<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For transition period _________________ to _________________
Commission file number 0-13551
MONARCH BANCORP
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-38663296
(State of incorporation) (IRS Employer Identification No.)
30000 TOWN CENTER DRIVE, LAGUNA NIGUEL, CALIFORNIA 92677
(Address of principal executive officers)
(714) 495 3300
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,341,435
<PAGE>
INDEX
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
Consolidated Statement of Condition
March 31, 1995 (unaudited) and
December 31, 1994 2
Consolidated Statement of Operations
(unaudited) for the three months ended
March 31, 1995 and March 31, 1994 3
Consolidated Statement of Cash Flows
(unaudited) for three months ended
March 31, 1995 and March 31, 1994 4
Notes to consolidated financial statements 5
Item 2. Management's Discussion and Analysis of
Operations 6 - 9
Part II -- Other Information
Item 1. Legal Proceedings 10
Item 2. Change in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security
Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
<PAGE>
PART 1 ITEM 1
FINANCIAL STATEMENTS
MONARCH BANCORP
CONDENSED, CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(000's omitted)
<TABLE>
<CAPTION>
ASSETS 31-MAR-95 31-DEC-94
--------- ---------
<S> <C> <C>
Cash and due from banks $ 3,835 $ 4,762
Interest bearing deposits and
investment securities 17,733 17,520
Federal funds sold 10,250 5,891
Loans and leases (net) 29,383 30,051
Premises and equipment 632 650
Other real estate owned 617 617
Other assets 871 683
-------- --------
Total assets $ 63,321 $ 60,174
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 55,978 $ 58,643
Notes payable 0 54
Other borrowings 163 173
Deferred gain on sale of assets 0 0
Accrued interest payable and other liabilities 412 402
-------- --------
TOTAL LIABILITIES 56,553 59,272
Common stock, no par value,
authorized 25,000,000 shares
5,341,435 and 794,324 shares outstanding at
3/31/95 and at 12/31/94, respectively 13,036 7,368
Accumulated deficit (5,955) (5,937)
Unrealized appreciation (depreciation) on
investment securities available for sale (150) (356)
Deferred charge related to KSOP (163) (173)
-------- ---------
TOTAL SHAREHOLDERS' EQUITY 6,768 902
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,321 $ 60,174
-------- --------
-------- --------
</TABLE>
(see accompanying notes)
3
<PAGE>
MONARCH BANCORP
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
----------------------------------
(000's omitted) 31-MAR-95 31-MAR-94
--------- ---------
<S> <C> <C>
INTEREST AND LOAN FEE INCOME:
Investment securities $ 259 $ 204
Federal funds sold 48 21
Loans and leases 691 700
--- ---
TOTAL INTEREST INCOME 998 925
INTEREST EXPENSE:
Deposits 285 265
Notes payable 1 1
--- ---
TOTAL INTEREST EXPENSE 286 266
--- ---
NET INTEREST INCOME 712 659
Less increase in provision for loan losses 0 0
--- ---
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 712 659
OTHER OPERATING INCOME:
Service charges on deposit accounts 117 101
Other service charge and fee income 67 66
Other income 172 0
--- ---
TOTAL OTHER INCOME 356 167
OTHER OPERATING EXPENSES:
Salaries and benefits 430 404
Office operations 287 232
Depreciation 40 49
Advertising and marketing 31 37
Other real estate owned 12 5
Professional services 63 54
Other 30 1
--- ---
TOTAL OPERATING EXPENSES 893 782
Net income before provision for taxes 175 44
Provision for taxes (7) 0
--- ---
NET INCOME AFTER PROVISION FOR TAXES $ 182 $ 44
--- ---
--- ---
PER SHARE INFORMATION
Number of shares (Weighted average) 835,563 794,324
Income per share (dollars) $0.22 $0.06
</TABLE>
(see accompanying notes)
4
<PAGE>
<TABLE>
<CAPTION>
MONARCH BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THREE MONTH PERIOD ENDED
------------------------------
(000's omitted) 31-MAR-95 31-MAR-94
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 182 $ 44
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan loss 0 0
Depreciation, amortization (40) (49)
Increase (decrease) in accrued interest
payable and other liabilities 10 (97)
Increase in accrued interest
receivable and other assets (188) (233)
------- -------
NET CASH (FROM) USED BY OPERATING ACTIVITIES (37) (335)
Cash flows from investing activities:
