
    $
    12.602005
    
    
    
    March 31
    
    $
    14.33
    
    
    $
    12.00June 30
    
    $
    14.33
    
    
    $
    11.00September 30
    
    $
    13.75
    
    
    $
    12.00December 31
    
    $
    12.59
    
    
    $
    10.50
  33




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##### Table of Contents



ITEM 6. Selected Financial Data
 SELECTED FINANCIAL AND OTHER DATA
  December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In Thousands)Selected Financial Condition Data:Total Assets
    
    $
    277,068
    
    
    $
    275,448
    
    
    $
    203,123
    
    
    $
    197,985
    
    
    $
    168,684Loans receivable, net
    
    
    213,073
    
    
    
    219,317
    
    
    
    141,225
    
    
    
    145,162
    
    
    
    137,721Trading securities at fair value:Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    258Investment securities, at carrying value
    
    
    14,584
    
    
    
    8,324
    
    
    
    19,934
    
    
    
    17,434
    
    
    
    0Fed Funds sold and overnight deposits
    
    
    6,988
    
    
    
    6,120
    
    
    
    20,974
    
    
    
    16,063
    
    
    
    12,035Deposits
    
    
    172,746
    
    
    
    167,733
    
    
    
    107,240
    
    
    
    106,744
    
    
    
    105,698Federal Home Loan Bank Advances
    
    
    59,562
    
    
    
    65,955
    
    
    
    57,384
    
    
    
    52,500
    
    
    
    45,500Equity
    
    
    40,576
    
    
    
    39,419
    
    
    
    37,430
    
    
    
    36,949
    
    
    
    15,365
 December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In Thousands)Selected Operations Data:Total interest income
    
    $
    15,231
    
    
    $
    13,818
    
    
    $
    12,053
    
    
    $
    12,931
    
    
    $
    14,470Total interest expense
    
    
    6,567
    
    
    
    6,173
    
    
    
    6,060
    
    
    
    6,466
    
    
    
    8,117Net interest income
    
    
    8,664
    
    
    
    7,645
    
    
    
    5,993
    
    
    
    6,465
    
    
    
    6,353Provision for loan losses
    
    
    (385
    )
    
    
    4,875
    
    
    
    1,266
    
    
    
    397
    
    
    
    1,039Net interest income after provision for loan losses
    
    
    9,049
    
    
    
    2,770
    
    
    
    4,727
    
    
    
    6,068
    
    
    
    5,314Fees and service charges
    
    
    2,496
    
    
    
    2,333
    
    
    
    1,167
    
    
    
    1,154
    
    
    
    1,227Gains on sales of loans, mortgage-backed
securities and investment securities
    
    
    562
    
    
    
    805
    
    
    
    1,672
    
    
    
    998
    
    
    
    1,170Other non-interest income
    
    
    341
    
    
    
    287
    
    
    
    86
    
    
    
    7
    
    
    
    85Total non-interest income
    
    
    3,399
    
    
    
    3,425
    
    
    
    2,925
    
    
    
    2,159
    
    
    
    2,482Total non-interest expense
    
    
    10,503
    
    
    
    9,978
    
    
    
    6,737
    
    
    
    6,798
    
    
    
    6,738Income before taxes
    
    
    1,945
    
    
    
    (3,783
    )
    
    
    915
    
    
    
    1,429
    
    
    
    1,058Income tax provision
    
    
    505
    
    
    
    (1,272
    )
    
    
    251
    
    
    
    415
    
    
    
    299Net income (loss)
    
    $
    1,440
    
    
    $
    (2,511
    )
    
    $
    664
    
    
    $
    1,014
    
    
    $
    759
 34




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##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Selected Financial Ratios and Other Data:Performance Ratios:Return on assets (ratio of net income to average total assets)
    
    
    0.52
    %
    
    
    -0.97
    %
    
    
    0.32
    %
    
    
    0.54
    %
    
    
    0.44
    %Return on Equity (ratio of net income to average equity)
    
    
    3.59
    %
    
    
    -6.53
    %
    
    
    1.80
    %
    
    
    4.08
    %
    
    
    5.05
    %Interest rate spread information:Average during period
    
    
    3.41
    %
    
    
    3.15
    %
    
    
    2.69
    %
    
    
    3.58
    %
    
    
    3.69
    %Net interest margin
    
    
    3.56
    %
    
    
    3.33
    %
    
    
    3.11
    %
    
    
    3.85
    %
    
    
    3.89
    %Ratio of operating expense to average total assets
    
    
    3.80
    %
    
    
    3.85
    %
    
    
    3.22
    %
    
    
    3.72
    %
    
    
    3.87
    %Ratio of average interest-earning assets to average
interest-bearing liabilities
    
    
    1.05
    
    
    
    1.07
    
    
    
    1.13
    
    
    
    1.07
    
    
    
    1.04Efficiency ratio
    
    
    85.39
    %
    
    
    88.18
    %
    
    
    74.14
    %
    
    
    75.10
    %
    
    
    74.10
    %Asset Quality Ratios:Non-performing assets to total assets at end of period
    
    
    1.31
    %
    
    
    2.23
    %
    
    
    2.94
    %
    
    
    2.53
    %
    
    
    3.29
    %Non-performing loans to total loans
    
    
    0.37
    %
    
    
    1.87
    %
    
    
    2.60
    %
    
    
    2.04
    %
    
    
    2.16
    %Allowance for loan losses to non-performing loans
    
    
    356.97
    %
    
    
    150.91
    %
    
    
    69.89
    %
    
    
    58.70
    %
    
    
    56.57
    %Allowance for loan losses to loans receivable, net
    
    
    1.36
    %
    
    
    2.82
    %
    
    
    1.81
    %
    
    
    1.18
    %
    
    
    1.20
    %Capital ratios:Equity to total assets at end of period
    
    
    14.64
    %
    
    
    14.31
    %
    
    
    18.43
    %
    
    
    18.67
    %
    
    
    9.11
    %Other data:Number of full-service offices
    
    
    6
    
    
    
    7
    
    
    
    5
    
    
    
    5
    
    
    
    5
 
 (1)
    
    Net interest income divided by average-earning assets.(2)
    
    Total noninterest expenses, excluding real estate owned and repossessed property expense, as a
percentage of net interest income and total noninterest income. 35




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##### Table of Contents



ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
   Critical Accounting Policies
  Allowance for Loan Losses.
 Goodwill.
 Management Strategy
   36




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##### Table of Contents



Changes in Financial Condition from December 31, 2004 to December 31, 2005
 General.
 Loans.
   Securities.
 Liabilities.
  Equity
 37




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##### Table of Contents



Average Balances, Net Interest Income, Yields Earned and Rates Paid
  Year Ended December 31,2005
    
    
    2004Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate(dollars in thousands)Fed Funds and overnight deposits
    
    $
    6,834
    
    
    $
    269
    
    
    
    3.94
    %
    
    $
    9,349
    
    
    $
    123
    
    
    
    1.32
    %Investment securities
    
    
    13,494
    
    
    
    500
    
    
    
    3.71
    
    
    
    17,643
    
    
    
    442
    
    
    
    2.51Other securities
    
    
    4,753
    
    
    
    204
    
    
    
    4.29
    
    
    
    4,093
    
    
    
    179
    
    
    
    4.37Loans receivable (1)
    
    
    218,632
    
    
    
    14,258
    
    
    
    6.52
    
    
    
    198,336
    
    
    
    13,074
    
    
    
    6.59Total earning assets
    
    $
    243,713
    
    
    $
    15,231
    
    
    
    6.25
    
    
    $
    229,421
    
    
    $
    13,818
    
    
    
    6.02Demand and NOW Accounts
    
    $
    33,811
    
    
    $
    78
    
    
    
    0.23
    
    
    $
    28,880
    
    
    $
    94
    
    
    
    0.33Money market accounts
    
    
    16,731
    
    
    
    211
    
    
    
    1.26
    
    
    
    15,815
    
    
    
    176
    
    
    
    1.11Savings accounts
    
    
    28,535
    
    
    
    119
    
    
    
    0.42
    
    
    
    24,215
    
    
    
    117
    
    
    
    0.48Certificates of deposit
    
    
    90,397
    
    
    
    2,929
    
    
    
    3.24
    
    
    
    83,478
    
    
    
    2,323
    
    
    
    2.78Federal Home Loan Bank Advances
    
    
    61,842
    
    
    
    3,230
    
    
    
    5.22
    
    
    
    62,643
    
    
    
    3,463
    
    
    
    5.53Total interest bearing liabilities
    
    $
    231,316
    
    
    
    6,567
    
    
    
    2.84
    
    
    $
    215,031
    
    
    
    6,173
    
    
    
    2.87Net interest income
    
    
    
    
    
    $
    8,664
    
    
    
    
    
    
    
    
    
    
    $
    7,645Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.41
    %
    
    
    
    
    
    
    
    
    
    
    3.15
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.56
    %
    
    
    
    
    
    
    
    
    
    
    3.33
    %
 2003Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    RateFed Funds and overnight deposits
    
    $
    23,745
    
    
    $
    253
    
    
    
    1.07
    %Investment securities
    
    
    18,063
    
    
    