Principal payments received on investment securities 169 5,575
Purchases of investment securities (250) (5,959)
Increase in net loans 623 367
Proceeds from sale of oreo 0 1,252
Additions to premises and equipment (22) (10)
------- -------
NET CASH USED BY INVESTING ACTIVITIES 520 1,225
Cash flows from financing activities:
Net decrease in demand and savings deposits (2,665) (442)
Repayment of debt (54) 0
Proceeds from issuance of common stock 5,668 284
Proceeds from issuance of debt 0 0
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,949 (158)
Net increase (decrease) in cash and cash equivalents 3,432 732
Cash and cash equivalents at beginning of three month period 10,653 8,346
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THREE MONTH PERIOD $14,085 $ 9,078
------- -------
NON-CASH ACTIVITIES:
Property acquired through foreclosure $ 0 $ 810
------- -------
------- -------
Repayment of KSOP debt $ 10 $ 9
------- -------
------- -------
Equity adjustments for FASB 115 changes to AFS securities $ 206 ($ 119)
------- -------
------- -------
</TABLE>
(see accompanying notes)
5
<PAGE>
MONARCH BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
1. In the opinion of management of Monarch Bancorp (the "Company"), the
following accompanying unaudited consolidated financial statements contain
all adjustments (consisting only of normal, recurring accruals) necessary to
present fairly the consolidated financial position of the Company at March
31, 1995, and the consolidated results of operations for the three months
ended March 31, 1995 and March 31, 1994, and the cash flows for the same
three month periods. These consolidated financial statements do not include
all disclosures associated with the Company's annual financial statements
and, accordingly, should be read in conjunction with such statements.
2. The results of operations for the three month period ended March 31, 1995
are not necessarily indicative of the results to be expected for the full
year.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS.
CAPITAL ISSUES
On March 31, 1995, the Company completed the first closing of an expected two
part private placement stock offering. The first closing provided approximately
$5.7 million net of expenses. Proceeds from the offering were used to: (i)
increase the Company's investment in Monarch Bank by $3.6 million and thereby
meet and exceed the requirements of regulatory Orders to increase the Bank's
capital by not less than $2 million and to a Tier 1 Leverage Capital Ratio of
not less than 7.0% (the Bank's leverage ratio as of March 31, 1995 was 7.85%);
repay the remaining $53,500 in Company debt; and as a cash reserve for the
Company of approximately $2 million.
While all capital requirements have now been met, the Company anticipates a
final closing of the private placement during the second quarter of 1995 with an
approximate additional $1.1 million in gross proceeds (approximately $1 million
after fees), and is currently preparing a shareholders' rights offering which it
anticipates filing in the second quarter, and which is anticipated to add an
approximate additional $2.1 million in gross proceeds (approximately $1.9
million net proceeds after fees and costs). The final stage of the private
placement is dependent on regulatory approvals of change of control files which,
if approved, will result in two individual shareholders each owning in excess of
approximately 12% of the Company.
Available cash from the first closing and any proceeds from an additional
closing of the private placement and rights offering will be used as backup
financial support for the Bank and/or for growth for the Company and Bank.
Although the Company has had preliminary discussions regarding acquisitions with
a number of financial institutions.
REGULATORY MATTERS
Since December 1994, the Bank has been operating under a Federal Deposit
Insurance Corporation (FDIC), Section 8(b) Order and a California State Banking
Department (SBD), 1913 Order (the "Orders"). The Orders contain similar
provisions covering three main areas and direct the Bank (1) to increase
capital by a specific amount and to specific ratios by April 30, 1995, (2) to
improve credit administration, and (3) to generally improve other written
internal policies and procedures.