    457
    
    
    
    2.53Other securities
    
    
    2,915
    
    
    
    148
    
    
    
    5.08Loans receivable (1)
    
    
    147,896
    
    
    
    11,195
    
    
    
    7.57Total earning assets
    
    $
    192,619
    
    
    $
    12,053
    
    
    
    6.26Demand and NOW Accounts
    
    $
    14,082
    
    
    $
    79
    
    
    
    0.56Money market accounts
    
    
    10,241
    
    
    
    135
    
    
    
    1.32Savings accounts
    
    
    15,996
    
    
    
    137
    
    
    
    0.86Certificates of deposit
    
    
    72,286
    
    
    
    2,513
    
    
    
    3.48Federal Home Loan Bank Advances
    
    
    57,111
    
    
    
    3,196
    
    
    
    5.60Total interest bearing liabilities
    
    $
    169,716
    
    
    
    6,060
    
    
    
    3.57Net interest income
    
    
    
    
    
    $
    5,993Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.69
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.11
    %
 
 (1)
    
    Calculated net of deferred loan fees, loan discounts and loans in process. Nonaccrual loans are
included in the average outstanding balance. 38




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##### Table of Contents



Rate/Volume Analysis
  Year Ended December 31,
    
    
    Year Ended December 31,2005 vs. 2004
    
    
    2004 vs. 2003Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalIncrease (Decrease) Due to
    
    
    Increase
    
    
    Increase (Decrease) Due to
    
    
    IncreaseRate
    
    
    Volume
    
    
    Mix
    
    
    (Decrease)
    
    
    Rate
    
    
    Volume
    
    
    Mix
    
    
    (Decrease)(in thousands)Interest earning AssetsFed funds and overnight deposits
    
    $
    245
    
    
    $
    (33
    )
    
    $
    (36
    )
    
    $
    146
    
    
    $
    59
    
    
    $
    (153
    )
    
    $
    (36
    )
    
    $
    (130
    )Investment securities
    
    
    212
    
    
    
    (104
    )
    
    
    (50
    )
    
    
    58
    
    
    
    (4
    )
    
    
    (11
    )
    
    
    
    
    
    
    (15
    )Other securities
    
    
    (3
    )
    
    
    29
    
    
    
    (2
    )
    
    
    25
    
    
    
    (21
    )
    
    
    60
    
    
    
    (8
    )
    
    
    31Loans receivable
    
    
    (140
    )
    
    
    1,338
    
    
    
    (14
    )
    
    
    1,184
    
    
    
    (1,446
    )
    
    
    3,818
    
    
    
    (493
    )
    
    
    1,879Total interest-earning assets
    
    $
    314
    
    
    $
    1,230
    
    
    $
    (102
    )
    
    $
    1,413
    
    
    $
    (1,412
    )
    
    $
    3,714
    
    
    $
    (537
    )
    
    $
    1,765Interest-bearing liabilitiesDemand and NOW Accounts
    
    $
    (27
    )
    
    $
    16
    
    
    $
    (5
    )
    
    $
    (16
    )
    
    $
    (33
    )
    
    $
    83
    
    
    $
    (35
    )
    
    $
    15Money market accounts
    
    
    23
    
    
    
    10
    
    
    
    3
    
    
    
    35
    
    
    
    (21
    )
    
    
    73
    
    
    
    (11
    )
    
    
    41Savings accounts
    
    
    (16
    )
    
    
    21
    
    
    
    (3
    )
    
    
    2
    
    
    
    (60
    )
    
    
    70
    
    
    
    (30
    )
    
    
    (20
    )Certificates of deposit
    
    
    382
    
    
    
    193
    
    
    
    32
    
    
    
    606
    
    
    
    (501
    )
    
    
    389
    
    
    
    (78
    )
    
    
    (190
    )Federal Home Loan Bank Advances
    
    
    (191
    )
    
    
    (44
    )
    
    
    2
    
    
    
    (233
    )
    
    
    (39
    )
    
    
    310
    
    
    
    (4
    )
    
    
    267Total interest bearing liabilities
    
    $
    171
    
    
    $
    195
    
    
    $
    30
    
    
    $
    394
    
    
    $
    (654
    )
    
    $
    925
    
    
    $
    (158
    )
    
    $
    113Net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,652
 39




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##### Table of Contents



December 31,2005
    
    
    2004Weighted average yield on:Fed Funds and overnight deposits
    
    
    3.75
    %
    
    
    1.85
    %Investment securities
    
    
    3.87
    %
    
    
    3.53
    %Federal Home Loan Bank stock
    
    
    4.75
    %
    
    
    4.25
    %Loans:One-to-four family
    
    
    6.62
    %
    
    
    6.51
    %Multi-family and
nonresidential real estate
    
    
    7.08
    %
    
    
    6.29
    %Construction or development
    
    
    5.86
    %
    
    
    5.75
    %Total real estate loans
    
    
    6.69
    %
    
    
    6.42
    %Other loans:Consumer loans
    
    
    7.62
    %
    
    
    7.17
    %Commercial business loans
    
    
    7.76
    %
    
    
    6.66
    %Total Loans
    
    
    6.85
    %
    
    
    6.51
    %Combined weighted average yield
on interest earning assets
    
    
    6.54
    %
    
    
    6.25
    %Weighted average rate paid on:Demand and NOW accounts
    
    
    0.27
    %
    
    
    0.25
    %Money market accounts
    
    
    2.36
    %
    
    
    0.96
    %Savings deposits
    
    
    0.41
    %
    
    
    0.51
    %Certificates of deposit
    
    
    3.95
    %
    
    
    3.05
    %Federal Home Loan Bank advances
    
    
    5.36
    %
    
    
    5.34
    %Combined weighted average rate paid
on interest-bearing liabilities
    
    
    3.32
    %
    
    
    2.82
    %Spread
    
    
    3.22
    %
    
    
    3.43
    %
 Comparison of Results of Operations for the Years Ended December 31, 2005, 2004, and 2003
 General
 Net Interest Income.
  40




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##### Table of Contents



Interest Income.
   Interest Expense.
  Provision for Loan Losses.
     41




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##### Table of Contents



Noninterest Income.
  Noninterest Expenses.
  Income Taxes.
 42




---



##### Table of Contents



Liquidity and Commitments
       Off-Balance Sheet Arrangements
  43




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##### Table of Contents



Contractual Obligations
  Payments Due by PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    AfterTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(Dollars in Thousands)Certificates of deposit
    
    $
    96,934
    
    
    $
    60,051
    
    
    $
    30,529
    
    
    $
    6,354
    
    
    $
    FHLB advances
    
    
    59,562
    
    
    
    11,585
    
    
    
    26,299
    
    
    
    6,328
    
    
    
    15,350Total
    
    $
    156,496
    
    
    $
    71,636
    
    
    $
    56,828
    
    
    $
    12,682
    
    
    $
    15,350
 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
    
    $
    12,854
    
    
    $
    12,854
    
    
    $
    
    
    
    $
    
    
    
    $
    Unfunded commitments under HELOCs
    
    
    15,916
    
    
    
    1,071
    
    
    
    3,457
    
    
    
    2,998
    
    
    
    8,390Unfunded commitments under Commercial LOCs
    
    
    476
    
    
    
    50
    
    
    
    55
    
    
    
    4
    
    
    
    367Letters of credit
    
    
    64
    
    
    
    14
    
    
    
    50
    
    
    
    
    
    
    
    Total
    
    $
    29,310
    
    
    $
    13,989
    
    
    $
    3,562
    
    
    $
    3,002
    
    
    $
    8,757
  Capital
  Impact of Inflation
   44




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##### Table of Contents



45




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Asset and Liability Management and Market Risk
 Our Risk When Interest Rates Change.
 How We Measure Our Risk of Interest Rate Changes.
    
    
    originating shorter-term consumer loans, commercial construction and
commercial permanent real estate loans for retention in our portfolio;
    
    selling a significant portion of the long-term, fixed rate residential
mortgage loans we make;
    
    managing our deposits to establish stable deposit relationships with an
emphasis on core, non-certificate deposits, supplementing these with
brokered deposits, as appropriate; and
    
    maintaining longer-term borrowings at fixed interest rates to offset the
negative impact of longer-term fixed rate loans in our loan portfolio.
Future borrowings are expected to be short-term to reduce the average
maturity of our borrowings.
  46




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##### Table of Contents



Change in Interest RatesBasis Points ("bp")
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Portfolio Value as %(Rate Shock in Rates) (1)
    
    Net Portfolio Value
    
    of Present Value of Assets$ Amount
    
    $ Change
    
    % Change
    
    NPV Ratio
    
    Change+ 300 bp
    
    
    34,641
    
    
    
    -2,761
    
    
    
    -7
    %
    
    
    13.22
    %
    
    - 51 bp+ 200 bp
    
    
    36,179
    
    
    
    -1,223
    
    
    
    -3
    %
    
    
    13.60
    %
    
    - 13 bp+100 bp
    
    
    37,119
    
    
    
    -283
    
    
    
    -1
    %
    
    
    13.77
    %
    
    + 4 bp0 bp
    
    
    37,402
    
    
    
    
    
    
    