As of March 31, 1995, the Bank is in full compliance with all Order provisions
relating to capital and capital ratios. In late December 1994 and the start of
1995, the Bank implemented a specific action plan to address each of the issues
in the Orders. As of April 28, 1995, Management has taken specific actions to
improve credit administration including writing revised policies for lending and
loan administration, made certain staffing changes to improve technical lending
skills, and actively working to reduce loans classified during a 1994
examination of the Bank by the FDIC and SBD. As of March 31, 1995, the Bank was
in compliance with specified targets for reductions in classified assets from
the 1994 examination and had also decreased these classified assets to below the
specified target level for June 1995. In addition to capital and credit
administration activities, the Bank has also taken action to revise and/or
improve written internal policies and procedures. In Management's opinion, the
Bank, as of March 31, 1995 is in full compliance with each of the sections in
the Orders and, in several instances, is in compliance with sections with future
date requirements. While the Bank has met and exceeded the capital requirements
and completed to the best of its knowledge the work needed to comply with the
other sections of the Order, if the FDIC and Superintendent at their next
examination find that the Company has complied with the terms of the Orders, the
Orders may be removed. The Bank's compliance with the terms of the Orders will
be determined by the FDIC and/or the Superintendent on
7
<PAGE>
their next examinations of the Company and the Bank. The FDIC and
Superintendent, as of April 28, 1995, had not examined the Bank and made a
determination of the Bank's compliance with the Orders, and there can be no
assurance given that in their next examination the FDIC and/or the
Superintendent will agree with Management's analysis. The Bank's regulatory
agencies are required to examine the Bank within certain stated time frames, and
Management of the Company believes the Bank will be examined before the end of
the second quarter of 1995. If the Bank is found not to be in compliance with
the Orders, the Bank could be subject to further Orders, and the Board of
Directors could be subject to the assessment of civil money penalties from the
Bank's regulatory agencies.
ECONOMIC CONDITIONS
Orange County continues to experience residual fallout from the recession and
from the bankruptcy filing by the County. Current economic data, including
financial data and earnings reports of community banks located in Orange County,
suggests that a recovery is ongoing. Most community banks have reported
improved first quarter earnings and decreases in the level of nonperforming
loans. Current unemployment data released in April shows a decrease from 6.7% a
year ago to 5.1% for the current period (versus a current 5.5% for the Nation
and 8.0% for Los Angeles County). Real estate data shows similar values between
a year ago and current information for the median home resale prices after a
period of several years' decrease in values. Permits for housing construction
also show a major improvement compared to prior years with 725 permits issued in
the current period versus 498 a year ago.
While economic conditions appear to be improving, there are still credit
concerns for business borrowers who have finally reached their limit and can no
longer continue operation. Even with decreasing unemployment, there are still
individuals who are losing their jobs and loan repayment ability because of
business consolidations or, in the case of Orange County workers or businesses
directly related to the County, from the bankruptcy. The Bank has made every
effort to work with each borrower or business and to factor both known problems
and the potential for the unexpected into current credit decisions, into credit
administration for the existing portfolio, and into its assessment of the
adequacy of the Reserve for Loan Losses.
RESULTS OF OPERATIONS
The first quarter $182,000 profit had three components (1) a $171,000 recovery
(net of expenses) for a fidelity bond claim from a prior period loss; (ii) a
recapture of a prior year tax payment for $7,000; and (iii) a small operating
profit for the quarter. The Bank also accrued $30,000 for an anticipated and
negotiated legal settlement which was paid in April.
The new capital which will provide a material base for income in future quarters
was received on March 31, 1995 and had no real financial impact except to
increase deposits and total assets as of the last day of the quarter.