    
    
    
    
    13.73
    %-100 bp
    
    
    36,666
    
    
    
    -736
    
    
    
    -2
    %
    
    
    13.36
    %
    
    - 37 bp-200 bp
    
    
    35,171
    
    
    
    -2,231
    
    
    
    -6
    %
    
    
    12.75
    %
    
    - 98 bp-300 bp
    
    
    n/m
    (2)
    
    
    n/m
    (2)
    
    
    n/m
    (2)
    
    
    n/m
    (2)
    
    
    n/m
    (2)
 
 (1)
    
    Assumes an instantaneous uniform change in interest rates at all maturities.(2)
    
    Not meaningful because some market rates would compute to a rate less than 0.     47




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##### Table of Contents



Principal Amount Maturing In:2011 and
    
    
    
    
    
    
    Fair Value2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    beyond
    
    
    Total
    
    
    12/31/2005Rate-sensitive assetsFed funds and overnight deposits
    
    $
    6,988
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,988
    
    
    $
    6,988Average interest rate
    
    
    3.75
    %Securities
    
    $
    4,760
    
    
    $
    4,051
    
    
    $
    2,450
    
    
    $
    1,993
    
    
    $
    505
    
    
    $
    1,058
    
    
    $
    14,817
    
    
    $
    14,573Average interest rate
    
    
    3.73
    %
    
    
    3.55
    %
    
    
    4.07
    %
    
    
    4.11
    %
    
    
    3.67
    %
    
    
    4.89
    %Gross loans
    
    $
    14,850
    
    
    $
    6,676
    
    
    $
    10,927
    
    
    $
    8,809
    
    
    $
    16,302
    
    
    $
    159,044
    
    
    $
    216,608
    
    
    $
    218,731Average interest rate
    
    
    6.74
    %
    
    
    7.18
    %
    
    
    7.47
    %
    
    
    7.22
    %
    
    
    7.17
    %
    
    
    6.75
    %Rate-sensitive liabilitiesSavings & interest-bearing
demand deposits
    
    $
    68,386
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    68,386
    
    
    $
    68,386Average interest rate
    
    
    0.80
    %Certificates of deposit
    
    $
    60,050
    
    
    $
    18,795
    
    
    $
    11,735
    
    
    $
    3,665
    
    
    $
    2,689
    
    
    $
    
    
    
    $
    96,934
    
    
    $
    97,107Average interest rate
    
    
    3.81
    %
    
    
    4.25
    %
    
    
    4.02
    %
    
    
    4.23
    %
    
    
    4.46
    %FHLB advances
    
    $
    11,585
    
    
    $
    6,146
    
    
    $
    20,153
    
    
    $
    160
    
    
    $
    6,168
    
    
    $
    15,350
    
    
    $
    59,562
    
    
    $
    59,953Average interest rate
    
    
    4.98
    %
    
    
    6.43
    %
    
    
    5.67
    %
    
    
    5.64
    %
    
    
    6.19
    %
    
    
    4.48
    %
 48




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##### Table of Contents



ITEM 8. Financial Statements
 Monarch Community Bancorp, Inc.
and Subsidiaries
 Consolidated Financial Report
 December 31, 2005
 49




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 ContentsReport Letter
    
    
    51Consolidated Financial StatementsBalance Sheet
    
    
    52Statement of Operations
    
    
    53Statement of Stockholders Equity
    
    
    54Statement of Cash Flows
    
    
    55Notes to Consolidated Financial Statements
    
    
    56-91
 50




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
  
    
 
 51




---



##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Consolidated Balance Sheet
(000s omitted, except per share data)
 December 312005
    
    
    2004AssetsCash and due from banks
    
    $
    9,298
    
    
    $
    9,529Federal funds sold and overnight deposits
    
    
    6,988
    
    
    
    6,120Total cash and cash equivalents
    
    
    16,286
    
    
    
    15,649Securities  Available for sale (Note 3)
    
    
    14,337
    
    
    
    8,057Securities  Held to maturity (Note 3)
    
    
    247
    
    
    
    267Other securities (Note 3)
    
    
    4,837
    
    
    
    4,720Real estate investment  Limited partnership (Note 4)
    
    
    1,129
    
    
    
    1,278Loans held for sale
    
    
    168
    
    
    
    361Loans, net (Note 5)
    
    
    213,073
    
    
    
    219,317Foreclosed assets, net (Note 7)
    
    
    2,811
    
    
    
    1,960Premises and equipment (Note 8)
    
    
    5,706
    
    
    
    6,444Goodwill (Note 2)
    
    
    9,606
    
    
    
    9,606Core deposit intangible (Note 2)
    
    
    1,383
    
    
    
    1,752Other assets (Notes 6 and 11)
    
    
    7,485
    
    
    
    6,037Total assets
    
    $
    277,068
    
    
    $
    275,448Liabilities and Stockholders EquityLiabilitiesDeposits (Note 9):Noninterest-bearing
    
    $
    7,426
    
    
    $
    5,198Interest-bearing
    
    
    165,320
    
    
    
    162,535Total deposits
    
    
    172,746
    
    
    
    167,733Federal Home Loan Bank advances (Note 10)
    
    
    59,562
    
    
    
    65,955Accrued expenses and other liabilities (Note 15)
    
    
    4,184
    
    
    
    2,341Total liabilities
    
    
    236,492
    
    
    
    236,029Commitments and Contingencies(Notes 12 and 20)
    
    
    
    
    
    
    Stockholders Equity(Notes 13 and 14)Common stock  $0.01 par value
authorized  20,000,000 shares
issued and outstanding  2,710,596 and 2,709,220
shares at December 31, 2005 and 2004, respectively
    
    
    27
    
    
    
    27Additional paid-in capital
    
    
    28,150
    
    
    
    28,059Retained earnings
    
    
    14,401
    
    
    
    13,529Accumulated other comprehensive income (loss)
    
    
    (155
    )
    
    
    2Unearned compensation (Notes 18 and 19)
    
    
    (1,847
    )
    
    
    (2,198
    )Total stockholders equity
    
    
    40,576
    
    
    
    39,419Total liabilities and stockholders equity
    
    $
    277,068
    
    
    $
    275,448
 
 52




---



##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Consolidated Satatement of Operations
(000s omitted, except per share data)
 Year Ended December 312005
    
    
    2004
    
    
    2003Interest IncomeLoans, including fees
    
    $
    14,258
    
    
    $
    13,074
    
    
    $
    11,195Investment securities
    
    
    704
    
    
    
    621
    
    
    
    605Federal funds sold and overnight deposits
    
    
    269
    
    
    
    123
    
    
    
    253Total interest income
    
    
    15,231
    
    
    
    13,818
    
    
    
    12,053Interest ExpenseDeposits (Note 9)
    
    
    3,337
    
    
    
    2,710
    
    
    
    2,864Federal Home Loan Bank advances
    
    
    3,230
    
    
    
    3,463
    
    
    
    3,196Total interest expense
    
    
    6,567
    
    
    
    6,173
    
    
    
    6,060Net Interest Income
    
    
    8,664
    
    
    
    7,645
    
    
    
    5,993Provision for Loan Losses(Note 5)
    
    
    (385
    )
    
    
    4,875
    
    
    
    1,266Net Interest Income After Provision for Loan Losses
    
    
    9,049
    
    
    
    2,770
    
    
    
    4,727Noninterest IncomeFees and service charges
    
    
    2,034
    
    
    
    1,933
    
    
    
    954Loan servicing fees
    
    
    462
    
    
    
    400
    
    
    
    213Net gain on sale of loans
    
    
    562
    
    
    
    865
    
    
    
    1,672Net gain (loss) on sale of investment securities (Note 3)
    
    
    
    
    
    
    (60
    )
    
    
    Other income (Note 4)
    
    
    341
    
    
    
    287
    
    
    
    86Total noninterest income
    
    
    3,399
    
    
    
    3,425
    
    
    
    2,925Noninterest ExpensesSalaries and employee benefits (Notes 15, 18 and 19)
    
    
    5,103
    
    
    
    5,084
    
    
    
    3,662Occupancy and equipment
    
    
    1,081
    
    
    
    1,060
    
    
    
    724Data processing
    
    
    689
    
    
    
    622
    
    
    
    359Amortization of mortgage servicing rights
    
    
    438
    
    
    
    385
    
    
    
    353Professional services
    
    
    602
    
    
    
    632
    
    
    
    409Amortization of core deposit intangible (Note 2)
    
    
    369
    
    
    
    329
    
    
    
    NOW account processing
    
    
    182
    
    
    
    179
    
    
    
    141ATM/Debit card processing
    
    
    221
    
    
    
    219
    
    
    
    76Foreclosed property expense (Note 7)
    
    
    521
    
    
    
    216
    
    
    
    126Other general and administrative
    
    
    1,297
    
    
    
    1,252
    
    
    
    887Total noninterest expense
    
    
    10,503
    
    
    
    9,978
    
    
    
    6,737Income (Loss)- Before income taxes
    
    
    1,945
    
    
    
    (3,783
    )
    
    
    915Income Taxes (Recovery)(Note 11)
    
    
    505
    
    
    
    (1,272
    )
    
    
    251Net Income (Loss)
    
    $
    1,440
    
    
    $
    (2,511
    )
    
    $
    664Earnings (Loss) Per Share (Note 1)Basic
    
    $
    0.57
    
    
    $
    (1.05
    )
    
    $
    0.31Diluted
    
    $
    0.57
    
    
    $
    (1.05
    )
    
    $
    0.31
 
 53




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Consolidated Statement of Stockholders Equity
(000s omitted, except per share data)
 Common Stock
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    OtherNumber of
    
    
    
    
    
    
    Paid in
    
    
    Retained
    
    
    Comprehensive
    
    
    UnearnedShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Compensation
    
    
    TotalBalance- January 1, 2003
    
    
    2,314
    
    
    
    23
    
    
    
    22,149
    
    
    
    16,379
    
    
    
    64
    
    
    
    (1,666
    )
    
    
    36,949Issuance of 88,875 shares of common
stock at $13/share awarded in connection
with Restricted Stock Plan, net of
forfeitures of 3,700 shares
    
    
    85
    
    
    
    1
    
    
    
    1,106
    
    
    
    
    
    
    
    
    
    
    
    (1,107
    )
    
    
    Allocation of ESOP shares (Note 18)
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    282Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    664
    
    
    
    
    
    
    
    
    
    
    
    664Change in unrealized gain on
securities available-for-sale,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    675Dividends paid ($0.20/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (476
    )
    
    
    
    
    
    
    
    
    
    
    (476
    )Balance- December 31, 2003
    
    
    2,399
    
    
    
    24
    
    
    
    23,352
    
    
    
    16,567
    
    
    
    75
    
    
    
    (2,588
    )
    
    
    37,430Issuance of 310,951 shares of common
stock at $14.75/share in connection with
acquisition of MSB Financial, Inc. (Note
2)
    
    
    311
    
    
    
    3
    
    
    
    4,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,586797 shares repurchased at $14.15/share
    
    
    (1
    )
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Issuance of 18,000 shares of common
stock at $14.26/share awarded in
connection with Restricted Stock Plan,
net of forfeitures of 18,484 shares at
$13/share
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    Vesting of 17,040 restricted shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221
    
    
    
    221Allocation of ESOP shares (Note 18)
    
    
    
    
    
    
    
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    304Comprehensive income:Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,511
    )
    
    
    
    
    
    
    
    
    
    
    (2,511
    )Change in unrealized gain on
securities available-for-sale,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    (73
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,584
    )Dividends paid ($0.20/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (527
    )
    
    
    
    
    
    
    
    
    
    
    (527
    )Balance- December 31, 2004
    
    
    2,709
    
    
    $
    27
    
    
    $
    28,059
    
    
    $
    13,529
    
    
    $
    2
    
    
    $
    (2,198
    )
    
    $
    39,419Issuance of 4,000 shares of common stock
at an average price of $11.57/share in
connection with Restricted Stock Plan
    
    
    4
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    $
    2,624 shares repurchased at average
price of $12.27/share
    
    
    (3
    )
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )Vesting of 16,018 restricted shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212
    
    
    
    212Allocation of ESOP shares (Note 18)
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    262Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,440
    
    
    
    
    
    
    
    
    
    
    
    1,440Change in unrealized gain on
securities available-for-sale,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (157
    )
    
    
    
    
    
    
    (157
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,283Dividends paid ($0.21/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (568
    )
    
    
    
    
    
    
    
    
    
    
    (568
    )Balance- December 31, 2005
    
    
    2,710
    
    
    $
    27
    
    
    $
    28,150
    
    
    $
    14,401
    
    
    $
    (155
    )
    
    $
    (1,847
    )
    
    $
    40,576
 
 54




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Consolidated Statement of Cash Flows
(000s omitted)
 Year Ended December 312005
    
    
    2004
    
    
    2003Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    1,440
    
    
    $
    (2,511
    )
    
    $
    664Adjustments to reconcile net income (loss) to net cash
from operating activitiesDepreciation and amortization
    
    
    1,029
    
    
    
    1,448
    
    
    
    1,139Provision for loan loss
    
    
    (385
    )
    
    
    4,875
    
    
    
    1,266Stock dividends on other securities
    
    
    (100
    )
    
    
    (171
    )
    
    
    (111
    )(Gain) loss on sale of foreclosed assets
    
    
    (53
    )
    
    
    (16
    )
    
    
    40Deferred income taxes
    
    
    323
    
    
    
    599
    
    
    
    (329
    )Mortgage loans originated for sale
    
    
    (25,217
    )
    
    
    (29,553
    )
    
    
    (59,447
    )Proceeds from sale of mortgage loans
    
    
    25,973
    
    
    
    30,670
    
    
    
    62,225Gain on sale of mortgage loans
    
    
    (562
    )
    
    
    (865
    )
    
    
    (1,672
    )(Gain) loss on sale of available for sale securities
    
    
    
    
    
    
    60
    
    
    
    (Gain) loss on sale of premises and equipment
    
    
    (39
    )
    
    
    
    
    
    
    Earned stock compensation
    
    
    474
    
    
    
    525
    
    
    
    282Net change in:Deferred loan fees
    
    
    168
    
    
    
    (333
    )
    
    
    (41
    )Accrued interest receivable
    
    
    79
    
    
    
    229
    
    
    
    234Other assets
    
    
    (2,060
    )
    
    
    4,844
    
    
    
    (842
    )Accrued expenses and other liabilities
    
    
    1,843
    
    
    
    (2,025
    )
    
    
    (723
    )Net cash provided by operating activities
    
    
    2,913
    
    
    
    7,776
    
    
    
    2,685Cash Flows From Investing ActivitiesActivity in available-for-sale securities:Purchases
    
    
    (8,408
    )
    
    
    (8,545
    )
    
    
    (7,635
    )Proceeds from sale of securities
    
    
    
    
    
    
    16,946
    
    
    
    Proceeds from maturities of securities
    
    
    1,909
    
    
    
    2,823
    
    
    
    4,798Activity in held-to-maturity securities:Purchases
    
    
    (17
    )
    
    
    (21
    )
    
    
    (291
    )Proceeds from maturities of securities
    
    
    
    
    
    
    19
    
    
    
    279Activity in other securities:Purchase of other securities
    
    
    
    
    
    
    (18
    )
    
    
    (111
    )Loan originations and principal collections, net
    
    
    2,852
    
    
    
    (11,254
    )
    
    
    (132
    )Proceeds from sale of foreclosed assets
    
    
    2,810
    
    
    
    3,819
    
    
    
    2,649Proceeds on sale of premises and equipment
    
    
    345
    
    
    
    
    
    
    
    Purchase of premises and equipment
    
    
    (129
    )
    
    
    (373
    )
    
    
    (22
    )Acquisition, net of cash acquired (Note 2)
    
    
    
    
    
    
    (13,192
    )
    
    
    Net cash used in investing activities
    
    
    (638
    )
    
    
    (9,796
    )
    
    
    (465
    )Cash Flows From Financing ActivitiesNet increase (decrease) in deposits
    
    
    5,187
    
    
    
    (9,723
    )
    
    
    496Repurchase of Common Stock
    
    
    (32
    )
    
    
    (11
    )
    
    
    Dividends paid
    
    
    (568
    )
    
    
    (527
    )
    
    
    (476
    )Proceeds from FHLB advances
    
    
    4,000
    
    
    
    4,000
    
    
    
    5,000Repayment of FHLB advances
    
    
    (10,225
    )
    
    
    (3,401
    )
    
    
    (116
    )Net cash provided by (used in) financing activities
    
    
    (1,638
    )
    
    
    (9,662
    )
    
    
    4,904Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    637
    
    
    
    (11,682
    )
    
    
    7,124Cash and
Cash Equivalents Beginning
    
    
    15,649
    
    
    
    27,331
    
    
    
    20,207Cash and Cash Equivalents End
    
    $
    16,286
    
    
    $
    15,649
    
    
    $
    27,331
 
 55




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 1  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 charted 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 shares of the common stock
of the Bank.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 percent of
Community Services Group, Inc., which invests in other entities, including 100 percent
ownership of First Insurance Agency, a minority ownership in a limited liability
company that operates a title insurance company, and a minority ownership in a limited
liability company that re-insures private mortgage insurance services provided to the
Banks customers. The Bank also owns a 25% interest in a limited partnership formed to
construct and operate multi-family housing units.Basis of Presentation and Consolidation- The consolidated financial statements include
the accounts of Monarch Community Bancorp, Inc., Monarch Community Bank, and Community
Services Group, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.Use of Estimates The accounting and reporting policies of the Corporation and its
subsidiaries conform to accounting principles generally accepted in the United States
of America. Management is required to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results
could differ from these estimates and assumptions. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, identification and valuation of
impaired loans, valuation of the mortgage servicing asset, valuation of intangible
assets and the valuation of the other real estate.Significant Group Concentrations of Credit Risk Most of the Corporations activities
are with customers located within its primary market areas in Michigan. Note 3
discusses the types of securities the Corporation invests in. Note 4 discusses the
Corporations investment in an unconsolidated partnership. Note 5 discusses the types
of lending that the Corporation engages in. The Corporation has a significant
concentration of loans secured by residential real estate located in Branch, Calhoun
and Hillsdale counties.Cash and Cash Equivalents For the purpose of the consolidated statement of cash
flows, cash and cash equivalents include cash and balances due from banks,
interest-bearing deposits and overnight time deposits with the Federal Home Loan Bank
and fed funds sold. The Bank is required to maintain average balances on hand or with
the Federal Reserve Bank. At December 31, 2005 and 2004, these reserve balances
amounted to approximately $649,000 and $565,000, respectively.
 56