NET INTEREST INCOME
Increasing interest rates allowed the Bank to increase the comparative quarterly
Net Interest Income by $73,000. Using quarter end data, which is generally
consistent with quarterly averages, the major components of earning assets show
(dollars in thousands):
8
<PAGE>
MARCH MARCH
1995 1994
------ ------
Federal Funds Sold 10,250 4,030
Net Loans 29,383 33,914
Investments 17,733 22,256
------ ------
Earning Assets 57,366 60,200
In mid-March 1994, the average prime rate was 6.0%, the Fed Funds rate was
3.25%, the yield on the investment portfolio was 4.87%. Since March 1994
interest rates were progressively increased by the Federal Reserve, and in March
1995 the average for prime rate was 9.0%, the Federal Fund rate was near 6.0%,
and the Bank's investment portfolio was yielding just over 6.0%
INTEREST EXPENSE
Expenses for deposits have also been impacted by the overall increase in
interest rates for the first quarter of 1995 when compared to the same period in
1994. Since 1993 the Bank has very carefully controlled interest rates on
deposits to maintain core banking relationships rather than to attract new
depositors during a period when the Bank needed to control its capital ratios
and during a period of very slow loan demand. As the Bank resumes its growth
following the March 31, 1995 recapitalization, it expects to see its cost of
funds increase as it raises rates to attract new deposits at a time when most
banks and financial institutions are becoming far more rate competitive for
insured deposits. Banks are also competing for an increasingly small share of
the deposit pool as many investors have moved funds to non-insured deposit
products.
PROVISION FOR LOAN LOSSES
The Bank had a major increase in its Allowance for Loan Losses in December 1994.
This large increase was made based on a careful analysis of the existing
portfolio, on a contingent factor for the possibility of new problem assets as a
result of the carryover from the recession, and on a careful review of the Bank
by the Financial Advisors who assisted in the structuring and completion of the
private placement. A continued discussion of the Allowance and credit
administration is included in a later section of this MD&A.
NON-INTEREST INCOME
The net settlement for the bond claim is included in Other Income and this
$171,000 accounts for a majority of the $189,000 increase in Non-interest
Income. During the past year, the Bank has consistently worked to increase
its normal service charge income by reducing the level of waived charges.
Specific income generated in the first quarter of 1995 from NSF checking
activities showed a marginal increase over the same period in 1994. NSF
activity has been consistent for several years with no measurable losses from
this deposit activity. The Bank continues to call each NSF customer and to work
with each customer to insure their checks are covered; in some instances the
Bank will allow a short term overdraft for customers who have other compensating
balances or who have known financial strengths.
OPERATING EXPENSES
SALARY AND BENEFITS increased for the comparative periods by $26,000; however,
this includes unequal adjustments for the cash surrender value of Bank owned
insurance policies on senior officers. Actual salary expenses were
approximately $14,000 higher in the first quarter of 1995 than the same period
in 1994 because of the addition of a new, experienced VP level loan officer at
the start of 1995 before other staffing changes
9
<PAGE>
were completed later in the quarter. The increased salary expense is directly
related to staffing changes being made to improve credit administration. The
Bank instituted a full salary freeze in mid-1993 and this freeze has been
continued through the first quarter of 1995. A $55,000 comparative increase in
OFFICE OPERATIONS for the first quarter of 1995 is reflective of a $50,000 extra
ordinary recovery in 1994. On a direct comparison basis, operations expenses
have been relatively flat for the two comparative quarters. DEPRECIATION
EXPENSE has declined by $9,000 for the comparative quarters as older but
functional equipment becomes fully depreciated. PROFESSIONAL SERVICES expenses
increased for the comparative quarters because of increased costs relating to
regulatory issues. OTHER expenses includes the $30,000 accrued expense for a
legal settlement that was negotiated in February and March and paid in April
1995.
CREDIT ADMINISTRATION
The Bank has taken several steps to improve credit administration and its focus
on credit quality including but not limited to: specific staffing changes to
improve technical lending skills; increased emphasis in anticipatory analysis of
the adequacy of the Allowance for Loan Losses for unknown credit problems during
the end of a recession and slow start of a recovery cycle; and investing time
and expense in revising and updating written policies and procedures.
While progress is being made in credit administration, nonperforming loans are
still higher than desired and a number of borrowers are on various workout
schedules and plans.
On a comparative basis, problem loan and loan related data are detailed in the
following tables:
MARCH DEC. MARCH DEC.
1995 1994 1994 1993
----- ---- ----- ----
Charge offs 163 992 498 815
Recoveries 6 78 15 16
OREO 617 617 810 1,293
Nonaccrual Loans 454 431 1,415 2,420
Accruing loans past due 90 + 487 362 334 505
Allowance for Loan Losses 980 1,137 471 1,055
Period-end Gross Loans 30,413 31,040 34,498 35,369
Ratio comparison to Period-end Gross Loans and OREO to
Charge offs 0.5% 3.1% 1.4% 2.2%
Recoveries 0.0% 0.2% 0.0% 0.0%
OREO 2.0% 1.9% 2.3% 3.5%
Nonaccrual Loans 1.5% 1.4% 4.0% 6.6%
Accruing loans past due 90 + 1.6% 1.1% 1.0% 1.4%
Allowance for Loan Losses 3.2% 3.6% 1.3% 2.9%
The Bank has one OREO property that has been written down to 90% of the lower of
the appraised value or expected market value. This property is currently for
sale and the Bank is making every effort to sell it at a market value. The
property is located in an exclusive residential area that was especially hard
hit by the large drop in million dollar residences in California over the past
few years.
10
<PAGE>
Nonaccrual loans and loans past due 90 + days are generally collateralized
and/or in the process of collection. Possible losses associated with
nonperforming loans have been factored into the Allowance for Loan Losses on
best estimates of collateral values and borrowers' expected repayability.
In addition to directed attention to nonperforming loans, the Bank also has
focused careful attention on loan underwriting standards and is being very
selective in approving new loans.
FORWARD LOOKING
The Company expects to continue to focus on a final closing for the private
placement and the pending rights offering to generate sufficient cash and equity
to realistically begin to plan for some form of growth for the Company. It
currently has adequate cash reserves to continue as a strong financial support
for possible growth by the Bank as the local economy begins to revive after the
prolonged recession. The Company has not opened specific discussions for
acquisitions or mergers with other financial institutions but has had
preliminary discussion with a number of financial institutions and investors.
As of March 31, 1995, the Bank has met all of its regulatory capital commitments
and has sufficient excess equity to allow for reasonable growth that is expected
to coincide with a recovery of the local economy. Nonperforming assets, while
improving, still require a significant amount of management time and continue to
be of primary importance in working to generate sustainable profitability. At
present, the Bank does not expect to introduce any new products or services but
does expect to carefully focus on traditional community banking products and
high quality customer service.
11
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Monarch Bancorp
Date: May 12, 1994 /s/ E. Lynn Caswell
-------------------------
E. Lynn Caswell,
Chairman of the Board and CEO
Date: May 12, 1994 /s/ William C. Demmin
-------------------------
William C. Demmin
Executive Vice President and CFO
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> MAR-31-1995
<CASH> 3,835
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 17,733
<LOANS> 29,383
<ALLOWANCE> 0
<TOTAL-ASSETS> 63,321
<DEPOSITS> 55,978
<SHORT-TERM> 163
<LIABILITIES-OTHER> 412
<LONG-TERM> 0
<COMMON> 13,036
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 63,321
<INTEREST-LOAN> 691
<INTEREST-INVEST> 259
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 998
<INTEREST-DEPOSIT> 285
<INTEREST-EXPENSE> 286
<INTEREST-INCOME-NET> 712
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 893
<INCOME-PRETAX> 175
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> (7)
<CHANGES> 0
<NET-INCOME> 182
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 0
<LOANS-NON> 454
<LOANS-PAST> 487
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,137
<CHARGE-OFFS> 163
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 980
<ALLOWANCE-DOMESTIC> 980
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