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 1
 Summary of Significant Accounting Policies (Continued)
 Securities
  Loans

Held for Sale
 Loans

   Allowance
for Loan Losses 
  57




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 1
 Summary of Significant Accounting Policies (Continued)
    Servicing
 Credit
Related Financial Instruments
 58




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 1  Summary of Significant Accounting Policies (Continued)
 Foreclosed
Assets
 Premises
and Equipment
 Goodwill
and Other Intangible Assets
  Income Taxes 
 Comprehensive
Income
 59




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 1  Summary of Significant Accounting Policies (Continued)
  2005
    
    
    2004
    
    
    2003Unrealized holding gain (loss) on
available-for-sale securities
    
    $
    (236
    )
    
    $
    (170
    )
    
    $
    16Reclassification adjustment for losses
(gains) realized in income
    
    
    
    
    
    
    60
    
    
    
    Net unrealized gains (losses)
    
    $
    (236
    )
    
    $
    (110
    )
    
    $
    16Tax effect
    
    
    79
    
    
    
    37
    
    
    
    (5
    )Net-of-tax amount
    
    $
    (157
    )
    
    $
    (73
    )
    
    $
    11
 Earnings (Loss) Per Common Share
 60




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 1  Summary of Significant Accounting Policies (Continued)
  2005
    
    
    2004
    
    
    2003Basic earnings (loss) per shareNumerator:Net income (loss)
    
    $
    1,440
    
    
    $
    (2,511
    )
    
    $
    664Denominator:Weighted average common shares outstanding
    
    
    2,709
    
    
    
    2,619
    
    
    
    2,373Less: Average unallocated ESOP shares
    
    
    (130
    )
    
    
    (148
    )
    
    
    (167
    )Less: Average non-vested RRP shares
    
    
    (59
    )
    
    
    (73
    )
    
    
    (59
    )Weighted average common shares outstanding
for basic earnings (loss) per share
    
    
    2,520
    
    
    
    2,398
    
    
    
    2,147Basic earnings (loss) per share
    
    $
    0.57
    
    
    $
    (1.05
    )
    
    $
    0.31Diluted earnings (loss) per shareNumerator:Net income (loss)
    
    $
    1,440
    
    
    $
    (2,511
    )
    
    $
    664Denominator:Weighted average common shares outstanding
for basic earnings (loss) per share
    
    
    2,520
    
    
    
    2,398
    
    
    
    2,147Add: Dilutive effects of assumed exercises of stock options
    
    
    
    
    
    
    
    
    
    
    8Add: Dilutive effects of average non-vested RRP shares
    
    
    
    
    
    
    
    
    
    
    16Weighted average common shares and dilutive
potential common shares outstanding
    
    
    2,520
    
    
    
    2,398
    
    
    
    2,171Diluted earnings (loss) per share
    
    $
    0.57
    
    
    $
    (1.05
    )
    
    $
    0.31
  61




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 1  Summary of Significant Accounting Policies (Continued)
 Employee
Stock Ownership Plan (ESOP)
 Stock Based Compensation 
 2005
    
    
    2004
    
    
    2003As reported net income (loss)
    
    $
    1,440
    
    
    $
    (2,511
    )
    
    $
    664less: additional stock-based compensation determined
under the fair value method, net of tax
    
    
    85
    
    
    
    63
    
    
    
    59$
    1,355
    
    
    $
    (2,574
    )
    
    $
    605As reported earnings (loss) per share
    
    $
    0.57
    
    
    $
    (1.05
    )
    
    $
    0.31Proforma earnings (loss) per share
    
    $
    0.54
    
    
    $
    (1.07
    )
    
    $
    0.28As reported earnings (loss) per diluted share
    
    $
    0.57
    
    
    $
    (1.05
    )
    
    $
    0.31Proforma earnings (loss) per diluted share
    
    $
    0.54
    
    
    $
    (1.07
    )
    
    $
    0.28
   2004
    
    2003Dividend yield
    
    
    1.4
    %
    
    
    1.4
    %Expected life
    
    7 years
    
    7 yearsExpected volatility
    
    
    17.5
    %
    
    
    17.2
    %Risk-free interest rate
    
    
    3.0
    %
    
    
    3.0
    %
 62




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 1  Summary of Significant Accounting Policies (Continued)
 Recent
Accounting Pronouncement
 Supplemental Cash Flow Information (000s omitted)
 December 31,2005
    
    2004
    
    2003Cash paid (received) for:Interest
    
    $
    6,470
    
    
    $
    6,115
    
    
    $
    6,069Income taxes
    
    
    (63
    )
    
    
    (315
    )
    
    
    635Noncash investing activities -Loans transferred to real estate owned
    
    
    3,608
    
    
    
    2,221
    
    
    
    2,844Issuance of common stock in connection with
the 2003 Recognition and Retention Plan
    
    
    46
    
    
    
    16
    
    
    
    1,107Issuance of common stock in connection with
the acquisition of MSB Financial, Inc.
    
    
    
    
    
    
    4,586
    
    
    
    
 Reclassification 
 Note 2  Acquisition
   63




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 2  Acquisition (Continued)
  Cash and cash equivalents
    
    $
    7,144Other securities
    
    
    1,500Loans, net
    
    
    73,793Premises and equipment
    
    
    2,452Core deposit intangible
    
    
    2,081Goodwill
    
    
    9,606Other assets
    
    
    9,861Total assets acquired
    
    
    106,437Deposits
    
    
    70,216Federal Home Loan Bank advances
    
    
    8,002Other liabilities
    
    
    3,297Total liabilities assumed
    
    
    81,515Net assets acquired
    
    $
    24,922
  2006
    
    $
    2912007
    
    
    2302008
    
    
    1812009
    
    
    1492010
    
    
    142Thereafter
    
    
    390Total
    
    $
    1,383
 64




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 2  Acquisition (Continued)
  2004
    
    
    2003Net interest income
    
    $
    3,698
    
    
    $
    8,399Noninterest income
    
    
    3,874
    
    
    
    5,406Total income
    
    
    7,572
    
    
    
    13,805Net income (loss)
    
    $
    (4,102
    )
    
    $
    1,781Basic earnings per share
    
    $
    (1.71
    )
    
    $
    0.74Diluted earnings per share
    
    $
    (1.71
    )
    
    $
    0.74
  65




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 3  Securities
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market Value2005Available-for-sale securities:U.S. government agency obligations
    
    
    11,961
    
    
    
    
    
    
    
    (188
    )
    
    
    11,773Mortgage-backed securities
    
    
    1,317
    
    
    
    
    
    
    
    (39
    )
    
    
    1,278Obligations of states and
political subdivisions
    
    
    1,293
    
    
    
    
    
    
    
    (7
    )
    
    
    1,286Total available-for-sale securities
    
    $
    14,571
    
    
    $
    
    
    
    $
    (234
    )
    
    $
    14,337Held-to-maturity securities:Municipal security
    
    $
    247
    
    
    $
    
    
    
    $
    (11
    )
    
    $
    2362004Available-for-sale securities:U.S. government agency obligations
    
    
    3,984
    
    
    
    5
    
    
    
    
    
    
    
    3,989Mortgage-backed securities
    
    
    1,677
    
    
    
    6
    
    
    
    (8
    )
    
    
    1,675Obligations of states and
political subdivisions
    
    
    2,394
    
    
    
    1
    
    
    
    (2
    )
    
    
    2,393Total available-for-sale securities
    
    $
    8,055
    
    
    $
    12
    
    
    $
    (10
    )
    
    $
    8,057Held-to-maturity securities:Municipal security
    
    $
    267
    
    
    $
    1
    
    
    $
    
    
    
    $
    268
 66




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 3  Securities (Continued)
  Held to Maturity
    
    
    Available for SaleAmortized
    
    
    
    
    
    
    AmortizedCost
    
    
    Market Value
    
    
    Cost
    
    
    Market ValueDue in one year or less
    
    $
    
    
    
    $
    
    
    
    $
    4,760
    
    
    $
    4,739Due in one through five years
    
    
    
    
    
    
    
    
    
    
    8,494
    
    
    
    8,320Due after five years through ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due after ten years
    
    
    247
    
    
    
    236
    
    
    
    
    
    
    
    Total
    
    $
    247
    
    
    $
    236
    
    
    
    13,254
    
    
    
    13,059Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    1,317
    
    
    
    1,278Total available-for-sale securities
    
    
    
    
    
    
    
    
    
    $
    14,571
    
    
    $
    14,337
  67




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 3  Securities (Continued)
  Less than Twelve Months
    
    
    Twelve Months and OverGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    EstimatedLosses
    
    
    Market Value
    
    
    Losses
    
    
    Market Value2005Available-for-sale securities:U.S. government agency obligations
    
    $
    102
    
    
    $
    8,376
    
    
    $
    86
    
    
    $
    3,397Mortgage-backed securities
    
    
    39
    
    
    
    1,278
    
    
    
    
    
    
    
    Obligations of states and
political subdivisions
    
    
    7
    
    
    
    1,286
    
    
    
    
    
    
    
    Total available-for-sale securities
    
    $
    148
    
    
    $
    10,940
    
    
    $
    86
    
    
    $
    3,397Held-to-maturity securities:Municipal security
    
    $
    11
    
    
    $
    236
    
    
    $
    
    
    
    $
    2004Available-for-sale securities:Mortgage-backed securities
    
    $
    
    
    
    $
    
    
    
    $
    8
    
    
    $
    698Obligations of states and
political subdivisions
    
    
    2
    
    
    
    419
    
    
    
    
    
    
    
    Total available-for-sale securities
    
    $
    2
    
    
    $
    419
    
    
    $
    8
    
    
    $
    698
   Note 4  Real Estate Investment  Limited Partnership
  68




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 4  Real Estate Investment  Limited Partnership (Continued)
   69




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 5  Loans
  December 31,2005
    
    
    2004Mortgage loans on real estate:One-to-four family
    
    $
    138,473
    
    
    $
    141,251Multi-family
    
    
    3,534
    
    
    
    4,042Commercial
    
    
    33,162
    
    
    
    42,746Construction or development
    
    
    5,415
    
    
    
    8,853Total real estate loans
    
    
    180,584
    
    
    
    196,892Consumer loans:Automobile
    
    
    2,447
    
    
    
    2,631Home equity
    
    
    16,170
    
    
    
    14,234Manufactured housing
    
    
    576
    
    
    
    784Other
    
    
    7,745
    
    
    
    6,645Total consumer loans
    
    
    26,938
    
    
    
    24,294Commercial business loans
    
    
    9,086
    
    
    
    5,330Subtotal
    
    
    216,608
    
    
    
    226,516Less: Allowance for loan losses
    
    
    2,895
    
    
    
    6,385Net deferred loan fees
    
    
    640
    
    
    
    808Loans in process
    
    
    
    
    
    
    6Loans, net
    
    $
    213,073
    
    
    $
    219,317
 70




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 5  Loans (Continued)
  December 31,2005
    
    
    2004
    
    
    2003Balance  Beginning
    
    $
    6,385
    
    
    $
    2,618
    
    
    $
    1,735Allowance acquired in acquisition
    
    
    
    
    
    
    513
    
    
    
    Provision for loan losses
    
    
    (385
    )
    
    
    4,875
    
    
    
    1,266Loans charged-off
    
    
    (3,254
    )
    
    
    (1,799
    )
    
    
    (571
    )Recoveries of loans previously charged off
    
    
    149
    
    
    
    178
    
    
    
    188Balance  Ending
    
    $
    2,895
    
    
    $
    6,385
    
    
    $
    2,618
  December 31,2005
    
    
    2004Impaired loans with a valuation allowance
    
    $
    2,570
    
    
    $
    10,205Valuation allowance related to impaired loans
    
    $
    670
    
    
    $
    3,727Total non-accrual loans
    
    $
    397
    
    
    $
    4,231Total loans past-due ninety days or more and still accruing
    
    $
    
    
    
    $
    
  December 31,2005
    
    
    2004
    
    
    2003Average investment in impaired loans
    
    $
    4,177
    
    
    $
    4,905
    
    
    $
    1,777
  71




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 6  Servicing
    December 31,2005
    
    
    2004
    
    
    2003Mortgage servicing rights  Beginning
    
    $
    1,539
    
    
    $
    667
    
    
    $
    428Mortgage servicing rights acquired in acquisition
    
    
    
    
    
    
    940
    
    
    
    Mortgage servicing rights capitalized
    
    
    257
    
    
    
    316
    
    
    
    592Mortgage servicing rights  amortization and direct
writedown for loan payoffs
    
    
    (438
    )
    
    
    (384
    )
    
    
    (353
    )Mortgage servicing rights  Ending
    
    $
    1,358
    
    
    $
    1,539
    
    
    $
    667
 72




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 7  Foreclosed Assets
  December 31,2005
    
    
    2004Real estate owned
    
    $
    1,462
    
    
    $
    1,234Real estate in judgment and subject to redemption
    
    
    1,349
    
    
    
    726Total
    
    $
    2,811
    
    
    $
    1,960
  December 31,2005
    
    
    2004
    
    
    2003Net loss (gain) on sales of real estate
    
    $
    (54
    )
    
    $
    (16
    )
    
    $
    40Operating expenses
    
    
    515
    
    
    
    205
    
    
    
    114Total
    
    $
    461
    
    
    $
    189
    
    
    $
    154
 73




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 8  Premises and Equipment
  December 31,
    
    
    DepreciableLife2005
    
    
    2004
    
    
    (in Years)Land
    
    $
    598
    
    
    $
    646Buildings and improvements
    
    
    5,890
    
    
    
    6,233
    
    
    
    7-40Furniture, fixtures and equipment
    
    
    2,803
    
    
    
    4,083
    
    
    
    2-7Total bank premises and equipment
    
    
    9,291
    
    
    
    10,962Less accumulated depreciation
and amortization

    
    
    3,585
    
    
    
    4,518Net carrying amount
    
    $
    5,706
    
    
    $
    6,444
  74




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 9  Deposits
  December 31,2005
    
    
    2004Balances by account type:Demand and NOW accounts
    
    $
    26,083
    
    
    $
    27,843Money market
    
    
    15,767
    
    
    
    19,114Passbook and statement savings
    
    
    26,536
    
    
    
    29,177Total transactional accounts
    
    
    68,386
    
    
    
    76,134Certificates of deposit:$100,000 and over
    
    
    35,949
    
    
    
    17,844Under $100,000
    
    
    60,985
    
    
    
    68,557Total certificates of deposit
    
    
    96,934
    
    
    
    86,401Total
    
    $
    165,320
    
    
    $
    162,535
   December 31,2005Less than
    
    
    $100,000 &$100,000
    
    
    greaterLess than one year
    
    $
    39,511
    
    
    $
    20,539One to two years
    
    
    11,997
    
    
    
    6,798Two to three years
    
    
    5,636
    
    
    
    6,099Three to four years
    
    
    1,565
    
    
    
    2,100Four to five years
    
    
    2,276
    
    
    
    413Total
    
    $
    60,985
    
    
    $
    35,949
 75




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 9  Deposits (Continued)
  December 31,2005
    
    
    2004
    
    
    2003Demand and NOW accounts
    
    $
    78
    
    
    $
    94
    
    
    $
    79Money market
    
    
    211
    
    
    
    176
    
    
    
    135Passbook and statement savings
    
    
    120
    
    
    
    117
    
    
    
    137Certificates of deposit
    
    
    2,928
    
    
    
    2,323
    
    
    
    2,513Total deposit interest expense
    
    $
    3,337
    
    
    $
    2,710
    
    
    $
    2,864
 Note 10  Federal Home Loan Bank Advances
   76




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 10  Federal Home Loan Bank Advances (Continued)
  December 31,2005Less than one year
    
    $
    11,585One to two years
    
    
    6,146Two to three years
    
    
    20,153Three to four years
    
    
    160Four to five years
    
    
    6,168Thereafter
    
    
    15,350Total
    
    $
    59,562
 Note 11  Income Taxes
  December 31,2005
    
    
    2004
    
    
    2003Current expense (recovery)
    
    $
    182
    
    
    $
    (1,871
    )
    
    $
    590Deferred expense (recovery)
    
    
    323
    
    
    
    599
    
    
    
    (339
    )Total tax expense (recovery)
    
    $
    505
    
    
    $
    (1,272
    )
    
    $
    251
 77




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 11  Income Taxes (Continued)
  Percent of Pretax Income (Loss)December 31,2005
    
    
    2004
    
    
    2003Statutory federal tax rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %Increase (decrease) resulting from:Nondeductible expenses
    
    
    0.20
    %
    
    
    0.30
    %
    
    
    8.90
    %Dividend received deduction
    
    
    0.00
    %
    
    
    -0.30
    %
    
    
    -5.20
    %Tax exempt income
    
    
    -1.90
    %
    
    
    -1.10
    %
    
    
    -4.80
    %Low income housing credit
    
    
    -9.80
    %
    
    
    -4.00
    %
    
    
    -8.40
    %Other
    
    
    3.50
    %
    
    
    4.70
    %
    
    
    2.90
    %Reported tax expense (recovery)
    
    
    26.00
    %
    
    
    33.60
    %
    
    
    27.40
    %
 78




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 11  Income Taxes (Continued)
  December 31,2005
    
    
    2004Deferred tax assets:Provision for loan losses
    
    $
    530
    
    
    $
    1,719Net deferred loan fees
    
    
    217
    
    
    
    273Deferred compensation
    
    
    365
    
    
    
    288Employee benefits
    
    
    23
    
    
    
    52Net operating loss carryforward
    
    
    209
    
    
    
    Unrealized loss on available for sale securities
    
    
    79
    
    
    
    General business tax credit carryforward
    
    
    557Other
    
    
    227
    
    
    
    53Total deferred tax assets
    
    
    2,207
    
    
    
    2,385Deferred tax liabilities:Mortgage servicing rights
    
    
    429
    
    
    
    483Original issue discount
    
    
    120
    
    
    
    111Net purchase premiums
    
    
    1,090
    
    
    
    1,030Stock dividends
    
    
    167
    
    
    
    133Other
    
    
    33
    
    
    
    16Total deferred tax liabilities
    
    
    1,839
    
    
    
    1,773Net deferred tax asset
    
    $
    368
    
    
    $
    612
   79




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 12  Off-Balance Sheet Activities
 Credit
Related Financial Instruments
   Contract AmountDecember 31,2005
    
    
    2004Commitments to grant loans
    
    $
    12,854
    
    
    $
    257Unfunded commitments under lines of credit
    
    
    19,838
    
    
    
    18,672Unfunded commitments under letters of credit
    
    
    64
    
    
    
    97
    Collateral
Requirements
 80




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 13  Regulatory Matters
    81




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 13  Regulatory Matters (Continued)
  December 31,2005
    
    
    2004Equity per consolidated balance sheet
    
    $
    37,420
    
    
    $
    35,090Less: intangible assets and deferred tax asset
    
    
    (11,448
    )
    
    
    (11,361
    )Tangible and leverage capital
    
    
    25,972
    
    
    
    23,729Plus: Allowance for loan losses **
    
    
    2,280
    
    
    
    1,747Risk based capital
    
    $
    28,252
    
    
    $
    25,476
 
 **
    
    Limited to 1.25 percent of risk weighted assets  To be Well CapitalizedFor Capital Adequacy
    
    Under Prompt CorrectiveActual
    
    Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2005:Tangible capital
    
    $
    25,972
    
    
    
    9.90
    %
    
    $
    3,933
    
    
    
    1.50
    %
    
    $
    7,867
    
    
    
    3.00
    %Leverage capital
    
    
    25,972
    
    
    
    9.90
    %
    
    
    10,489
    
    
    
    4.00
    %
    
    
    13,111
    
    
    
    5.00
    %Total risk-based capital
    
    
    28,252
    
    
    
    15.54
    %
    
    
    14,544
    
    
    
    8.00
    %
    
    
    18,180
    
    
    
    10.00
    %As of December 31, 2004:Tangible capital
    
    $
    23,729
    
    
    
    9.06
    %
    
    $
    3,928
    
    
    
    1.50
    %
    
    $
    7,857
    
    
    
    3.00
    %Leverage capital
    
    
    23,729
    
    
    
    9.06
    %
    
    
    10,475
    
    
    
    4.00
    %
    
    
    13,094
    
    
    
    5.00
    %Risk-based capital
    
    
    25,476
    
    
    
    13.62
    %
    
    
    14,959
    
    
    
    8.00
    %
    
    
    18,699
    
    
    
    10.00
    %
 82




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 14  Restrictions on Dividends, Loans and Advances
  Note 15  Retirement Plans
     Note 16  Related Party Transactions
  83




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 17  Fair Value of Financial Instruments
   Cash
and Cash Equivalents
 Securities
 Mortgage
Loans Held for Sale
 84




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 17  Fair Value of Financial Instruments (Continued)
 Loans Receivable 
 Deposit Liabilities 
 Federal Home Loan Bank Advances 
 Accrued Interest 
 85




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 17  Fair Value of Financial Instruments (Continued)
  December 31,2005
    
    2004Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    16,286
    
    
    $
    16,286
    
    
    $
    15,649
    
    
    $
    15,649Securities  Held to maturity
    
    
    247
    
    
    
    236
    
    
    
    267
    
    
    
    268Securities  Available for sale
    
    
    14,337
    
    
    
    14,337
    
    
    
    8,057
    
    
    
    8,057Other securities
    
    
    4,837
    
    
    
    4,837
    
    
    
    4,720
    
    
    
    4,720Loans held for sale
    
    
    168
    
    
    
    169
    
    
    
    361
    
    
    
    367Net loans
    
    
    213,073
    
    
    
    215,196
    
    
    
    219,317
    
    
    
    221,929Accrued interest
and late charges receivable
    
    
    1,217
    
    
    
    1,217
    
    
    
    1,138
    
    
    
    1,138Liabilities:Federal Home Loan Bank
advances
    
    
    59,562
    
    
    
    59,953
    
    
    
    65,955
    
    
    
    68,155Deposits
    
    
    172,746
    
    
    
    172,919
    
    
    
    167,733
    
    
    
    168,712Accrued interest payable
    
    
    430
    
    
    
    430
    
    
    
    333
    
    
    
    333
 Note 18  Employee Stock Ownership Plan (ESOP)
  Year Ending December 312006
    
    $
    1722007
    
    
    1812008
    
    
    1912009
    
    
    2022010
    
    
    214Thereafter
    
    
    225$
    1,185
 86




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 18  Employee Stock Ownership Plan (ESOP) (Continued)
   2005
    
    
    2004Allocated shares
    
    
    55,545
    
    
    
    37,030Shares released for allocation
    
    
    18,515
    
    
    
    18,515Shares distributed
    
    
    (11,284
    )
    
    
    (3,841
    )Unreleased shares
    
    
    111,090
    
    
    
    129,605Total ESOP shares
    
    
    173,866
    
    
    
    181,309Fair value of unallocated shares
    
    $
    1,465
    
    
    $
    1,876
  Note 19  Stock Compensation Plans
    87




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 19  Stock Compensation Plans (Continued)
  2005
    
    
    2004Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at
beginning of year
    
    
    192
    
    
    $
    13.21
    
    
    
    183
    
    
    $
    13.00Granted
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    13.90Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/expired
    
    
    7
    
    
    
    13.00
    
    
    
    36
    
    
    
    13.00Outstanding at end
of year
    
    
    185
    
    
    $
    13.22
    
    
    
    192
    
    
    $
    13.21Exercisable at year-end
    
    
    65
    
    
    $
    13.12
    
    
    
    30
    
    
    $
    13.00
  Note 20  Subsequent Event
  88




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 21  Condensed Financial Statements of Parent Company
  Condensed Balance Sheet (000s omitted)
 December 31,
    
    
    December 31,2005
    
    
    2004AssetsCash
    
    $
    2,614
    
    
    $
    1,007Investments
    
    
    667
    
    
    
    1,283Investment in Monarch Community Bank
    
    
    37,420
    
    
    
    35,089Other assets
    
    
    157
    
    
    
    2,350Total assets
    
    $
    40,858
    
    
    $
    39,729Liabilities and Stockholders EquityAccrued expenses
    
    $
    282
    
    
    $
    310Stockholders equity
    
    
    40,576
    
    
    
    39,419Total liabilities and stockholders equity
    
    $
    40,858
    
    
    $
    39,729
 89




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 21  Condensed Financial Statements of Parent Company (Continued)
 Condensed Statement of Income (000s omitted)
 December 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Income  Interest on investments
    
    $
    84
    
    
    $
    106
    
    
    $
    120Dividends from Monarch Community Bank
    
    
    
    
    
    
    10,000
    
    
    
    Operating expense
    
    
    170
    
    
    
    233
    
    
    
    220Income (loss)  Before equity in undistributed
net income of subsidiary
    
    
    (86
    )
    
    
    9,873
    
    
    
    (100
    )Equity in undistributed net income of subsidiary
    
    
    1,526
    
    
    
    (12,384
    )
    
    
    764Net income (loss)
    
    $
    1,440
    
    
    $
    (2,511
    )
    
    $
    664
 90




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##### Table of Contents



Monarch Community Bancorp, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 Note 21  Condensed Financial Statements of Parent Company (Continued)
 Condensed Statements of Cash Flows (000s omitted)
 December 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    1,440
    
    
    $
    (2,511
    )
    
    
    664Adjustments to reconcile net income to net
cash provided by operating activities:Amortization
    
    
    7
    
    
    
    25
    
    
    
    34Allocation of ESOP and RRP
    
    
    474
    
    
    
    525
    
    
    
    282(Increase) decrease in other assets
    
    
    1,230
    
    
    
    4,001
    
    
    
    (404
    )Increase (decrease) in accrued expenses
    
    
    (24
    )
    
    
    (133
    )
    
    
    11Undistributed net (income) loss of subsidiary
    
    
    (1,526
    )
    
    
    12,384
    
    
    
    (764
    )Net cash provided by (used in) operating activities
    
    
    1,601
    
    
    
    14,291
    
    
    
    (177
    )Cash flows from investing activities:Purchase of securities
    
    
    
    
    
    
    
    
    
    
    (624
    )Proceeds from maturities of securities
    
    
    606
    
    
    
    964
    
    
    
    75Acquisition, net of cash
    
    
    
    
    
    
    (20,120
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    606
    
    
    
    (19,156
    )
    
    
    (549
    )Cash flows from financing activities:Repurchase of common stock
    
    
    (32
    )
    
    
    (11
    )
    
    
    Dividends paid
    
    
    (568
    )
    
    
    (527
    )
    
    
    (476
    )Net cash used in financing activities
    
    
    (600
    )
    
    
    (538
    )
    
    
    (476
    )Net increase (decrease) in cash
    
    
    1,607
    
    
    
    (5,403
    )
    
    
    (1,202
    )Cash at beginning of year
    
    
    1,007
    
    
    
    6,410
    
    
    
    7,612Cash at end of year
    
    $
    2,614
    
    
    $
    1,007
    
    
    $
    6,410
 91




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##### Table of Contents



QUARTERLY RESULTS OF OPERATIONS
  Year Ended December 31, 20051st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th Qtr(Dollars in thousands, except per share data)Interest income
    
    $
    3,766
    
    
    $
    3,763
    
    
    $
    3,818
    
    
    $
    3,884Interest expense
    
    
    1,546
    
    
    
    1,596
    
    
    
    1,666
    
    
    
    1,759Net interest income
    
    
    2,220
    
    
    
    2,167
    
    
    
    2,152
    
    
    
    2,125Provision for loan losses
    
    
    (385
    )
    
    
    
    
    
    
    
    
    
    
    Net interest income after
provision for loan losses
    
    
    2,605
    
    
    
    2,167
    
    
    
    2,152
    
    
    
    2,125Noninterest income
    
    
    780
    
    
    
    844
    
    
    
    884
    
    
    
    891Noninterest expense
    
    
    2,821
    
    
    
    2,540
    
    
    
    2,541
    
    
    
    2,601Income before income taxes
    
    
    564
    
    
    
    471
    
    
    
    495
    
    
    
    415Income tax expense
    
    
    152
    
    
    
    120
    
    
    
    129
    
    
    
    104Net Income
    
    $
    412
    
    
    $
    351
    
    
    $
    366
    
    
    $
    311Earnings per share:Basic
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.14Diluted
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.14Cash dividends declared per share
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.06
 Year Ended December 31, 20041st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th Qtr(Dollars in thousands, except per share data)Interest income
    
    $
    2,743
    
    
    $
    3,554
    
    
    $
    3,787
    
    
    $
    3,734Interest expense
    
    
    1,404
    
    
    
    1,585
    
    
    
    1,602
    
    
    
    1,582Net interest income
    
    
    1,339
    
    
    
    1,969
    
    
    
    2,185
    
    
    
    2,152Provision for loan losses
    
    
    
    
    
    
    450
    
    
    
    375
    
    
    
    4,050Net interest income after
provision for loan losses
    
    
    1,339
    
    
    
    1,519
    
    
    
    1,810
    
    
    
    (1,898
    )Noninterest income
    
    
    485
    
    
    
    966
    
    
    
    1,080
    
    
    
    894Noninterest expense
    
    
    1,677
    
    
    
    2,408
    
    
    
    3,195
    
    
    
    2,698Income before income taxes
    
    
    147
    
    
    
    77
    
    
    
    (305
    )
    
    
    (3,702
    )Income tax expense
    
    
    44
    
    
    
    (19
    )
    
    
    (45
    )
    
    
    (1,252
    )Net Income
    
    $
    103
    
    
    $
    96
    
    
    $
    (260
    )
    
    $
    (2,450
    )Earnings per share:Basic
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    (0.10
    )
    
    $
    (1.03
    )Diluted
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    (0.10
    )
    
    $
    (1.03
    )Cash dividends declared per share
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.05
 92




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##### Table of Contents



ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 ITEM 9A. Controls and Procedures
   
 ITEM
9B. Other Information 
 
 PART III
 
 ITEM 10. Directors and Officers of the Registrant
  
 ITEM 11. Executive Compensation
  93




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##### Table of Contents



ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
  Equity Compensation Plan Information
  Number of securitiesto be issued upon
    
    Weighted-average
    
    Number of securitiesexercise of
    
    exercise price of
    
    remaining available foroutstanding options
    
    outstanding options
    
    future issuance underPlan Category
    
    warrants and rights
    
    warrants and rights
    
    equity compensation plansEquity
compensation plans
approved by
security holders
(1)
    
    
    185,487
    
    
    
    13.22
    
    
    
    45,951Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Includes 2003 Stock Option and Incentive Plan and 2003 Recognition and Retention Plan
approved at the 2003 Annual Meeting of Shareholders 
 ITEM 13. Certain Relationships and Related Transactions
  
 ITEM 14. Principal Accountant Fees and Services
  94




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##### Table of Contents



PART IV
 
 ITEM 15. Exhibits and Financial Statement Schedules
 Documents Filed As Part Of This Annual Report on Form 10-K
 1.
    
    Financial Statement  See the Financial Statements included in Item 8.2.
    
    Financial Statement Schedules  Financial statement schedules are omitted for
the reason that they are not required or are not applicable, or the required information is
included in the financial statements.3.
    
    Exhibits  The exhibits filed as part of this Annual Report on Form 10-K are
identified in the Exhibit Index, which Exhibit Index specifically identifies those exhibits
that describe or evidence all management contracts and compensation plans or arrangements
required to be filed as exhibits to this report. Such Exhibit Index is incorporated herein
by reference.
 95




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##### Table of Contents



SIGNATURES
  MONARCH COMMUNITY BANCORP, INC.Dated: March 21, 2006
    
    By:
    
    /s/ Donald L. DenneyDonald L. Denney, Presidentand Chief Executive Officer
  Signature
    
    Title
    
    Date/s/ Donald L. Denney

Donald L. Denney
    
    President and Chief Executive Officer(Principal Executive Officer)
    
    March 21, 2006/s/ Stephen M. Ross

Stephen M. Ross
    
    Chairman of the Board
    
    March 21, 2006/s/ Ralph A. Micalizzi, Jr.

Ralph A. Micalizzi, Jr.
    
    Vice President and Chief Financial Officer
(Principal Accounting Officer)
    
    March 21, 2006/s/ Harold A. Adamson

Harold A. Adamson
    
    Director
    
    March 21, 2006/s/ Lauren L. Bracy

Lauren L. Bracy
    
    Director
    
    March 21, 2006/s/ James R. Vozar

James R. Vozar
    
    Director
    
    March 21, 2006/s/ Martin L. Mitchell

Martin L. Mitchell
    
    Director
    
    March 21, 2006/s/ Gordon L. Welch

Gordon L. Welch
    
    Director
    
    March 21, 2006/s/ Craig W. Dally

Craig W. Dally
    
    Director
    
    March 21, 2006/s/ Richard L. Dobbins

Richard L. Dobbins
    
    Director
    
    March 21, 2006
 96




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##### Table of Contents



Exhibit Index
 Reference toPrior Filing orExhibit
    
    
    
    Exhibit NumberNumber
    
    Document
    
    Attached Hereto3.1
    
    Registrants Articles of Incorporation
    
    
    *3.2
    
    Registrants Bylaws
    
    
    *4
    
    Registrants Specimen Stock Certificate
    
    
    *10.1
    
    Employment Agreement between Monarch Community Bancorp, Inc and Donald L. Denney
(incorporated by reference from Form 8-K filed on 9/23/2004)10.2
    
    Management Continuity Agreement between Monarch Community Bancorp, Inc. and
William C. Kurtz and Andrew J. Van Doren (incorporated by reference from Form 8-K
filed on 12/21/2004)10.3
    
    Registrants Employee Stock Ownership Plan
    
    
    *10.4
    
    Registrants 2003 Stock Option and Incentive Plan
    
    
    **10.5
    
    Registrants Recognition and Retention Plan
    
    
    **10.6
    
    Form of Stock Option Agreement
    
    
    ***10.7
    
    Management Continuity Agreement between Monarch Community Bancorp, Inc. and Ralph
A. Micalizzi, Jr.10.8
    
    2003 Recognition and Retention Plan Restricted Stock Agreement11
    
    Statement re computation of per share earnings
    
    See Note 1 of the
Notes
to Consolidated
Financial
Statements
contained in
this report12
    
    Statements re computation of ratios
    
    None13
    
    Annual Report to Security Holders
    
    Not required14
    
    Registrants Conflict of Interest and Ethics Policy
    
    
    1416
    
    Letter re: change in certifying accountant
    
    None18
    
    Letter re: change in accounting principles
    
    None21
    
    Subsidiaries of the registrant
    
    
    2122
    
    Published report regarding matters submitted to vote of security holders
    
    None23
    
    Consent of Plante & Moran, PLLC24
    
    Power of Attorney
    
    Not required31.1
    
    Rule 13a-14(a) Certification of the Companys President and Chief Executive Officer
    
    
    31.131.2
    
    Rule 13a-14(a) Certification of the Companys Chief Financial Officer
    
    
    31.232
    
    Section 1350 Certification.
    
    
    32
 
 *
    
    Filed on March 27, 2002 as an exhibit to the Registrants Registration Statement on
Form SB-2 (File No. 333-85018), and incorporated herein by reference**
    
    Filed on March 19, 2003 as part of Registrants Schedule 14A (File No. 000-49814), and
incorporated by reference***
    
    Incorporated by reference from Annual Report on Form 10-KSB for the year ended December 31,
2004 97